Debt of Honor - Tom Clancy [29]
3—Collegium
"So, we're agreed?" the Chairman of the Federal Reserve Board asked.
Those around the table nodded. It wasn't that hard a call. For the second time in the past three months, President Durling had made it known, quietly, through the Secretary of the Treasury, that he would not object to another half-point rise in the Discount Rate. That was the interest rate which the Federal Reserve charged to banks that borrowed money—where else would they borrow such sums, except from the Fed? Any rise in that rate, of course, was passed immediately on to the consumer.
It was a constant balancing act, for the men and women around the polished oak table. They controlled the quantity of money in the American economy. As though by turning the valve that opened or closed the floodgate on an irrigation dam, they could regulate the amount of currency that existed, trying always not to provide too much or too little.
It was more complex than that, of course. Money had little physical reality. The Bureau of Engraving and Printing, located less than a mile away, had neither the paper nor the ink to make enough one-dollar bills for what the Fed parceled out every day. "Money" was mainly an electronic expression, a matter of sending a message: You, First National Bank of Podunk, now have an additional three million dollars which you may lend to Joe's Hardware, or Jeff Brown's Gas-and-Go, or for new homeowners to borrow as mortgage loans to pay back for the next twenty years. Few of these people were paid in cash—with credit cards there was less for a robber to steal, an employee to embezzle, or most inconveniently of all, a clerk to count, recount, and walk to the local branch of the bank. As a result, what appeared by the magic of computer E-mail or teleprinter message was lent out by written draft, to be repaid later by yet another theoretical expression, usually a check written on a small slip of special paper, often decorated with the pictures of a flying eagle or a fishing boat on some lake that didn't exist, because the banks competed for customers and people liked such things.
The power of the people in this room was so stunning that even they rarely thought about it. By a simple decision, the people around the table had just made everything in America cost more. Every adjustable-rate mortgage for every home, every auto loan, every credit card revolving line, would become more expensive every month. Because of that decision, every business and household in America would have less disposable income to spend on employee benefits or Christmas toys. What began as a press release would reach into every wallet in the nation. Prices would increase on every consumer item from home computers to bubble gum, thus reducing further still everyone's real buying power.
And this was good, the Fed thought. All the statistical indicators said the economy was running a little too hot. There was a real danger of increasing inflation. In fact, there was always inflation to one degree or another, but the interest raise would limit it to tolerable levels. Prices would still go up somewhat, and the increase in the discount rate would make them go up further still.
It was an example of fighting fire with fire. Raising interest rates meant that, at the margin, people would borrow less, which would actually reduce the amount of money in circulation, which would lessen the buying pressure, which would cause prices to stabilize, more or less, and prevent