FRIEDMAN WOULD TAKE FED JOB. . . BUT PAUL VOLCKER'S GOT IT AND SHOWS
NO INTENTION OF RESIGNING

Author: By Robert Lenzner Globe Staff

Date: Wednesday, April 1, 1981
Page: ?????
Section: ECONOMY

Friedman hasn't been offered the position, yet. Paul Volcker still holds it and shows no signs of resigning.

However, William Casey, who was chairman of the Reagan Administration selection committee, told The Globe last fall that Friedman would be his choice to succeed Volcker if Volcker resigned. "That would be a great way to signal the world what we're about," the present CIA director said then.

Friedman, the 68-year-old economist who has been a vociferous critic of the Fed, said on Monday, "I have no false modesty. I don't know what I'd do. It's the only job I'd have to think deeply about. If I said no, then I'd have to shut up about monetary policy. That would be a very high price to pay."

Friedman, whose latest book, "Free to Choose," is on the best-seller list, was brutally critical about the Federal Reserve's policies under Volcker during an hour-long interview at San Francisco's Mark Hopkins Hotel. "I want him to put up or shut up. He talks about a stable money policy. But his record shows fluctuations more erratic than any comparable time before. I am baffled," said Friedman.

He points out that the February to May, 1980, period showed "an unprecedented decline in money supply." This was followed by a complete turn- around, May through October 1980 when "the rate of increase was greater than in any other five-month period."

The diminutive Friedman's conclusion: If the Fed doesn't get turned around, inflation will move up to a 25 percent rate sometime in the next few years, despite the Reagan economic policy of budget cuts and less taxes.

Friedman would overhaul Fed policy if he were chairman. Here is his prescription for success in controlling the money supply.

First, he would make banks figure their reserves on current deposit level. Since banks reserve money based on deposits held two weeks ago, Friedman charges this "means the money supply this week is out of control." Friedman maintains that Volcker abstained from a tie vote of the Fed Board last September to make this important change in policy.

Second, Friedman would establish the Fed's discount rate, the charge made for money lent to member banks, at an automatic penalty rate of the current Treasury bill rate plus three percent. This would raise the cost of borrowing
from the Fed above the market.

The economist, who now teaches at the Hoover Institution on War, Revolution and Peace on Stanford University's campus, claims the present Fed Board won't raise the discount rate permanently "because they don't want to give up their power. Government bureaucracies, even that small, don't voluntarily give up power."

Third, Friedman would appease the large banks by paying them the present Treasury bill rate on their excess reserves. This would give them an extra income on the money they don't lend out.

Fourth, he would pick a single measure of the money supply and stick with it. The current practice of using several measures like M1 or M2 was "a clever device by Arthur Burns to confuse the oversight operation of the House Banking Committee in the past," says Friedman.

Friedman also charges that the policy of the Fed does not work because three members of the board, Nancy Teeters, Lyle Gramley and Charles Partee are "died-in-the-wool Keynesians, and Democrats, and overpower the rest of the open market committee. That's part of the problem," he says.

Friedman admits that "Paul Volcker is not about to resign. He won't resign unless he turns the Fed around. I hope he achieves it. If he doesn't, we're in deep deep trouble," he says.

He suggests that already there is quiet pressure from within the Reagan Administration on the Fed. Friedman says his choice for President in 1984 would be David Stockman, because of his brilliance and charismatic leadership on economic problems.

He also suggests that other people would be good as chairman of the Fed, including economist Alan Greenspan, Citicorp Chairman Walter Wriston, and Beryl Sprinkel, present Undersecretary of the Treasury for Monetary Affairs.

The hardcover edition of "Free to Choose" has already sold 400,000 copies, as many as "Capitalism and Freedom" have sold since 1962 when it was first published. Friedman's television series on the economy has been purchased for viewing all over Western Europe and in Scandinavia, too. The reason for his popularity now, says Friedman, is that "the intellectual community went further to the left than the public. Now the left-leaning intellectuals are bankrupt."

Friedman does not worry about Reagan's increased military appropriations. He says, "They will go up rapidly but spending won't go up as rapidly as the appropriations. That's what everyone forgets."

Friedman also argues that inflation has nothing to do with the current budget deficit. Rather, he says, it has to do with monetary policy and he does not believe that government spending is really the cause of inflation.

BERTRA;03/31,18:38 LDRISC;04/02,12 B07918942