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If the exercise of power were measured in terms of how swiftly and intimately it altered the behavior of others, then the Federal Reserve was arguably the most powerful instrument of government, certainly in the realm of economic behavior. Congress could raise taxes or authorize new spending, but that process took many months of legislative debate and its actual effects would usually not be felt by citizens until many months later. The Presdient established the broad directions for tax-and-spending policies and, in extreme circumstances, might activate emergency controls over the economy. neither Congress nor the White House, however, could affect private lives with the immediacy and universal reach of the Federal Reserve's power, its ability to send instant signals rippling through every family's financial decisioons, to change the incentives in virtually every business transaction. The paradox for democracy was obvious: the Washington institution that was most intimately influential in the lives of ordinary citizens was the one they least understood, the one most securely shielded from popular control.
A pyschologist would describe what was going on in these terms: the Federal Reserve was operating a vast national program in behavior modification.
source: "Secrets of The Temple" by William Greider. Copyright 1987 by Simon & Schuster
The real cost of higher interest rates fell unevenly on citizens, banks and businesses, depending inversely on their level of incomes and profits. The wealthiest and most successful suffered least; struggling businesses and families of limited income paid the highest price. That was the most elementary point of political inequity, and it stemmed not simply from federal reserve policy but from high interest rates interacted with the U.S. tax code. Every taxpayer, large or small, was entitled to deduct interest payments from his taxable income, but these deductions naturally became more valuable if one was in a higher-income bracket and was taxed at a higher rate. A corporation saved, for instance, 46 percent of its interest costs on its tax bill. A wealthy individual, paying the maximum tax rate, would recover 50 percent of his interest payments in tax savings or as much as 70 percent if all of his income was from stocks and bonds and other investments. This effectively cut the real cost of higher interest rates in half for them - while others paid the full freight. This differential was always present, but it became magnified as interest rates rose.
The idea that the government rationed and commodity was naturally repugnant to the free-market ethos of American politics. A system that rationed money in a way that favored the largest enterprises and wealthiest individuals would seem to be especially offensive. Except very few understood that this was how monetary policy worked and the government - both elected politicans and the federal Reserve - had little incentive to make things clearer for people.
This was another good reason why most politicians preferred not to tamper with the staus quo. To correct the inequities, they would have to directly attack the prerogatives of the strongest interests.