A Monetary Reform Agenda for the GOP, Should It Win the Coming Election
Published in The New York Sun.
It’s been half a century since the collapse of the Bretton Woods gold exchange standard — how do we like the results?
This month will mark the 53rd anniversary of the radical move to a global monetary system of pure paper money. This system is governed by the changing theories of central banks, especially by the theories of the Federal Reserve, the issuer of paper dollars for the world.
On August 15, 1971, President Nixon felt compelled to renege on the international commitment of the United States to redeem in gold dollars presented to our treasury by foreign governments, and all were forced to set sail on an uncharted sea of fiat currency.
How do we like the results? Since then, average U.S. consumer prices, as measured by the Consumer Price Index, have increased by 670 percent. In other words, the purchasing power of the dollar has fallen by 87 percent.
In terms of its gold value, before 1971 it took $35 to equal an ounce of gold, now it takes about $2,400, a depreciation of the dollar versus gold of more than 98 percent. In terms of financial stability, there have been financial crises in every decade: the 1970s, 1980s, 1990s, 2000s, 2010s and 2020s.
It’s quite a record for the Nixonian monetary era. Yet the monetary powers granted to our government in the Constitution are granted to Congress, which must bear the ultimate blame for legislating the era of fiat money, meaning paper dollars that must be accepted because of a government fiat.
Suppose that following this year’s election, Republicans control both the administration and the Congress, and suppose they decide to move America to a sounder, Constitutional monetary regime. Here are eight specific steps they could take.
Reinforce in legislation the already existing statutory instruction to the Federal Reserve that it is supposed to pursue “stable prices.” This straightforward term has been warped by the Fed’s unilateral announcements that “stable prices” really means perpetual inflation. The Fed’s current theory is that average consumer prices should rise forever, at some rate that the Fed itself would set unilaterally. Since 2012, the Fed has proclaimed that its “target” for this rate is 2 percent a year, but it believes it could target more inflation, if it decided to — again unilaterally.
Formally revoke the 2 percent inflation target proclaimed without congressional debate or approval. Amend the Federal Reserve Act to make it clear that setting the value of money requires review and approval by Congress — that the Fed may propose, but not decide, the nature of the money the government provides to and imposes on the people. The central bank is an operational, not an imperial, function.
Congress should debate and decide what kind of “inflation target,” if any, is consistent with the stipulated goal of “stable prices.” As a first step, it might set a target at “zero to 2 percent,” so there is no commitment to perpetual inflation. Or it might specify a long-run average inflation rate of approximately zero, in the context that periods of high productivity growth reduce prices while increasing the standard of living.
Allow gold-redeemable currencies to compete with the Fed’s paper dollar, consistent with the famous proposal of F. A. Hayek that people should be free to choose the money they prefer. Hayek’s proposal has been an inspiration for cryptocurrency proponents, but he really hoped it would lead to a remonetization of gold by consumer choice.
Establish in both the Financial Services Committee of the House and the Banking Committee of the Senate new Subcommittees on the Federal Reserve. This is to develop the disciplined understanding of central banking issues needed to provide effective oversight of the Fed, its theories, its actions and its risks, which affect every citizen of the United States and every country in the world.
Reform the accounting practices of the Federal Reserve, by instructing it to follow GAAP in calculating the Federal Reserve Banks’ retained earnings and capital. The Fed should no longer be able to lose amounts vastly greater than its capital, as it has, and then hide the resulting negative capital. It should honestly report its capital position to the public. Then Congress should consider recapitalization of the Fed.
Instruct the Fed that its investing in mortgage securities, which is by definition a credit allocation and a market distortion that increases house prices, can only be a temporary, emergency intervention. Specify that the Fed’s more than $2 trillion pile of mortgage securities must be reduced to zero over a reasonable time.
Finally, Congress should expressly state that it does not suffer from the illusion that the Fed has any special ability to know the future, and that the Fed’s urge to unilateral discretion must be subject to constitutional checks and balances.