The True Gold Standard (Second Edition)
Dr. Janet Yellen now has taken over the chair of the Fed. And President Obama, to great acclaim, recently nominated Prof. Stanley Fischer as Vice Chairman. Prof. Fischer may be the most distinguished and beloved central banker at work within the world financial system today.
It is not often that central bankers find themselves beloved. Fed Chairman William McChesney Martin famously quoted a writer saying that the Federal Reserve is “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” Yet Fischer is beloved.
In 1999 Dr. Fischer was interviewed by Arthur J. Rolnick, then Senior Vice President and Director of Research of the Federal Reserve Bank of Minnesota. The Fed, at that moment, was riding high. When asked about the gold standard, Dr. Fischer’s answer concluded that “It may be hubris to believe that human beings can do better than depend on the supply of gold, but we certainly should be able to do so, and are doing so now.”
With the Federal Reserve’s recent announcement that it’s set to begin reducing its monthly purchases of interest-bearing bonds, the conversation has partially shifted to the economic implications of the central bank’s pivot. If the ‘taper’ is engineered properly, the near and long-term results have the potential to be very positive.
To see why, it’s useful to look back to Robert L. Bartley’s essential 1992 book, The Seven Fat Years. Bartley was of course the long-time editor of the Wall Street Journal’s editorial page, and monetary policy was a major focus of his writing.
In a 1986 editorial referenced within, Bartley observed about monetary policy that “a central bank can follow a quantity rule,” or it can utilize “a price rule, which we have come to favor in light of recent experience.” The Fed can focus on the quantity of dollars created without regard to the dollar’s value, or it can focus on stabilizing the value of the dollar without regard to the quantity of dollars issued.
Following President Obama’s lead, the Democrats are seeking to make income inequality the wedge issue of the 2014 Congressional and Senate elections. This unquestionably addresses an issue that — after forty years of middle class family wage stagnation — resonates with voters. Yet the Republicans, thanks to Sen. John Cornyn (R-Tx) and Rep. Kevin Brady (R-Tx), not the Democrats, are better positioned to take this on.
The Republicans are far better positioned to get right and use the underlying issue — which is more one of inequity than inequality — to political advantage. The rise of stagnation and inequality started (and continued and continues) with shabby monetary policy. The GOP (which, by the way, has issued an authentic invitation for Democrats to engage with them) has taken the lead on getting to the root of stagnation and inequality. There is a Republican-authored, with one Democratic co-sponsor, pending proposal to form a Monetary Commission to get, among other things, to the bottom of this very issue.
The increasingly fraudulent economics profession, along with the media commentariat which enables it, is almost to a man and women viscerally opposed to a return to the gold standard. Outgoing Fed Chairman Ben Bernanke has long been very public about his opposition to stable money, and it would be naïve to presume that Janet Yellen is any different.
What’s interesting about the opponents of stable money is that their arguments against the gold standard are most successful for explaining why we need one. In March of 2012 Bernanke gave a lecture in which he expressed his opposition, but in decrying a monetary system that would rob the Fed of discretionary powers, not to mention give the dollar the very definition that makes the foot and minute so useful, the hapless Fed Chairman unwittingly explained why a return to money defined by the constant that is gold would represent rocket fuel for the global economy.
During the year that is just starting the U.S. economy will face major challenges. The pressures built in health care, monetary, and immigration policies are likely to lead to decisions that can have a major impact on economic growth. There are always chances for additional positive and negative shocks. A faster move to freer trade with Europe would be a positive shock. A liberalization of North American energy markets, including the approval of the Keystone pipeline and continued progress in Mexico is another. Negative shocks can come not only from the economic arena, but also for national or international security threats, such as acts of terror or wars affecting the U.S. or its major allies. Think Tanks are playing an important role in most of these battles.