First published by The Hill
All government agencies try to maximize power and minimize accountability, but the Federal Reserve is in a league of its own. What began as a quasi-public clearinghouse with the limited function of stopping bank runs has evolved into a monetary-regulatory behemoth. Its sphere of influence has grown despite its failures, of which 40-year-high inflation is the most recent but by no means the worst.
Constitutionally, the Fed answers to Congress. It’s time for legislators to take back the reins. Three bills recently filed by congressional Republicans – the Gold Reserve Transparency Act of 2021, the Price Stability Act of 2022 and a yet-to-be titled act, H.R. 9157, linking the dollar to gold – can bring the Fed to heel. All Republicans and moderate Democrats should consider them carefully.
We can’t afford an out-of-control Fed much longer. America’s central bank has blurred the line between fiscal and monetary policy beyond recognition. Washington ran $6 trillion in deficits during the COVID-19 years; the Fed added $3.3 trillion to its balance sheets over the same period. That’s more than 50 percent indirect debt accommodation by monetary policymakers.
Our de facto experiment with Modern Monetary Theory has subjected millions of Americans to crippling price hikes. While inflation appears to be cooling down, prices are still rising more than three times as fast as the Fed’s official goal. In fact, Fed officials don’t expect prices to return to normal until 2025. So much for aggressive tightening.
What are our options for reform? All three bills mentioned above subject the Fed to the discipline of rules. Congress gave the Fed its famous “dual mandate” of full employment and stable prices in 1977, but those goals are hopelessly vague. They give the Fed an excuse for its mistakes. For example, the Fed failed to curb inflation partly because it was committed to easy money, which it thought would keep labor markets tight. The problem is the Fed decides for itself how to interpret its mandate. Congressional Republicans are rightly trying to return this authority to the people’s representatives.
Rep. French Hill’s (R-Ark.) Price Stability Act is a simple reform with far-reaching implications. As the bill’s title suggests, it would strike the “full employment” plank from the Fed’s mandate. The central bank would aim for price stability alone. This is a welcome improvement, since the dollar’s purchasing power is one of the few things the Fed controls. The only way the Fed can help labor markets is through ordinary monetary policy. If we achieve stable prices, we get full employment as a bonus, as even many Keynesian economists acknowledge.
The other two bills, sponsored by Rep. Alexander Mooney (R-W.V.), would bind the Fed’s hands even tighter. Instead of tweaking our fiat money system, why not go for gold? Commodity money is history’s most successful example of rule-bound monetary policy. Rep. Mooney’s first bill would ascertain just how much gold the federal government, including the Fed, owns. The bill calls for the Government Accountability Office to report on U.S. gold holdings every five years.
Regular gold audits are an important stepping-stone to the second bill’s goal: redefining the dollar in terms of gold. The text of the bill rightly asserts that the American money supply should be “controlled by the market not the government.” By reintroducing a gold-backed dollar, we can get the Fed out of the business of managing the money supply. This will raise red flags for many economists. It shouldn’t. Contrary to the triumphant narrative among monetary technocrats, the Fed did not obviously improve U.S. economic performance, even if you give it a pass on the tumultuous years between the Great Depression and World War II.
Inflation averaged a mere 0.21 percent per year before the Fed. But since World War II, it’s been 3.70 percent per year. The economy has also gotten less productive. Average growth was 4.12 percent in the pre-Fed years compared with 2.25 percent in the years since the war. There were no compensating benefits in terms of economic stability; recessions have not become less frequent or lengthy.
The only data point that breaks the Fed’s way is inflation volatility. But even here, the Fed deserves no credit. It’s an artifact of inflationary Civil War finance: suspend the gold standard, print greenbacks, slowly deflate after the emergency ends. The historical record is clear: Gold-backed money is fully capable of delivering short-run stability and long-run prosperity. The Fed can’t.
The Fed has many backers in the capital. They would fight these reforms tooth and nail. Victory means assembling a sustainable legislative coalition. Inevitably the bills would change to build the necessary support. But the core idea – curbing the Fed’s ability to act as a law unto itself – is worth supporting. For Republicans, the appeal is obvious. But there are benefits for moderate Democrats, too. The Fed is the chief culprit behind the enrichment of Wall Street at the expense of Main Street. And with inflation persisting at painful levels, citizens will demand relief from both parties’ politicians. Reining in the Fed has always been good economics; now it’s good politics, too.