Monday, April 30, 2012

Benjamin Cole on the History of Fed Independence

        Cole is a long time commentator as many of you may know. I know him mostly as a normal commentator as Sumner's Money Illusion. I don't know if this is his first blog post over at Marcus Nunes' Faint of Heart but it's the first I've read and I got to say I'm pretty impressed. Cole gave us a bit of a history lesson and it's interesting as a source of comparison.

       The Republicans-and their offical organ, the Wall Street Journal editorial page-have gone wholly "hard money" now. I mean they are writing crazy bill in Congress about going back on the gold standard-indeed in many states they are doing the same thing. In Kansas a bill passed about allowing payment in gold and silver-it of course far from truly brings back bimetallism.

      "Paul's message finally seems to be gaining traction outside Washington. Since the beginning of 2009, lawmakers in more than a dozen states, with the backing of conservative organizations like the Tenth Amendment Center and the American Principles Project, have introduced bills promoting the use of gold and silver currency for everything from buying groceries to paying taxes. Last week, Utah became the first state to enact such legislation, declaring gold and silver coins from the US mint legal tender, and creating a commission to study the efficacy of this move."

     "Other proposals, in Georgia and Iowa, would mandate that all state taxes be paid in gold and silver. In Montana, a "sound money" bill that would have required all taxes on cigarettes and tobacco products be paid in precious metals was narrowly defeated on Monday."

     "Some supporters hope the movement will succeed where Paul's efforts have fallen short—by bringing down the Federal Reserve system from the bottom up."

     "It's much more difficult to be lobbying against one bill than it is against 50 bills," says Bill Greene, a conservative activist and political consultant whose sample legislation has served as a foundation for a bill that's currently before the Georgia legislature. "As soon as one state passes a sound money bill, that state is going to reap the most benefits first. That'll open the floodgates and get the ball rolling and more and more states wanting to do it."


       However, Benjamin shows us that the GOP wasn't always so "fiscally repsonsible."

       "Read an “old” newspaper, from the ancient pre-Internet era of December of 1984: “The Reagan Administration is considering a plan to would place the now autonomous US Federal Reserve under some form of administrative control, The US Treasury Secretary, Don Regan, said yesterday.”  That was AP wire copy, and the story went national."

     "Long forgotten today, given the near-hysteria and requisite orthodoxy on the American right that only tight money is sound policy and patriotic, is that the Reagan White House tried to skin Fed Chief Paul Volcker alive back in 1984.  And not just Volcker—they wanted to eviscerate the Federal Reserve Board, and shift control of the money supply into the Oval Office.  Inflation in 1984 had just dropped under 5 percent, and the Reaganauts wanted the Fed to print a lot more money, and keep the economy flourishing.
Secretary Regan mustered more than a few arguments. “The United States is the only country in the world that has a totally independent central bank,” he averred.  The Fed was an errant oddball institution, obsessed with fighting inflation instead of promoting growth, the Reaganauts charged.  Ergo, Volcker (originally an appointee of President Jimmy Carter) was a loose cannon on the deck of macroeconomic policy making.
Some Reagan hagiographers have tried to pooh-pooh Regan’s commentary as not truly part of the Reagan heritage, and cite Reagan’s gentlemanly public statements about Volcker as proof of the pudding.  Indeed, “Reagan, The Inflation Fighter” is a subspecies of GOP monographs, written even by people who know better, such as GOP solon and Stanford University academic John Taylor.   But the Reaganauts are engaging in Soviet-style revisionism."

     "Speaking before the National Association of Realtors in December 1984, President Reagan echoed the Regan assault on the Fed. “Let me assure you we are not pleased with the recent increases in interest rates,” said President Reagan. “And frankly there is no satisfactory reason for them.”

     Cole argues that in comparison, the Obama White House looks positively 'milquetoast." Lars Christensen argues that Reagan was wrong to jawbone the Fed in that way and compromise its precious independence. Of course the real point now is that Obama has had perfectly legitimate ways to put his imprint on Fed policy by who he nominates and most don't think that he's been very aggressive in putting his own people in there. To take again the counterexample of Reagan-of whom I was not and am not a fan-he certainly was not shy about putting conservatives into the Supreme Court shaping its ideology for years to come.

    Reagan's investment paid off in itself no doubt from the Bush-Gore decision of 2000 alone and we get more soon with the Obama healthcare law and the Ariizona immigration law before the court. Comparatively has the Obama Administration thought that they could have a similar impact on the Fed for generations to come-if Obama is re-elected he may by the time he leaves office in 2016 have appointed the entire Fed.

     One thing Cole is certainly right about is that the Republicans-and their official organ the WSJ editorial page-has very different monetary policy prescriptions depending who's in office:

       "If GOP contender Mitt Romney wins the White House, most likely the pressure on the Fed will dissipate—indeed, one can anticipate John Taylor as Fed chief, devising a version of the Taylor Rule that calls for steady QE (as he advocated for Japan). “Deficits don’t matter”—a Bush era mantra—may be heard again.  Seems likely, no?"



  1. Mike - A link to the piece of news from 1984 that Benjamin comments can be found in this post:

    PS That was the third guest post that I hosted for Benjamin.

  2. Thanks a lot for the info Marcus!