The problem with government is that when it isn’t benefiting politicians, bureaucrats and special interests at the expense of everyone else, its handy work is aimed at the symptoms of problems rather than at the problems themselves. This misdirection not only masks the true cause of problems it also exacerbates them, which, as Ronald Reagan said, makes government part of the problem, not the solution. The more problems government attempts to solve, the more new problems it creates for itself to solve, a sort of bureaucratic perpetual motion machine.
The Federal Reserve Board is a case in point. Ostensibly created to maintain price stability, the Fed has actually feathered the nest of the banking cartel it created and produced a century of monetary instability and ancillary economic problems.
Historical estimates of the dollar’s value and inflation are difficult to make but numerous techniques developed to do so all tell the same basic story. According to the inflation calculator of the Bureau of Labor Statistics, for example, the value of the dollar has eroded by 95% since the Fed’s inception in 1913. By contrast, in pre-Fed times during the era of the classical gold standard, 1872-1913, the dollar actually appreciated by 21%.
By the late 1970s, the Fed’s ham-handed efforts to maintain price stability through manipulation of a fiat dollar had produced not only rampant inflation but also steep unemployment–stagflation–something Keynesian economists theretofore had believed impossible. In its usual dunderheaded fashion, Congress decided in 1978 to reward incompetence by enacting the Humphrey-Hawkins Act to give the Fed a second mandate, namely achieving full employment. Nothing succeeds like failure in Washington, D.C.
On the one hand, having a dual mandate made the Fed’s life even more complicated. Even if the Fed were able in theory to maintain price stability–that’s called an assumption for the sake of argument–it would still be impossible to manipulate its one policy lever (monetary policy) in pursuit of two objectives. But never sell pointy-headed bureaucrats short.
Out of this conundrum came a solution that not only gave Fed technocrats greater discretion to reconcile the objectives of its dual mandate but also provided the perfect excuse for the Fed’s spectacular failure to maintain price stability, and presaged its predictable failure to achieve full employment. The Fed’s solution was to concoct a theory out of the questionable empirical observations of New Zealand-born economist William Phillips, which posited an inherent trade-off between inflation and employment. Contrary to Milton Friedman’s contention that inflation is everywhere and always a monetary phenomenon, the Phillips Curve led to the misguided demand-side notion of “economic overheating,” whereby too much economic growth drives the general price level higher.
What a godsend the Phillips Curve was for the monetary manipulators at the Fed. Under the Phillips Curve delusion, not only had Congress given it too many policy objectives to pursue with too few policy instruments, it had also dumped into the Fed’s lap a logically impossible task of minimizing the values of two variables (monetary inflation and idle real resources) that purportedly move in different directions at once–to the extent the value of one variable is reduced, it drives the value of the other one higher.
A disaster for the Fed? To the contrary, it was perfect. In a Phillips Curve world, the Fed suddenly had perfect cover and maximum flexibility to use discretionary monetary authority in pursuit of the golden mean between inflation and unemployment. The popular metaphor became the heroic Fed chairman standing at the economic helm using his masterful navigation skills and keen economic judgment to pilot the country between the Scylla of inflation and the Charybdis of recession.
But reality has a nasty way of rebutting half-cocked theory, and now the Fed is getting blamed for a double failure as the dollar looks to be circling the drain and unemployment remains stubbornly high. Some members of Congress are agitating to remove the Fed’s dual mandate and return to the status quo ante Humphrey Hawkins so that it can concentrate on shoring up the dollar and preventing another financial meltdown.
The problem with the logic underlying this proposal is that it assumes, contrary to all historical evidence, that the Fed would actually be capable of manipulating a fiat dollar to maintain price stability if only it were unburdened of the conflicting full-employment mandate. That is why legislative efforts to repeal Humphrey Hawkins are a diversion, a snare and a delusion.
The real challenge is to remove both the Fed’s mandates and its discretionary monetary authority along with them, and replace them all with a simple statutory directive to calibrate dollar liquidity so as to maintain the dollar price of gold within a narrow band around a statutory gold price that defines the dollar. Any other legislative “solution” simply exonerates the Fed from responsibility and gives them more cover to fail. Indeed, diverting attention from the real problem and the real solution is a classic instance of playing the useful idiot on behalf of the real culprit.
The objective is simple and straightforward: Save the dollar, not the Fed. Remove all its discretion, not just half of it.
Lawrence A. Hunter is president of The Alliance for Retirement Prosperity.