Politicizing the Fed? Blame Nixon, Not Perry

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We got a good idea of what we can expect from Rick Perry as a candidate for president when he jumped feet first into controversy and denounced Ben Bernanke as "almost treasonous" for debasing the dollar and warned ominously that if the Federal Reserve chief ever finds himself in Texas, folks down there will "treat him pretty ugly."

This was answered with nods of agreement in some corners of the right, even if it was generally acknowledged that calling Bernanke "treasonous" was a bit too far. (At least Perry said "almost.")

On the left, of course, it summoned up howls that Perry was threatening a lynch mob. (It wasn't a threat, but coming from a guy with the flinty, Chuck Norris toughness that Perry exudes, I guess it might seem like one.) But the more interesting response was the complaint that politicians shouldn't publicly criticize the Fed or attempt to lobby it because the Fed is supposed to be "independent" of politics.

Nonsense. The fact is that the Fed is already up to its neck in politics and has been for four decades. If you don't like it, don't blame Rick Perry. Blame Dick Nixon.

All of this started forty years ago this week, when Nixon closed the gold window and killed off the gold standard once and for all. The dollar's convertibility to gold had helped keep the Fed out of politics, because it meant that everyone could guess what the Fed would do with the value of our money: preserve it.

But look at the reasons Nixon took us off gold. An interesting retrospective on Nixon's fateful decision makes clear the political pressures he wanted to put on the Fed. Inflation had been creeping upward, endangering the Fed's ability to maintain the convertibility of the dollar. In order to stop inflation, the Fed would have to clamp on the monetary brakes so hard that it might cause a recession. But Nixon decreed to his new Fed chief, "no recession," because he didn't want the inconvenience of campaigning during an economic downturn. It was not the only dishonest corner Nixon would cut in his paranoid obsession with re-election.

Nixon closed the gold window so that the Fed could keep inflating and prevent the economy from going into a recession during an election year. So the modern, fiat-money Fed was plunged neck deep in politics from the beginning.

The actual, long-term result of Nixon's policy is well-known, if not well-acknowledged. In trying to keep inflation burning and prevent a recession, the Fed ended up with both a recession and runaway inflation, together.

Does any of that sound familiar? For years now, the Fed has been pumping money into the economy, trying to keep it afloat. Yet the long-range result has been the same. Just-released numbers for last month indicate a higher-than-expected increase in consumer prices, while estimates for the first two quarters of 2011 showed negligible economic growth. So we have a combination of economic stagnation and inflation. Maybe somebody should coin a word for that.

When the Fed takes on the task, not of protecting honest money, but of trying to manage booms and busts, of trying to stimulate the economy here and puncture "irrational exuberance" there, it is engaged in the political realm of public policy. In fact, this is the biggest, most ambitious public policy there is: the central planning of the economy.

The value of money is fundamental and all-pervasive. If you politicize money, it's like politicizing mathematics. Actually, since money is the unit of measure, the denomination in which everything in the economy is counted, you are politicizing mathematics.

Is it any wonder, then, that we live in an era of financial volatility, with the daily stock market results reading like the EKG of a patient in cardiac arrest? We are in economic cardiac arrest, because the heart of the economy, money, has been destabilized. We are suffering from the uncertainty created when the basic unit of measure is debased, making all economic calculations inherently unpredictable.

Complaining about an attempt to politicize the Fed gets everything backward. The point of complaining about the Fed is not that we want to control it to manipulate the currency in our own way. (The irony of Perry's complaint is that the current policy has benefited him politically. Inflation causes a surge in the value of commodities, particularly oil, which is the driver of a good part of the "Texas miracle.") What we want instead is for the Fed to stop manipulating the currency, period. We want the Fed stop playing politics with our money.

Hence Bernanke's "ugly" reception in much of the country. We're rebelling against the sense that he is reaching into our lives and altering our decisions and our future prospects without our permission. It's very dangerous to play politics with people's lives when they never elected you.

When Rick Perry announced his run for the presidency, he closed his speech by vowing that "I'll work every day to try to make Washington, DC, as inconsequential in your life as I can." Whatever other virtue or flaws he may have, this is the right goal. In particular, stopping the money-printing and interest-rate manipulation of the Fed would allow individuals, companies, and investors to once again make stable economic calculations.

It's time to make Washington irrelevant to money.


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