Photo credit: (c) Can Stock Photo
Last month, financial markets sighed in relief as the Federal Open Market Committee (FOMC), a branch of the Federal Reserve Board, decided not to raise interest rates. The run-up to this decision was characterized by jitters in financial markets that were not entirely attributable to weak global markets: traders, investors, and entrepreneurs were genuinely unsure whether the FOMC would decide to raise rates. A rate hike could have significant implications for the profitability of various investment projects, so it’s no surprise that Fed-watchers and market analysts were pleased with this decision.
Next week, the guessing game will continue as the FOMC meets once again. It’s alarming that such a small committee, with little oversight and an opaque decision-making procedure, wields so much power over our lives and livelihoods. It’s all the more surprising that few people seem to find this state of affairs troubling. In a society where adherence to the rule of law is the cornerstone of the body politic, it’s downright bizarre that our sensible insistence on governance according to laws, not the whims of men, isn’t applied to monetary policy as well.
Looking ahead to the FOMC’s October meeting, it’s important to note that, although the Federal Reserve’s ability to influence interest rates receives the most attention, its monopoly on the issuance of base money is far more important. With this extraordinary privilege should come extraordinary responsibility. Money is the foundational institution of commercial civilization. Without money, the division of labor would be rudimentary at best, and humans would all be very, very poor. This is because without money there could be no interpersonal accounting calculations. If I am a rancher, and I trade a cow for three sacks of oats and a yard of rope, am I producing responsibly? Have I added value to society’s scarce resources? There’s simply no way to tell. With money, however, we have a common denominator for comparing the viability of various production plans. Profits are a sign of added value, losses a sign of destroyed value. The existence of this method for comparing production plans greatly widens the extent of markets. The result is massively increased wealth for all.
These insights, familiar to any student who has passed Econ 101, have profound implications. If the economic prosperity we often take for granted depends on money, then money has the same status as other basic institutions, such as private property and the family, upon which public authorities may not tread. If the monetary regime is subject to arbitrary tinkering, its integrity is compromised. Individuals require a stable and predictable monetary system to plan long-term production projects. In addition, money mischief can have unjust distributional consequences. For example, a central bank that unexpectedly prints money and creates inflation redistributes wealth from creditors to borrowers.
More concerning still is the fact that unexpected inflation serves to transfer wealth from the holders of money to the government. The rich have most of their wealth in assets that earn a rate of return that can be adjusted based on the inflation rate, so this tends to be only a minor annoyance for them. Those who are not so financially fortunate end up bearing the largest costs, because those on the lowest rungs of the socioeconomic ladder tend to have the largest regular cash holdings. Thus, despite their frequent ignorance of basic economics, those on the left who despise the modern financial system — from Occupy Wall Street to Bernie Sanders supporters — have stumbled upon an essential truth: modern monetary institutions often hurt the most vulnerable among us the most.
Even if the effects described above turn out to be small in any particular instance, the repeated economic blunders made by central bankers over the past century are anything but. From the Great Depression to the Great Recession, a strong case can be made that the Fed was an agent of economic chaos, rather than stability. Legislators are beginning to realize this, and Congress is currently taking steps toward rethinking existing monetary arrangements. Currently, there is legislation on the table that could bring us ever closer to a rule-based and truly lawful money — a currency governed by the rule of law rather than the arbitrary discretion of men.
H.R. 2912, The Centennial Monetary Commission Act of 2015, introduced by Rep. Kevin Brady (R-TX), proposes the establishment of a commission that would critically examine the performance of the Fed. The bill moved to the House floor earlier this year. The commission it proposes would have a unique opportunity to explore alternative ways of securing an economically and morally responsible monetary policy. Concurrently, Rep. Scott Garrett’s (R-NJ) bill H.R. 2625, the Bailout Prevention Act of 2015, takes aim at the Fed’s ability to bail out banks. Such legislation represents a first, but necessary, step toward the institutionalization of lawful money.
Unlawful monetary policy is pernicious, and it must come to an end. Reasonable people can disagree as to precisely how monetary arrangements should change, but for the sake of commercial society’s continued health, we must demand the rule of law in monetary affairs. Luckily for proponents of sound money, the rule of law in monetary policy seems to be on the table once again. It is not impossible to imagine that the Oct. 27 FOMC meeting might be one of the last ones shadowed by unhindered discretion and unpredictability.