Donald Trump, the Politicized Fed, and the Golden Rule

Donald Trump (photo credit: Gage Skidmore)
Donald Trump (photo credit: Gage Skidmore)

Left-leaning thought leaders have been unfairly scalding Donald Trump for his recent observations that the Federal Reserve is politicized. Therein an inconsistency, verging over into naked hypocrisy, by the left is revealed.

The LA Times summed up the story in an article headlined “Is the Fed Politically Biased“:

Every four years, the independent Fed faces the same predicament: how to try to manage the economy without appearing to favor either party’s presidential candidate.

The sly phrase is “without appearing to.”

Which, of course, is a very different thing than “without.”

The politicization of the Fed is one of Washington’s biggest Open Secrets.  As I wrote in Forbes.com, “Dear Chair Yellen: Mend The Fed“:

As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):

Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds.  “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington.  The Fed serves a wonderful function.  They get beat up on by the Congress and the administration.  Everyone knows the game and everyone plays it.  But no one wants their responsibility.”

Why, then, gold?  As Virgil wrote in the Aeniad: Facilis descensus Averni.  “Easy is the descent into Hell.”

It’s easy to create easy money.  It makes one popular.

To consistently be in what iconic Fed Chairman William McChesney Martin called “the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up” is just asking too much of most mere mortals. …

The current fiduciary system is the source of a persistent moral hazard.

The left understands the political nature of the Fed when it suits them. As I wrote in Forbes.com last year, in an article entitled “Monetary Politics: The Biggest Money Player In Politics Is the Fed,” I observed:

The Washington Post’s Matt O’Brien, one of the smartest cats in the (admittedly small and dark, but crucial) monetary policy alley, published a column at the Post’s Wonkblog entitled Yes the Federal Reserve has enormous power over who is president. 

O’Brien states:

The arc of the political universe is long, but it bends towards monetary policy.

That’s the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. …

O’Brien’s column may, just possibly, represent a watershed turn in the political conversation. Game on.

Game on, that is, until Donald Trump makes a comparable point. O’Brien is not vulnerable to charges of inconsistency. O’Brien is, for example, a consistent aurophobe, someone gripped by an irrational gold standard phobia. That’s a serious condition, albeit entirely different from hypocrisy.

How then to resolve the persistent moral hazard in which the Fed finds itself? Trusted Trump economic advisor Lawrence Kudlow immediately nailed it in National Review:

…Trump’s view of monetary policy, especially the dollar, needs to be resolved. At the Economic Club of New York, he charged that the Fed is being “totally controlled politically.” Elsewhere he has stated that Fed chair Janet Yellen is keeping interest rates ultra-low in a political effort to boost Democratic fortunes. I disagree.

[…]

True enough, the Fed needs radical reforms. In particular, it needs to replace its failed forecasting models and be rid of the academics who overwhelm the Fed system. But as New York Sun editor Seth Lipsky has taught us, the best way to depoliticize the Fed is to develop a standard of value to make the dollar strong, reliable, and stable. In other words, a monetary rule.

Here, as so often, Kudlow is giving Candidate Trump some great economic policy advice.

What monetary rule would be optimal? Let’s note the standard of value the referenced Seth Lipsky teaches. The New York Sun, of which Lipsky is the editor-in-chief, editorialized the very day before Kudlow’s column appeared:

The answer is clear — and has been since the founding of our constitutional republic. It is called the gold standard. That is, a law that defines the dollar as a specified weight of gold and leaves it at that. Then it’s up to the government to operate its finances in a way that ensures that its notes maintain that legally defined value. If they don’t, those of us who conduct our business and receive our wages in dollars will know whether our politicians have been living up to what the law requires.

… It is precisely to Congress — the most political branch of the government — that the Constitution grants all of the monetary powers of the government. They are the power to tax, spend, borrow, and regulate the value of the dollar and fix the standard of weights and measures.

The Second United States Congress was the first to exercise that power. It passed Alexander Hamilton’s Coinage Act, which defined the dollar as 371 and a quarter grains of pure silver or a 15th as much gold. The debate over bimetallism consumed much of the 19th century. After the unambiguous election of 1896, Congress turned around and settled the matter in favor of gold. It passed the Gold Standard Act of 1900, which was signed by McKinley. Congress created the Fed in 1913, making it clear that it did not intend for the central bank to abrogate the gold standard.

Since then, the dollar has lost more than 98% of its value.

Donald Trump, in an aside to GQ, said “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”

“Wonderful.” “[A] standard on which to base our money.” Bull’s eye.

Larry Kudlow (photo credit: Gage Skidmore)
Larry Kudlow (photo credit: Gage Skidmore)

Larry Kudlow is uniquely situated to point out to Candidate Trump that the left has confounded policy — and strangled equitable prosperity — with a claim that “bringing back the gold standard would be very hard to do.” This claim is flatly untrue.

All that is needed is the passage of the Jack Kemp Gold Standard Act which Kemp, with the co-sponsorship of Newt Gingrich, introduced in 1984. The US government owns plenty of gold — the most of any government in the world and by far. The Kemp Gold Standard Act embodies just how easy it is to define the dollar as a fixed weight of gold legally convertible thereto. Thereafter removing all tax and regulatory barriers to the use of gold as money is in order to further insulate the gold standard from future political tampering. But first things first.

Kemp, of course, was the political quarterback for Reaganomics. Kemp also was the primary inspiration of … Larry Kudlow. Kudlow may well have an opportunity, now, to change the course of history by bringing to completion Kemp’s “Unfinished Symphony,” the true gold standard.

The gold standard is no more difficult than taking a dollar bill into the bank and receiving four quarters in exchange. Rather than the dollar being convertible to a coin made from an alloy of base metals, copper and zinc, dollars become convertible to gold coin. Nothing hard about that.

The gold standard, properly applied, was the basis for America’s (and the world’s) greatest era of equitable prosperity ever. To make America great again the next president need only advance, in his first hundred days, the Golden Rule: the Jack Kemp Gold Standard Act.

Calling Candidate Trump!

Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles Project’s Senior Advisor, Economics.