The Fed’s announcement last week that it intends to print lots of greenbacks to get the economy moving again has Jim Grant up in arms:
Barely nudging Mr. Madoff out of the top of the news was the Federal Reserve’s announcement last Tuesday that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, “continue to consider ways of using its balance sheet to further support credit markets and economic activity.”
Wall Street that day did handsprings. Even government securities prices raced higher, as if, somehow, Treasury bonds were not denominated in the currency with which the Fed had announced its intention to paper the face of the earth. Economic commentators praised the central bank’s determination to fight deflation — that is, to reinstate inflation. All hands, including President-elect Obama, seemed to agree that wholesale money-printing was the answer to the nation’s prayers.
Inflation is all the rage these days. That just goes to show that not much changes; every country that has gotten in debt over the last several thousand years has either defaulted or resorted to inflation. And inflation has usually just postponed the default. Grant provides a history lesson:
The underlying cause of these mishaps is the dollar and the central bank that manipulates it. In ages past, it was so simple. A central banker had one job only, and that was to assure that the currency under his care was exchangeable into gold at the lawfully stipulated rate. It was his office to make the public indifferent between currency or gold. In a crisis, the banker’s job description expanded to permit emergency lending against good collateral at a high rate of interest. But no self-respecting central banker did much more. Certainly, none arrogated to himself the job of steering the economy by fixing an interest rate. None, I believe, had an economist on the payroll. None facilitated deficit spending by buying up his government’s bonds. None cared about the average level of prices, which rose in wartime and sank in peacetime. It sank in peacetime because technological progress and the opening of new regions to agricultural production made merchandise and commodities cheaper and more abundant.
The Federal Reserve is a privately owned organization (it is owned by the member banks not the US government) that has been granted a monopoly in the production of money. The Justice Department spends billions of dollars each year attempting to prevent monopolies in the private sector and yet we have created one to oversee the most basic function of government. Should we expect better performance from a public monopoly than a private monopoly? Apparently not. Grant thinks Bernanke needs to answer some questions:
After Mr. Bernanke gets a good night’s sleep, he should be called to account for once again cutting interest rates at the expense of the long-suffering (and possibly hungry) savers. He should be asked to explain how the central-banking methods of the paper-dollar era represent any improvement, either in practice or theory, over the rigor, elegance, simplicity and predictability of the gold standard. He should be directed to read aloud the text of critique by Elihu Root and explain where, if at all, the old gentleman went wrong. Finally, he should be directed to put himself into the shoes of a foreign holder of U.S. dollars. “Tell us, Mr. Bernanke,” a congressman might consider asking him, “if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?”
It is a good question – why would anyone hold dollars knowing that the Fed is about to print up a whole bunch more of the little green buggers?