A New Idea for the Fed
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
The idea that the Federal Reserve is talking too much is now being advanced by no less a source than the Federal Reserve Bank of Dallas, the Wall Street Journal reports the other day in a story brought to our attention by the editor of the Interest Rate Observer, James Grant. He winged the story our way because he knew it would delight us. That’s owing to an editorial we issued five years ago under the headline “The Verbal Dollar.” It’s one of our favorite themes.
What we call the “verbal dollar” is a phenomenon associated with the age of fiat money. This age opened in the 1970s, when the dollar lost its definition in law and officially became backed by no specie, neither gold, silver, copper, tobacco nor beaver pelts. Zilch. The only thing for which one can redeem a Federal Reserve Note is another Federal Reserve note or base metal coins. So with increasing desperation the Fed has been trying to talk up or down the dollar.
The verbal dollar really came to be a feature of Fed under Chairman Bernanke. It was he who launched quantitative easing to get the economy going after TARP didn’t work and the raid on AIG threatened to land him in court (where the Fed under his direction was eventually found to have violated the Fifth Amendment’s takings clause). When quantitative easing didn’t do the trick, the Fed chairman decided to hold quarterly press conferences.
If Mr. Bernanke draws the title for his memoir from what he calls his “courage to act,” the verbal dollar might be called the “courage to talk” — save for the fact that it is so contrary to classical central banking practice. Mr. Grant pointed us five years ago to long-ago testimony of Bank of England’s Sir Ernst Harvey, who was being questioned by Lord Keynes himself, who asked whether it was a practice of the bank never to explain what its policy was.
Sir Ernst suggested that it was the bank’s practice to “leave our actions to explain our policy.” When pressed, he uttered the famous formulation: “To defend ourselves is somewhat akin to a lady starting to defend her virtue.” For its part, the Fed not only seeks to defend its virtue (to an increasingly skeptical Congress) but also to issue predictions of GDP growth, nearly all overly optimistic (and covered by, among others, David Stockman).
The new study by a Dallas Fed economist is characterized by the Journal as: “Fed Study To Fed: Stop Talking So Much.” The study suggests that a “more effective communication strategy for the central bank could be to speak less often and make each speech count.” The author, Antonella Tutino, fears that a “less-than-fully engaged public may misinterpret the statements, leading to an unintentional and counterproductive response.”
That strikes us as a tad condescending — particularly from a central banking system that employs something like 300 economists in its headquarters office alone and 700 worldwide. We don’t recall hearing such talk when America was on the gold standard. When one knows at what the government is obligated to redeem the dollar, one needn’t resort to wild guessing as to what monetary policy to expect. So the only way to stop the Fed from talking so much would be for Congress to get moving on monetary reform. Enough said.