Fiat Wages

What a remarkable thing that President Obama delivered a state of the Union message on the 100th anniversary of the founding of the Federal Reserve and made not one mention of monetary policy. He certainly had an opportunity in respect of wages. “Today,” said the President in his State of the Union message, “the federal minimum wage is worth about 20% less than it was when Ronald Reagan first stood here.” But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20%? The president glided right past that point.By our lights, the president owed the country an explanation. The editor of The New York Sun, writing in the New York Post a column from which this editorial is adapted, noted that when the Federal Reserve Act was passed a century ago Congress refused to agree to a Federal Reserve until language was included that would mandate protecting the convertibility of the dollar into gold. That law unraveled in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value.The minimum-wage crisis is a sign that fiat money is not working for working men and women. The sad fact is that they are being paid fiat wages. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Even after strengthening somewhat in the past year, the greenback has today a value of barely a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Mr. Obama took office and a 265th of an ounce on the day George W. Bush acceded to the presidency. Gold isn’t the only way to measure a dollar; Obama appears to be using the consumer price index to reckon the 20% decline in the value of the minimum wage since the Reagan years is serious.Mr. Obama, in any event, endorsed a proposal by Senator Harkin and Congressman George Miller, Democrats of Iowa and California respectively, to raise the minimum wage by a staggering 39%, to $10.10 an hour. What’s the point of raising the minimum wage if you’re going to run down the value of the dollar? Today a person has to work 173 hours at the minimum wage to earn an ounce of gold; by the end of Reagan’s presidency, it took only 125 hours. The Harkin-Miller bill would get closer to the Reagan years. But how long would that last? How is a person to know what his wages will be worth if the dollar is always jumping around? Banks and businesses are beset with the same problem. Wouldn’t it be better to focus less on the minimum wage and more on stabilizing the dollar, just as Congress insisted when it set up the Fed?It’s five years now that Mr. Obama has been in office, and he has avoided the monetary question at every turn. His first Fed chairman, Ben Bernanke, is leaving us a dollar valued at less than half of what it was when he became chairman. Janet Yellen, who’s set to succeed Mr. Bernanke, is promising policies that could drive the value of the dollar down further. We understand that it’s not entirely their fault. In 1978, Congress passed the Humphrey-Hawkins law, which gave the Federal Reserve a dual mandate. The Fed must, on the one hand, protect the value of the dollar; on the other, it has to try to bring about full employment. It puts the Fed brass in a devil of a bind.Even the liberals foresaw trouble. When the bill was passed, the New York Times warned that the law “would play a cruel hoax on the hard-core unemployed, holding before them the hope — but not the reality — of a job.” At the time, unemployment was 6.1%. It has been above 8% for much of Mr. Obama’s presidency and above 7% for almost all of it. Isn’t it time Congress looked at Humphrey-Hawkins and other laws that govern the Fed to see whether they helped cause the Great Recession? That would have been a presidential-scale challenge for the Congress. The legislature’s own Joint Economic Committee has proposed a bi-partisan Centennial Monetary Commission to review the first century of the Federal Reserve. Mr. Obama himself says that Americans are tired of “stale political arguments.” If so, rescuing the dollar would be the place to start.

Fiat Wages

Fiat Wages

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