It’s going to be something to see how the Democrats react to Donald Trump’s charge that the Federal Reserve has been keeping interest rates down for political reasons. The Donald drove this point home in the last question put to him at his live-streamed lunch with the Economic Club of New York. He gave a relaxed, knowing, savvy speech, and fielded his questions with ease. The last one was about the Fed, and that’s where he made the charge that the Fed is being “totally controlled politically.”
How in the world are the Democrats going to dispute that? It wasn’t so long ago, after all, that it was the Democrats claiming that the Republicans were politicizing the Fed. We addressed this in 2010, after President Obama’s treasury secretary at the time, Timothy Geithner, kvetched about how “it is very important to keep politics out of monetary policy.” We called that a “terrific” idea, keeping the dollar from being “whipsawed by politics.” That was in an editorial called “How To Depoliticize the Fed.”
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’s not our purpose here to suggest that politicization is the basic problem. These columns are one of the few publications — and we understand we’re a modest voice — that have repeatedly pointed out the primacy of Congress in respect of the dollar. 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. Mr. Trump was asked at the Economic Club whether he would countenance a default on America’s debt, and he replied definitively that he would not. He could just as well have said that neither would he have suspended gold convertibility of the dollar, as President Franklin Roosevelt did, nor allowed our government to default on its obligation, under Bretton Woods, to redeem in gold dollars presented to it by foreign governments.
Donald Trump knows that the Congress is unhappy with the Federal Reserve and is preparing to assert its constitutional powers to reform the monetary system. That is the significance of the Fed Oversight Reform and Modernization Act, which is favored by the GOP (and has already passed the House). It could lead to, among other things, ending the era of Humphrey Hawkins, the law that gave the Federal Reserve an additional mandate beyond price stability — namely, working toward full employment.
It’s no small thing that the current effort to politicize the Fed is from the far left. That is a campaign by the group Fed Up to curb the role of the Federal Reserve System’s member banks from governance of regional banks. That would tilt the table toward inflating our way out of the national debt, which is how the Democrats aim to cover their borrowing during the Obama years. The Democratic 2016 platform has endorsed this measure, as has Hillary Clinton herself — a point to remember in the coming contretemps over Mr. Trump’s remarks today.