The Federal Reserve Board seeks to maintain an inflation rate around two percent per year. While this rate might sound low for older types who remember double-digit inflation rates in the late 70s and early 80s, and a rate of 5.4 percent as recently as 1990, why tolerate, let alone seek to sustain, any inflation at all? Why not seek to establish zero inflation and stable prices? After all, even an inflation rate of only two percent a year means nominal prices still double every 36 years. And while people can and do broadly adjust their behavior in the face of anticipated inflation, it’s not a seamless process. Inflation distorts people’s economic decisions, whether as producers or consumers, labor or capital, and so imposes costs on us all.
The balance sheet of today’s Federal Reserve makes it the largest 1980s-model savings and loan in the world, with a giant portfolio of long-term, fixed rate mortgage securities combined with floating rate deposits. This would certainly have astonished the legislative fathers of the Federal Reserve Act like Congressman and then Senator Carter Glass, who strongly held that the Fed should primarily be about discounting short-term commercial notes.
Bitcoin, the premier cybercurrency, is at an all-time high in price and an all-time low in volatility. In a new article, Bitcoin: Order without Law in the Digital Age, Kyle Roche and I compare Bitcoin to fiat money and show why and how it may succeed in the long run in becoming a currency relied on by millions. In this post, we focus on the flaws in fiat currency that may enable Bitcoin’s success. In the next we will describe how Bitcoin is succeeding.
In 1924, Georg Friedrich Knapp, the father of monetary theory, wrote that “[t]he soul of currency is not in the material of the pieces, but in the legal ordinances which regulate their use.” The state must instill confidence through law that its currency will retain value. And it is the uneasy relation between a state and its currency that gives Bitcoin the opportunity to grow. Citizens in some nations rightly distrust their currencies, precisely because they have little confidence in the legal ordinances and institutions, like central banks, that regulate their use. For instance, in the recent past nations, like Argentina and China, have undermined the value of their currencies and yet also tried to prevent citizens from using other more stable and reliable currencies to maintain the value of their assets.
Bitcoin provides many people in monetarily oppressive regimes with a better alternative.
Fed Governor Lael Brainard declared yesterday that the Federal Reserve “is designed to ensure that independence from the executive branch is absolutely the focus of the deliberations of the Federal Open Market Committee.” It is clear that her comments were a response to Donald Trump’s criticisms that the Federal Reserve was keeping interest rates artificially low to help the election of the President’s preferred candidate—Hillary Clinton.
One does not have to endorse Trump’s claims fully to believe that the degree of independence touted by Brainard is a serious overstatement. As Peter Conti-Brown has shown, the practical independence of the Fed falls far short of its design.
The seven members of the Federal Reserve Board of Governors are nominated by the President and confirmed by the U.S. Senate. It is true that the full term of a governor is fourteen years and appointments are staggered so that one term expires in each even-numbered year The lengthy terms and staggered appointments are indeed intended to contribute to the insulation of the Board—and the Federal Reserve System as a whole—from day to day political pressures.
But governors almost never serve anything close to their fourteen year terms. The outside options are simply so lucrative that almost everyone resigns after terms far short of that. As a result, today every Governor of the Federal Reserve was appointed by President Obama. Brainard herself is Obama’s former Undersecretary of the Treasury, not to mention a candidate for Secretary of that department in the Clinton administration. Would we think a Supreme Court was independent of the President if all its members were appointed by him?
In the mid-1960s, Liberty Fund’s founder, Pierre Goodrich, decided to travel to Montauk, Long Island and rent an apartment overlooking the ocean. He arrived there with his wife and top personal assistant and spent a month reading Ludwig von Mises’ most important work, Human Action (1949). Such was Goodrich’s commitment to understanding the classics of liberty and such were his resources that he went to great lengths to read and contemplate one of the great works of 20th century Austrian economics.
Let’s suppose you are not a multimillionaire businessperson with the time and dedication to live by the ocean and read the great works of Mises and other Austrians. Fear not—John Tamny’s excellent, accessible, and surprisingly provocative Who Needs the Fed? will save you the cost of a beachfront rental on Long Island and give you a nice introduction to one of Mises’ other classic works, The Theory of Money and Credit.
“The sole use of money is to circulate consumable goods.” – Adam Smith
In a recent op-ed for the Wall Street Journal, Morgan Stanley economist Ruchir Sharma observed that while the world is seemingly “turning inward,” this comes “in a period when countries are more beholden than ever to one institution, the U.S. Federal Reserve.” Interesting about Sharma’s piece is that if anything, it revealed the Fed’s growing irrelevance.
Commenting on the health of big U.S. banks last week, former Fed Chairman Ben Bernanke wrote on his Brookings blog that “a lot of progress has been made (and more is in train) toward reducing the risks that large, complex financial institutions pose for the financial system and the economy.” Bernanke’s observation came after Minneapolis Fed president Neel Kashkari’s recent commentary about the need to reduce the alleged problem of “Too Big To Fail” within banking. Some readers could be excused for wondering why Bernanke would have any opinion on the matter at all.
Ben Bernanke’s new book, The Courage to Act, demonstrates throughout its 579 pages the fundamental uncertainty faced by central bankers, Treasury officers, and everybody else when dealing with financial cycles, panics and recoveries. “But if the last few years had taught us anything, it was that we had to be humble about our ability to detect emerging threats to financial stability,” he writes.
Huzzah: last week Congress passed, in bipartisan fashion, a five-year, $300 billion-plus transportation bill. President Obama is expected to sign the legislation. The bill provides for much-needed infrastructure development. Beyond that it fixes a constitutional infirmity; corrects an institutional oddity that’s been with us since 1913; and even promises better food service on Amtrak. Miracles happen, and not just in Bethlehem. Okay, I take that back. Making ready allowance for the usual sausage-making (which I’m happy to tolerate, within bounds) this enactment is mostly smh stuff. Start with the ostensible constitutional fix: the act makes Amtrak’s President, who is appointed by its…