Verbosity of Money

What would have happened had Chairman Ben Bernanke refrained from saying anything? Economists have a phrase called the "velocity of money," which is the rate at which a unit of money is involved in a transaction. The "verbosity of money" is the rate at which the Fed chairman talks about what he might do.

Editorial of The New York Sun
June 21, 2013
NY Sun

The debacle ignited by the Federal Reserve this week invites this question: What would have happened had Chairman Bernanke refrained from saying anything? He held on Wednesday one of his press conferences, announcing that, as the Associated Press put it, the Fed would likely slow its $85 billion-a-month program later this year and end it next year if the economy continued to strengthen. The stock market collapsed, and the value of the dollar soared — to more than a 1,300th of an ounce of gold at last check — and alarm is spreading.

Well, let it not be said that The New York Sun failed to warn of this kind of chaos. We did this a bit more than two years ago, in an editorial called “The Verbal Dollar.” It quoted a founder of TradeMonster.com, Jon Najarian, as warning Mr. Bernanke’s press conferences would ignite a “giant ramp up in volatility.” He reasoned that traders “react to one word removed from a paragraph in a policy statement” and remarked, “now he’s going to hold a press conference?” It reminded us that there had long been a tradition of silence among central banks, going back at least to the Bank of England.

Our editorial related the story of the question that Lord Keynes put in 1929 to the deputy governor of the Bank of England, Sir Ernst Harvey. He asked the governor 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 Keynes plowed on, Sir Ernst famously explained: “To defend ourselves is somewhat akin to a lady starting to defend her virtue.” We quoted James Grant, editor of the Interest Rate Observer, as remarking that the Bank of England in its glory days said “next to nothing” but conscientiously exchanged bank notes for gold.

Now it does the opposite — and, as Mr. Grant said, “can’t seem to stop talking.” What in Sam Hill is the point of it? What would have been the harm in holding the meeting the Fed just held and having Mr. Bernanke refrain from trans-fogging the airwaves with a lot of ambiguous blather about what the Fed might or might not do and, instead, simply go to a baseball game or something? It’s not as if Mr. Bernanke knows what he will do later this year. He only knows what he might do, and he might not even know that. Economists have a phrase called the “velocity of money,” which is the rate at which a unit of money is involved in a transaction. How about the “verbosity of money,” which would be the rate at which the Fed chairman talks about what he might do?

There was a time when we knew what the central bank or the other issuing authorities would do. Those were years when the law defined a dollar in terms of a given amount of gold. There was a period in our history where the law also specified the dollar in respect of silver. But the bimetallism debate was brought to an end with the Gold Standard Act of 1900 and, the Congress thought, with the Federal Reserve Act of 1913, which was passed on the condition that it not be taken to authorize an end to the convertibility of the dollar into gold at the value the Congress legislated using its constitutional authority to coin money and regulate its value and to fix the standard of weights and measures. Those years of dollar convertibility were, on a net basis, years of great prosperity and growth.

It turns out that the Congress is taking another look at things as we are coming up on the 100th anniversary of the Federal Reserve. The chairman of the Joint Economic Committee, Kevin Brady, is pushing the Sound Dollar Act, to relieve the Federal Reserve of the duty to pay attention to jobs and instead return its focus to the value of money. He is also pushing a bill to set up — on what he calls a “brutally bipartisan basis” — a Centennial Monetary Commission, that would use the double-jubilee of the Fed to look at the strategic question of monetary reform. It could include a law saying that if we do have a Fed, its directors adhere to the central banker’s code and let their actions speak, knowing that silence is golden.

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