Ending ‘Don’t Ask, Don’t Tell’ at the Fed

The Sound Dollar Act is a new measure being introduced to the Senate in an effort to end the era of "Humphrey-Hawkins," a law that has caused nothing but mischief since it was introduced. If the new Sound Dollar Act is passed, the Fed can focus more of its attention on price stability.

Editorial of The New York Sun
April 21, 2012
NY Sun

The big message from the meeting Friday of the Shadow Open Market Committee is that Congress is wising up to the Federal Reserve. This is implicit in the legislation that was the centerpiece of discussion at the meeting of Fed watchers. The measure, the Sound Dollar Act, was introduced in March by a Republican congressman from Texas, Kevin Brady, and a companion bill in the Senate was introduced by one of the leading advocates for honest money, Senator Lee of Utah. The measure would bring to an end the era of “Humphrey-Hawkins,” which is the law, named for Vice President Humphrey* and a California Democrat in the House, Augustus Hawkins, that requires the Fed work toward not only stable prices but also full employment. The measure has caused nothing but mischief since it was signed by President Carter. If the Sound Dollar Act is passed, the Fed can swing back to its original assignment, which is price stability.

The act itself isn’t as good a strategy as a return to what we like to call constitutional money, meaning a dollar defined in terms of silver or — to use the better specie for modern times — gold. The Sound Dollar Act doesn’t seek to restore a proper gold standard the way, say, the program being advanced by Lewis Lehrman would do. Nor does it address the problem of legal tender. It wouldn’t pass what one might call a Ron Paul purity test. Dr. Paul’s own measure, H.R. 1098, is called the Free Competition in Currencies Act and would do what really needs to be done in the long run, which is end legal tender for the fiat money being issued by the federal government and open the way to the use of privately issued money, an idea advanced by the Nobel laureate Friedrich Hayek.

The Sound Dollar Act, however, is calculated to have a better chance of actually passing the House and Senate, a point that was made at the Shadow Open Market Committee by Mr. Brady. So in this sense it could be called an important interim measure. Ending Humphrey-Hawkins, in and of itself, would be a boon for the economy, since price stability and full employment are sometimes — even often — contradictory goals. It would be like trying to travel east and west at the same time. Mr. Brady pointed out yesterday that the first time ever that the Fed invoked the employment half of its dual mandate was to justify the tripling of the size of its balance sheet in the course of its vast program of quantitative easing. Yet Mr. Brady reckons that “protecting the purchasing power of the dollar over time provides the strongest foundation for lasting economic growth and job creation.”

Ending the dual mandate is but one of several steps the Sound Dollar Act would take to rein in the Fed. It would improve the way the Fed watches prices. It currently concentrates on consumer prices. The Sound Dollar Act would require the Open Market Committee to monitor and report to Congress on what Mr. Brady characterized as “broad classes of assets including equities, corporate bonds, state and local government bonds and agricultural, commercial, industrial, and residential real estate." It would also require the foreign exchange value of the dollar to be thrown into the mix. And, most significantly, it would require the Fed to watch the price of gold, which, alone, would have, had the Fed been paying attention to it, have signaled the current crisis.

The Sound Dollar Act would also give a permanent vote on the Federal Open Market Committee to the presidents of each of the regional Federal Reserve banks. The measure would challenge the power of the Federal Reserve chairman, who has recently met dissent from some of the regional presidents. Mr. Brady told the Shadow Open Market Committee meeting that there might be other ways to achieve the diversity he wants in decision making, “but I’m seeking change that will provide Main Street with a greater voice in determining monetary policy.” The reforms would break up a system that has been in place for something like 70 years, but that doesn’t bother Mr. Brady. On the contrary, he reminds that it was the Congress that created the Fed in the first place and that surely Congress can reform it.

And his bill has a number of other reforms in it. It would curb the ability of the Fed to serve as an allocator of credit among various sectors of the economy, a role that Mr. Brady charged yesterday “exposes the Federal Reserve to political interference.” Noted he: “In Washington D.C., subsidies die hard.” His Sound Dollar Act would limit the kinds of securities in which the Federal Open Market Committee could deal. It would also require the Fed to publish its lender-of-last-resort policy. “In nearly a century of existence,” Mr. Brady said Friday, “the Federal Reserve has never articulated this critical policy.” He quoted Allan Meltzer as warning that the absence of clarity invites political solutions and risk taking by banks looking for a rescue, all adding up to “the well-known moral hazard problem.”

The Sound Dollar Act would also start to curb abuses of the Exchange Stabilization Fund, which Mr. Brady called a “slush fund that has been abused by Secretaries of the Treasury in both Democratic and Republican Administrations.” Over the years the fund received the profits from FDR’s nationalization of privately owned gold and the devaluation of the dollar that followed. Mr. Brady’s bill would steer the fund toward reducing federal debt. Finally, the Sound Dollar Act would nip in the bud one of the most outrageous abuses building at the Fed, funding for Elizabeth Warren’s Consumer Financial Protection Bureau. The measure would end the diversion of the Fed’s profits to the CFPB and force the agency to seek an annual appropriation from Congress, like any other agency.

* * *

The Sound Dollar Act is one of those measures whose importance is greater than the sum of its parts. One participant at Friday’s meeting, Marvin Goodfriend of Carnegie Mellon University, likened the measure to ending “Don’t Ask, Don’t Tell.” It is a signal that, as the Federal Reserve gets ready to mark its 100th anniversary, the legislature that created the central bank is not satisfied with its performance. The Fed was originally launched to end panics only to see a raft of them during its tenure, including a Great Depression in the 1930s and the Great Recession we are experiencing today. We don’t question the loyalty or integrity of the Fed’s chairman or governors. They were handed, particularly after the collapse of Bretton Woods, an impossible task of maintaining their credibility while dealing in fiat money. Guarded optimism about passage of the Sound Dollar Act was voiced to our J.V. Bennett at the Shadow Open Market Committee meeting. If the measure fails to prosper in the next congress, it would be logical to expect more radical measures to be pressed.

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