By Ralph Benko
Washington finally shows signs of coming to grips with the importance of money to politics. This is not about mere campaign finance. Recently there was a breakthrough in bringing the money policy issue out of the shadows and to center stage … where it belongs. The real issue of money in politics is about the Fed, not the Kochs. The Fed’s political impact is orders of magnitude greater than all the billionaires’ money, bright and dark, left and right, combined. There was a real breakthrough in the discourse last week. This breakthrough deserves far more attention than it yet has received.
The Washington Post’s Matt O’Brien, one of the smartest cats in the (admittedly small and dark, but crucial) monetary policy alley, published a column at the Post’s Wonkblog entitled Yes the Federal Reserve has enormous power over who is president.
The arc of the political universe is long, but it bends towards monetary policy.
That’s the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. That’s why every big ideological turning point—1896, 1920, 1932, 1980, and maybe 2008—has come after a big monetary shock.
Think about it this way: Bad monetary policy means a bad economy, which gives power back to the party that didn’t have it before. And so long as the monetary problem gets fixed, the economy will too, and the new government’s policies will, whatever their merits, get the credit. That’s how ideology changes.
O’Brien’s column may, just possibly, represent a watershed turn in the political conversation. Game on.
O’Brien demolishes not one but two myths. The first myth is of the Fed as politically independent. The second is that monetary policy properly resides outside the electoral process.
As I wrote here in a column Dear Chair Yellen: Mend the Fed:
As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):
Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington. The Fed serves a wonderful function. They get beat up on by the Congress and the administration. Everyone knows the game and everyone plays it. But no one wants their responsibility.”
Moreover, as to the political delicacy of this position, I wrote:
To consistently be in what iconic Fed Chairman William McChesney Martin called “the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up” is just asking too much of most mere mortals. It asks too much even of officials of such admirable integrity, intellect, and heart as Janet Yellen (and Chair Yellen’s deeply admirable Vice Chair Stanley Fischer, most recently seen talking with protestors at Jackson Hole).
Monetary policy has been relegated to the Fed and largely excluded from the formal electoral process for almost two generations. This is, at it happens, and as O’Brien states forthrightly, a historical anomaly.
Monetary policy was a white hot topic at the Constitutional Convention of 1787. Thereafter, it was crucial to the success of George Washington’s administration, one of the few matters in which cabinet members Thomas Jefferson and Alexander Hamilton concurred.
Monetary policy — in the North, “Greenbacks” — was a huge (and later litigated) issue during and after the Civil War.
Monetary policy was a fundamental issue for Grover Cleveland.
Monetary policy was the issue that propelled the young William Jennings Bryan to national prominence and three presidential nominations, beginning with his famous “cross of gold” speech.
Monetary policy was a, perhaps the, prime issue on which William McKinley campaigned (and won).
After the Panic of 1907 monetary policy was a central issue for U.S. Senator Nelson Aldrich, then called America’s “General Manager.” Aldrich chaired the National Monetary Commission. He wittily noted, in a 1909 speech, that “[T]he study of monetary questions is one of the leading causes of insanity.”
Thereafter — with the creation of the Fed — monetary policy became a key issue for Woodrow Wilson. As recorded in Historical Beginnings. The Federal Reserve by Roger T. Johnson, (published by The Federal Reserve Bank of Boston, revised 2010)
On December 23, just a few hours after the Senate had completed action, President Wilson, surrounded by members of his family, his cabinet officers, and the Democratic leaders of Congress, signed the Federal Reserve Act. “I cannot say with what deep emotions of gratitude… I feel,” the President said, “that I have had a part in completing a work which I think will be of lasting benefit to the business of the country.”
FDR’s revaluing gold, on the advice of agricultural economist George Warren, was crucial to lifting the Depression. This was a matter so politically dramatic as to land Warren on the cover of Time Magazine.
The importance of FDR’s action cannot be minimized. As I have elsewhere written:
As (conservative economic savant Jacques) Rueff observed in The Monetary Sins of the West (The Macmillan Company, New York, New York, 1972, p. 101):
“Let us not forget either the tremendous disaster of the Great Depression, carrying in its wake countless sufferings and wide-spread ruin, a catastrophe that was brought under control only in 1934, when President Roosevelt, after a complex mix of remedies had proved unavailing, raised the price of gold from $20 to $35 an ounce.”
As investment manager Liaquat Ahamed wrote in his Pulitzer Prize winning history Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463):
“But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15%. Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering. ‘Your action in going off gold saved the country from complete collapse,’ wrote Russell Leffingwell to the president.”
“Taking the dollar off gold provided the second leg to the dramatic change in sentiment… that coursed through the economy that spring. … During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.”
Of course, FDR did not take the dollar off gold. He revalued. That FDR did not have a firm grasp on the implications of his own policy is evidenced by his Treasury’s sterilization of gold inflows, arguably a leading factor leading to the 1937 double dip back into Depression.
Monetary policy figured more than tangentially in President Nixon’s “New Economic Policy,” announced in a national address on August 15, 1971. The inflationary consequences of Nixon’s closing of the gold window — and the easy money policy he bullied out of the Fed — figured prominently in the Ford and Carter administrations. The symptom of bad monetary policy — runaway inflation — was a major contributing factor in the election of Ronald Reagan.
A period that has been called the Great Moderation — under Fed Chairman Paul Volcker and the first two terms of Chairman Greenspan — followed. This saw the creation of almost 40 million new jobs, and economic mobility. This took monetary policy largely off the political agenda for almost two generations.
Then, of course, came the unexpected financial meltdown of 2008. That event — and the ensuing soggy recovery — helped propel monetary policy back into the realm of electoral politics.
The Republican Party national platform of 2012 called for the establishment of a monetary “commission to investigate possible ways to set a fixed value for the dollar.” This is something for which American Principles in Action (which I professionally advise) was and is a leading advocate.
This plank, widely noted around the world, directly led to the introduction, by Joint Economic Committee chairman Kevin Brady (R-Tx), of Centennial Monetary Commission legislation, which attracted 40 House and two Senate co-sponsors. It is expected to be reintroduced early in the 114th Congress.
The monetary commission legislation meticulously is bipartisan in nature. It includes ex-officio commissioners to be appointed by the Fed Chair and Treasury Secretary. It has been widely, and universally, praised in the financial press … including the FT, the Wall Street Journal, and Forbes.com. It is purely empirical in intent and has attracted the public support of many important civic leaders in the policy and political arena.
Last winter the commission received a unanimous resolution of support from the Republican National Committee. Democrats and progressives, of the kind of progressive Democrat President Cleveland, also well can support it.
There are a number of things about which one might quibble in O’Brien’s column. (O’Brien, for instance, reflexively opposes the gold standard. Yet the facts and analysis on which he rests his objections are incomplete.)
That said, O’Brien gets the big thing right: “The arc of the political universe is long, but it bends towards monetary policy.” Such an important columnist for the Post getting the big thing right is in and of itself a Big Thing.
Good money — and how to make our money good — is a matter that belongs at the center of our national, and, especially, presidential, politics. Good money is central to restoring job creation, economic mobility, equitable prosperity, the integrity of our savings and the solvency of our banks.
We are in what trenchantly has been called “uncharted territory.” Among issues which deserve a “national conversation” good money deserves the place at the head of the line. Fed Chair Yellen has been described, astutely, by Politico as having the Toughest job in Washington. It is high time for our elected officials — and presidential aspirants — to shoulder more responsibility. It is high time for monetary policy, after being in political near-hibernation for almost two generations, to enter the 2016 presidential debate.
Republished with permission from Forbes.com