What a remarkable thing that President Obama delivered a state of the Union message on the 100th anniversary of the founding of the Federal Reserve and made not one mention of monetary policy. He certainly had an opportunity in respect of wages. “Today,” said the President in his State of the Union message, “the federal minimum wage is worth about 20% less than it was when Ronald Reagan first stood here.” But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20%? The president glided right past that point.
By our lights, the president owed the country an explanation. The editor of The New York Sun, writing in the New York Post a column from which this editorial is adapted, noted that when the Federal Reserve Act was passed a century ago Congress refused to agree to a Federal Reserve until language was included that would mandate protecting the convertibility of the dollar into gold. That law unraveled in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value.
The decision of Senator Cornyn to get behind the idea of a Centennial Monetary Commission should put a bit of a spring in the step of the heroic band on the Hill that is nursing the idea of monetary reform. The legislation comes out of the Joint Economic Committee, which is chaired by Congressman Kevin Brady of Texas. The measure has something like 32 sponsors in the House, and they have been hoping for a serious figure to get behind it in the upper chamber. They’ve landed a terrific ally in Mr. Cornyn.
It happens that this newspaper was the first to endorse such a commission, which would undertake take a strategic review of the Federal Reserve as it begins its second century. Given the astonishing role the Fed has played in our national life, not to mention in the economy of the rest of the world, one would think that a centennial review would be a lead pipe cinch. Particularly because there has been such a radical expansion of the Fed’s balance sheet in the current crisis.
“Stocks Soar on Summers Withdrawal” is the headline on the New York Times Web site. It appears over a Reuters dispatch reporting that Wall Street and global market indices were rising after Lawrence Summers withdrew his name from consideration to be chairman of the Federal Reserve.
Reuters explained that Professor Summers was “widely regarded as more eager to taper the Fed’s $85 million a month bond-buying program” than was Janet Yellen, another leading contender. As a result, “In early trading the Standard & Poor’s 500-share index gained 0.9 percent, the Dow Jones industrial average 1 percent and the Nasdaq composite 0.8 percent. Wall Street was following global markets higher. In afternoon trading in Europe, major bourses were as much as 1.3 percent higher. Hong Kong’s Hang Seng closed with a gain of 1.5 percent.”
Chairman Bernanke: “We could raise interest rates in 15 minutes if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time. Now that time is not now.”
Scott Pelley, CBS 60 Minutes: “You have what degree of confidence in your ability to control this?”
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No doubt that exchange of 2010 will go down as the most famous of Mr. Bernanke’s tenure as chairman of the Federal Reserve. It is the context in which to savor — if that is the word — the news of today’s “surprise,” as the headlines labeled the announcement of the Federal Open Market Committee’s decision to keep on pumping. On the one hand the Fed has been signaling it's getting ready to start ending the regime of quantitative easing by which it has been trying to keep the sluggish economy from falling back into recession. On the other hand every time it wants to start tapering off it discovers it can’t.
“I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis. But this really proves it beyond a shadow of a doubt; if you really want to understand what’s going on here, the Austrian you need to read isn’t Friedrich Hayek or Ludwig von Mises, it’s Sigmund Freud.”
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So writes the Nobel laureate Paul Krugman in his Web log at the Times. He is reacting to our editorial, “The Female Dollar,” and to the Wall Street Journal’s more substantive debunking of the way gender has eclipsed monetary policy in the debate on the next chairman of the Federal Reserve. And, by George, if it doesn’t appear that Professor Krugman has stumbled onto something.