Why is Rep. Barney Frank rounding up his liberal legislative militia to oppose the Sound Dollar Act of 2012? This is a bill recently introduced by Rep. Kevin Brady, top Republican on the Congressional Joint Economic Committee. It is co-sponsored by 31 of his House colleagues and has a Senate counterpart from Utah’s Mike Lee.
A panicked Rep. Frank snapped to immediately. He rounded up 26 liberal democrats to sign a letter of opposition. “We believe strongly that the dual mandate should be maintained, and we believe that the Federal Reserve’s actions in pursuit of that mandate have been helpful in dealing with our unemployment problem,” wrote Frank and fellow liberals to committee chairman Spencer Bachus.
Believe it or not, Frank’s beliefs do not always coincide with common sense reality. As Boston Globe columnist Jeff Jacoby wrote in 2008:
“Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that “these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.” When the White House warned of “systemic risk for our financial system” unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.
“Now that the bubble has burst and the “systemic risk” is apparent to all, Frank blithely declares: ‘The private sector got us into this mess.” Well, give the congressman points for gall.
Frank and other liberals are hostile to legislation that constrains the Fed’s “discretionary activism.” Discretionary activism is what Columbia dean (and key Romney economic policy advisor) R. Glenn Hubbard indicts in Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity. This book contains a chapter entitled “Why an Easy-Money Street is a Dead End” and a subchapter “The Road to American Prosperity Cannot Be Paved with a Cheap Dollar.”
Brady’s legislation plays a major role in helping the GOP formulate a crucial plank in its economic platform: good money. Even more potent is this bill’s extraordinary emphasis on gold. In its findings, the Act directs the Federal Reserve to monitor prices in three sectors. One is, exclusively, gold: The “Federal Reserve should monitor … the value of the United States dollar relative to gold… to determine whether the Federal Reserve’s monetary policy is consistent with long term price stability.” Another section directs the Fed to monitor the prices of “major asset classes (including… gold and other commodities…).”
Gold alone thus occurs in two of the three directives to the Fed. This appears by no means accidental. Brady elegantly has structured this legislation in a way that gives space both to the conservatives (supply side, movement, libertarian, and constitutionalist Tea Party) and Establishment Republicans (and conservative Democrats) to come together to work out what good money looks like.
The overwhelming conservative consensus is for the dollar, whether issued by the government or the private sector, to be defined as a fixed weight of gold and for currency convertibility. Intramural differences among conservatives, and between conservatives and Republicans (and, for that matter, Blue Dog Democrats who are attuned to the popularity of the gold standard with voters) are far narrower than the differences between conservatives and liberals. The Weekly Standard.com, reports Brady’s position: “Our goal today…is to start a thoughtful debate….” He succeeds.
A highly respected member of the Republican policy establishment, Stanford University professor of economics John Taylor, recently testified before the Joint Economic Committee in favor of the Sound Dollar Act re-enforcing Dean Hubbard’s key point. Prof. Taylor then wrote a Wall Street Journal op-ed entitled The Dangers of an Interventionist Fed: A century of experience shows that rules lead to prosperity and discretion leads to trouble.
The conservative policy establishment view is exemplified by the Conservative Action Project chaired by President Reagan’s counselor and attorney general Edwin Meese III in its Conservative Consensus For 2012 issued last December. This important document firmly placed sound monetary policy in the top of the conservative agenda. The conservative policy establishment consensus also is exemplified by two nonprofit groups professionally advised by this writer, the American Principles Project and the Lehrman Institute’s monetary policy site, and by Atlas Economic Research Foundation’s Sound Money Project. These thought leaders, and many others, teach about a dollar defined as a fixed weight of gold and currency legally convertible at that weight.
The hard left reacts to monetary reform and the gold standard as a vampire does to a crucifix. Astute Roosevelt Institute fellow Mike Konczal, blogging at Rortybomb last April 2011 began the litany: “Conservatives are organizing against a full employment mandate and rallying around the gold standard wing of their party.” Since then, ThinkProgress’s Marie Diamond has stated that “Tea Party groups are determined to make returning to the gold standard a litmus test for GOP presidential candidates.” Paul Krugman warned in the New York Times that “Gold bugs have taken over the GOP.” Thomas Frank, in Harper’s Magazine, called gold “yet another eccentricity of the right-wing fringe… into the mainstream of American life.” Nouriel Roubini slurred supporters of gold as “lunatics and hacks.” Former Clinton Treasury Secretary and chair of Obama’s National Economic Council Larry Summers called the gold standard “the creationism of economics.”
Yet so bad has discretionary activism proved that even the center-left New York Times could headline, last August, a column A Gold Standard is Unthinkable No More. The sober, certainly not right wing, Bank of England issued a report last December which Bloomberg headlined as Global Economy Worked Better With Bretton Woods Currency System, BOE Says — Bretton Woods being a dilute gold standard.
Outside the cozy precincts of the hard left the gold standard has been rehabilitated. Clearly there is a productive conversation to be had between gold’s distinguished conservative and classical liberal proponents — such as Steve Forbes, Lewis Lehrman, Sean Fieler, James Grant, Judy Shelton, Brian Domitrovic, Lawrence White, Charles Kadlec, John Allison, John Tamny, James Rickards, and other respected figures who support gold convertibility — and the many distinguished mainstream economists who lean toward the something like the Taylor Rule. Brady has created a context for that thoughtful debate.
Since monetary reform is crucial to robust job creation Brady performs an invaluable public service by putting it front and center. The sponsors of the Sound Dollar Act demonstrate genuine statesmanship in moving the conversation forward in such a way as to allow everyone who believes in prosperity, with equity, through good money to unite behind Taylor’s axiom: “[T]he Federal Reserve should move to a … more rules-based policy of the kind that has worked in the past.” Rep. Brady and Sen. Lee have introduced legislation that represents a mortal threat to the practice of central planning that lingers on at full strength in just three capitals, Pyongyang, Havana, and Washington, DC … panicking Barney Frank.