The Alternative Gnomes of Macro-finance: Dr. Allan Meltzer & Dr. Gerald P. O’Driscoll Jr.

I just love the contemporary students of Hayek and Ludwig von Mises in the names of Allan Meltzer and Gerard P.  O’Driscoll.  Dr. O’Driscoll is a former President of the Federal Reserve Bank of Dallas.  Both men continue to hammer the Keynesians for the dangerous myopia regarding THAT the central bank (the Federal Reserve) is doing fiscal policy.  It isn’t supposed to be doing fiscal!  In fact, I along with guys like Marshall McLuhan would argue that the reality of digital money makes the Federal Reserve useless!  Both men continue to berate the mythology that underwrites the authority of the Federal Reserve and its relation to an expansive money supply.

I can’t use this post to summarize how monetarism defeated Keynsesians, but it DID!  Meltzer and O’Driscoll have exposed the utter uselessness of our central bank, specifically how it has tied its political fortune to being an arcane specialist for a dangerously myopic Congress.

Let me explain.

It is only with fiat money and the control of that money supply that underwrites why we need a central bank.  This means that a dual mandate for the Fed must be constrained to a single mandate:  price stability.  It would also mean that Congress must do the politically dangerous work of eliminating subsidies.  Cue the cry from the family farmer from the agriculture department!

Any standard or commodity places a limit on money creation.  This is the intrinsic value of the rules based argument for monetary policy.  If Greenspan can devise and implement the Great Moderation, then we can in fact twaddle between a rules based/discretionary based monetary regime.  This is a political reality dependent on prudence and intellectual   fortitude!  Both are in extremely low supply these days.

The second most dangerous myth of the Federal Reserve is that the central bank is needed to be the lender of last resort.

Historically, it always was; but with confiscatory taxation, bloated budgets and low mandated bank reserve requirements, banks can’t rely on either each other nor themselves to have enough reserve capital on hand.

A stronger reserve system would be intrinsically decentralized with very high reserve requirements.  In a sentence, a many reserve system. This can only happen in a highly decentralized political economy.

As Hayek laid out in ‘The Constitution of Liberty”, the central bank cannot have true independence because of its official political relation to Congressional authority.

The Federal Reserve gained its independence from the Treasury in 1951, it was here that it struck an accord with Treasury that the Fed would no longer be required to fix both govmint bonds and interest rates.  This would fully play-out under Nixon’s term immediately after the 1973 Israeli war, permitting much intellectual confusion about the origin of both inflation and stagflation that erupted with OPEC.  The answer is discovered in the quality of money not geopolitical strategy.

As Dr. Allan Meltzer wrote in his ‘History of the Federal Reserve’, both Fed Chairman William McChesney Martin, Johnson and Nixon (Martin’s time would end under Johnson, giving Nixon Arthur Burns), nevertheless, neither Fed Chairman thought that the central bank should operate independently of Congress.  This is not intrinsically evil, just naive. An ‘interventionist, activist, accommodative’ federal reserve is only a partial problem; we must discern the governing political philosophy underwriting it, if we are to judge it appropriately.

Federal Reserve Chairman Arthur Burns’ diary is worth reading, for it is here that we an discern a very aggressive Johnson like interventionist fed policy to accommodate the political goals of a President in need of re-election.

It would fall to Jimmy Carter’s pick of Fed Chairman Paul Vockler to embody true independence.  Vockler’s time at the fed during Reagan’s tenure is the model of a fed chairman!  His tight money policy broke inflation, restored the value of our currency and unleashed a 25 year economic boom.

We are not operating in any meaningful way toward the independence that Vockler achieved while at the Fed. Bernanke has purchased nearly 80% of Treasury debt.   In a bid to raise asset prices, he’s killed interest rates in an act to hinge monetary policy to immediate political goals; namely the re-election of Obama.

Since its founding in 1913, the Federal Reserve’s desire to accommodate any political class has unleashed inflation, currency depreciation and numerous other social ills to the detriment of the Union.  Prices alone have risen by a factor of 23 since 1913.

The real argument isn’t between choosing either a discretionary federal reserve regime or a rules based system.  The argument is POLITICAL and CULTURAL:  ITS ABOUT CONGRESSES ROLE IN FISCAL POLICY.  ESPECIALLY THE ROLE AND IMPACT OF SUBSIDIES, PRICES, COMMODITIES AND THE VALUE OF FIAT CURRENCIES.  THIS IS NOT A WAR TO BE FOUGHT INSIDE MONETARY POLICY.  Its a war over controlling the rate, pace and growth of govmint.

If we get that right, then monetary policy, price stability and the money supply is simple.

Welcome to the role of Monetarists.  RIP Keynes.

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About William Holland

Systematic Theologian/International Relations
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