Congressman Barney Frank has another flawed idea–somehow he thinks that the Federal Reserve has too much independence from political guidance, so he has a plan to reduce the representation of the regional Fed bank presidents on the central bank policy board and replace them with political appointees. We have enough problems with monetary policy as it is currently being managed without further politicizing it.
Congressman Ron Paul may be a borderline kook on many issues, but one he understands very well is the role of a sound reserve currency in the maintenance of growth and stability around the world and the importance of such a mission to American prosperity. Earlier this year, Paul asked Federal Reserve Chairman Ben Bernanke, “what is your definition of a dollar?’ The answer, not surprisingly, was “My definition of the dollar is what it can buy”, in other words, its purchasing power, which conforms to the currently popular understanding, but bears no relationship to the traditional definition or to the Constitutional intent of the role of the Congress in maintaining the value of our currency.
Seth Lipsky, Editor of The New York Sun, has written a masterful essay in the Summer 2011 edition of National Affairs entitled “What is a Dollar?”, in which he describes how we came to this point in defining the dollar in these terms, the damage it has done to our economy and order in world trade, and what we should do about it. In brief, we should start by restoring some semblance of the Bretton Woods accord that provided the foundation for stability in the dollar as the world’s reserve currency from 1944 until Richard Nixon dismantled the system in 1971.
In Forbes Magazine, Charles Kadlec catalogues where we have been since that dismantling in terms of economic growth, inflation, and unemployment. I won’t bore you with all the numbers, except to pass along one startling point he makes that is clear from the the data–that “the whole notion of an energy crisis since 1973 becomes a grand illusion created by the fall in the value of the paper dollar against gold!”
Needless to say, our purchasing power valuation policy has been a disaster for growth and prosperity and has been possible to sustain only because we have somehow maintained the dollar’s position as the world’s reserve currency, a luxury that may not last much longer if we remain tied to current monetary policy, and much less so if we buy into the further politicization of it with loony ideas like Barney Frank’s latest.