Mike Lee, U.S. Senator from Utah, recently sponsored a bill entitled the “Federal Reserve Modernization Act.” It is the counterpart to Rep. Kevin Brady's Sound Dollar Act of 2012 (which enjoys 35 House cosponsors and, of equal note, already is drawing liberal fire). The Brady/Lee legislation represents an important first step forward to restoring good money to America: money that can provide a foundation for prosperity with equity, security, and, of at least equal importance, constitutional integrity.
The Sound Dollar Act/Federal Reserve Modernization Act directs America's central bank to monitor the prices of major asset classes including gold and the value of the dollar relative to gold. Gold is the only asset twice specified. One of its three broad categories is entirely devoted to gold. Gold thereby emerges designated as a more important factor in monetary policy than it has played in two generations.
Mr. Brady and Mr. Lee thereby offer a first step toward Constitutional money, which is a dollar defined as a fixed weight of gold. Constitutional money was the good money, conceived by the Founders and installed by George Washington and his Treasury Secretary Alexander Hamilton, which gave the impetus to America to prosper. Both Lee and Brady demonstrate astute awareness of Constitutional history and performance.
Mr. Lee's official blog notes: “As for monetary policy, the American experience from the First Bank in 1791 to the modern Fed is that the economy operates more efficiently when the central bank, managed by competent individuals, operates independently with a rules-based approach. …. For too long, Congress has abdicated its responsibility of ensuring that the Fed's mandate properly reflects the lessons of history while building toward the future.”
Key words? “The lessons of history.”
Mr. Brady, too, draws on history in a recent speech before the Shadow Open Market Committee:
“Not far from here on West 141st Street stands the Grange, the recently restored home of Alexander Hamilton, our first Secretary of the Treasury. After careful consideration, Hamilton devised a monetary system that revived a moribund American economy and fostered rapid economic growth. As Hamilton did in his day, we must thoughtfully and clearly define the role of the Federal Reserve going forward.
“Learning from the past and looking to the future, Congress must select the right monetary policy mandate, maintain a Fed independent of political pressure, and hold the Fed accountable for the results.
“So let us examine what monetary policy should be going forward.”
American monetary policy today, with its QEs and Operation Twists, is by no means America's first experiment with paper money. The most notorious previous experiment was that of the Continental Congress, which issued a paper dollar called the “Continental.” Gen. George Washington wrote to John Jay, president of the Continental Congress, “The depreciation of it is got to so alarming a point that a wagon-load of money will scarcely purchase a wagon-load of provisions.” The Continental rapidly became a byword for worthlessness.
Almost all of America's Founders detested artificial paper money (of which Federal Reserve Notes are but the modern incarnation). James Madison — the chief architect of the Constitution — wrote this in Federalist #44: “The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.”
Thomas Jefferson wrote, in 1788, “Paper is poverty. It is only the ghost of money, and not money itself.” (To E. Carrington) His opinion did not improve. He wrote, in 1813: “Paper money is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.” “When I speak comparatively of the paper emission of the old Congress and the present banks, let it not be imagined that I cover them under the same mantle. The object of the former was a holy one; for if ever there was a holy war it was that which saved our liberties and gave us independence. The object of the latter is to enrich swindlers at the expense of the honest and industrious part of the nation.” (To J.W. Eppes)
Madison's Notes of Debates of the Federal Convention of 1787 show that the power to issue paper money was stripped from the federal government (except, perhaps, in times of war) too. The Convention stripped out this power by a vote of 9 states to 2. Some excerpts:
Mr. ELSEWORTH thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. …
Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.
Mr. READ, thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.
The Sound Dollar/Federal Reserve Modernization Act is a notable first step toward restoring Constitutional, prosperity-fostering, money. To fulfill its inherent promise another step beckons: to define the dollar as a fixed weight of gold and direct the Federal reserve not merely to reference the price of gold but, as fully articulated by Reagan Gold Commissioner Lewis E. Lehrman, founder and chairman of the Lehrman Institute (which this writer professionally advises) to take the known required measures to maintain the fixed value of the dollar — including interconvertiblility of paper and gold dollars — while also providing sufficient liquidity to allow the economy to prosper.
This is not an outré proposition. As The Economist's New York bureau chief stated in a recent video interview with the Wall Street Journal: “Gold does seem to in a way hearken back to another age, doesn't it. But I think the reason it has come back into fashion in the last ten years as we write In Gold We Trust people have lost faith in the 20th century religion of government backed fiat money.”
Amity Shlaes writes in Bloomberg (mentioning, in passing, this columnist) “The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods. 'Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives....'"
Directing the Fed to reference the price of gold is an important symbolic step. To really generate jobs in abundance now? Mark up this legislation so as to define the dollar as a fixed weight of gold and make our currency convertible thereto. Pivoting from symbol to substance will ignite an historic wave of job creation and put its proponents onto the same level of monetary statesmanship as George Washington, James Madison, Alexander Hamilton, Thomas Jefferson and all who brought forth upon this continent a new nation.