The Magazine


Good but incomplete.

Jul 23, 2012, Vol. 17, No. 42 • By LEWIS E. LEHRMAN
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

The United States stored up immense human and financial capital for centuries. But that wealth has now been substantially mortgaged to the Fed and foreign monetary authorities, commercial banks, government trust funds, domestic institutions, and increasingly to foreign lenders. Still more ominous, private national wealth, owned by American taxpayers, has been indirectly pledged as collateral for U.S. government debt and its enormous unfunded liabilities—among others, Medicare, -Medicaid, and government pensions. Unless there is a dramatic change in U.S. economic policy, national insolvency will ultimately overtake us. It is difficult to predict when. But in the long run, what cannot be sustained will not be sustained. European insolvency is the witness to this truth.

Romney and his advisers must analyze the true state of our national balance sheet in addition to our problematic national income accounts. They should offer a National Balance Sheet to the public, in accessible language. It will show America’s dire and deteriorating position as a massive debtor, largely propped up by the exorbitant privilege of the dollar’s role as a global reserve currency. Despite a solvent private sector, U.S. government budget deficits and balance of payments deficits, financed by the Fed and foreigners, increasingly compromise the American balance sheet.

Romney’s tax reform is pro-growth, but it tends to emphasize tax rate reductions for property income. It would be useful to emphasize that a pro-growth tax reform should not favor property income (e.g., capital gains and dividends) over labor income (wages and salaries). Cutting rates for both was the key to the bipartisan Reagan tax reform. The Reagan reform was also good politics. The vast majority of Americans, after all, are salary and wage earners.

Romney speaks clearly, even passionately, on monetary policy, sometimes indicting the hyperactive credit creation (or money printing) of the Greenspan-Bernanke Fed. He has recommended a rule-based monetary policy in place of the present unrestrained, discretionary (indeed, arbitrary) Fed policy.

The question is—which rule? The Taylor rule? Nominal GDP targeting? Inflation targeting? Money stock targeting? Men in the mold of Paul Volcker would help, Romney suggests. But this is a recommendation for different people instead of rule-based institutional reform of the Federal Reserve.

As Allan Meltzer’s magisterial two-volume history of the Fed shows, the 100-year legacy of the Federal Reserve System is a cycle of boom and bust, substantially caused by erratic Fed monetary policy—e.g., the 1920s boom, followed by financial collapse and the Great Depression; the 1990s stock market boom, crash, and recession; the real estate boom, financial collapse, and the Great Recession (2007-2009). These examples characterize the Fed’s century-long, unstable reign over the dollar and manipulation of the money supply. Worse yet, under the Fed’s arbitrary policies, the purchasing power of the dollar has declined 85 percent since 1971, when President Nixon terminated the last weak link of the dollar to gold. The depreciation of the value of the dollar has gradually impoverished those on fixed incomes and those on lagging wages and salaries. It is fair to say the Federal Reserve has presided over an age of inflation.

To carry out true monetary reform, Romney might consider other periods of American monetary history, instead of suggesting the uncertain device of more prudent Fed chairmen, or an easily manipulated Taylor rule, or an even more easily manipulated “inflation targeting rule” or nominal GDP rule.

In 1987, Romney’s economic adviser Glenn Hubbard, in a scholarly analysis of the classical gold standard (1879-1914), reviewed the performance of a period when the dollar was defined as a weight unit of gold; a period when the paper dollar was by law convertible to gold; a period when the dollar was neither an official reserve currency nor a floating monetary token in a turbulent sea of floating exchange rates. That period achieved an economic growth record the equal of any in American history. In stark contrast to the period 1971-2012, the purchasing power of the gold-backed dollar was almost exactly the same in 1914 as it was in 1879. The general price level wound up in 1914 the same as in 1879. There were variations in the price level from year to year, but over the full period, there was neither inflation nor deflation. During this period, the monetary standard of the United States—the dollar defined in law as a weight of gold—performed its constitutional role as a stable means of exchange, a stable unit of account, and a stable store of value.

Recent Blog Posts

The Weekly Standard Archives

Browse 19 Years of the Weekly Standard

Old covers