What are the chances that President Barack Obama and his Treasury secretary, Timothy Geithner, will ever have anything meaningful to say about monetary policy—beyond continuing to try to coax Federal Reserve chairman Ben Bernanke to print ever more dollars to buy up ever more U.S. government debt? About the same as the interest rate you are receiving on your savings: zero.
That’s why it matters so much for the future of the United States—indeed, the future of the global economy—that Paul Ryan is now on the Republican ticket. Because it’s not just the fiscal fiasco, caused by political cowardice and dithering, that has put our nation on a path to eventual bankruptcy. It’s also the loss of a monetary compass. The value of the dollar has been so compromised through loose Fed policies that it no longer functions as a trustworthy money unit. Instead of providing a reliable tool for measuring what something is worth, or for deciding whether to consume now or save for the future, the dollar has become yet another policy instrument of government.
One notable who’d be a severe critic of our monetary situation today is Thomas Jefferson. In his Notes on the Establishment of a Money Unit and of a Coinage for the United States, written in 1784, Jefferson focused on the need to protect the integrity of the American dollar. A dependable currency would not only unite the former colonies and facilitate commerce throughout the fledgling nation, it would also facilitate individual endeavor and economic opportunity. For the first time, for example, Jefferson argued, a nation’s monetary standard would be based on the decimal system so that business calculations would be simple, honest, and straightforward.
For Jefferson, the notion that the value of the U.S. dollar might one day be subordinated to a perceived need in the nation’s capital to accommodate budgetary failures would be a betrayal of the American promise. The money unit of the United States should represent an “unchangeable” standard of value, Jefferson firmly believed, that would remain “accessible to all persons, in all times and places.” A sound dollar underscored America’s commitment to free people and free -markets, to a self-governing nation dedicated to economic freedom and equal rights under the law.
Discussing monetary issues, Paul Ryan sounds Jeffersonian:
Money whose future value is unpredictable cannot serve its most important purpose, to provide a common rule to equate goods, services, and labor. When social transactions are undermined, people lose trust in one another, and the vacuum must be filled with the power of government. Our Founders experienced this firsthand, so they laid their foundations to provide for limited government with a maximum of entrepreneurial freedom and sound money.
You can be sure that detractors of the presumptive Republican nominee for vice president will brand this sort of thinking as “extreme” and “radical”—a threat to monetary policy as we know it. Certainly, Ryan’s views represent a different approach from what is currently practiced in Washington, where the dollar’s value is merely a consequence of interest-rate decisions and banking regulatory tweaks made every six weeks or so, entirely at the discretion of unelected officials appointed to the board of governors of the Federal Reserve.
But when Ryan emphasizes the need for sound money in the context of civil society and free markets under limited government, he is not only invoking the ideals of Jefferson. He is also building on the insights of Friedrich Hayek, the great free-market economist whose Constitution of Liberty (1960) carries this ominous warning: “All those who wish to stop the drift toward increasing government control should concentrate their effort on monetary policy.”
By questioning the boom-and-bust policies of the Fed and challenging its lack of accountability, Ryan is trying to do just that. In his role as House -Budget Committee chairman, he has pointedly asked Bernanke during congressional testimony to acknowledge “the long-term repercussions of . . . a weak currency policy” and to explain how the Fed can presume to quash future inflation in the wake of unprecedented
monetary stimulus. Ryan is highly skeptical that Fed officials can precisely calibrate the money supply to the needs of the economy through the creation of unwarranted dollars to purchase government debt; he deems it “a fatal conceit.” He would sooner trust in the aggregate wisdom of hundreds of millions of free market -participants—buyers and sellers, consumers and savers—operating under a stable monetary standard anchored to the real economy.
Ryan is also aware that Americans increasingly sense unfairness—unequal treatment—in the way monetary policy is conducted. Sophisticated investors and privileged financial institutions seem to be the main beneficiaries of Fed largesse, borrowing at cheap rates while savers earn virtually nothing. Equity markets have become subject to the pronouncements of Bernanke, -hoping for some hint of further “quantitative easing” to goose stock prices. Meanwhile, the amount of bank holdings of Treasury obligations and government agency debt has more than doubled this year over 2011, reaching an all-time high of $1.84 trillion. If community banks are now going the way of money-center banks, gaming interest rates on Treasury instruments rather than lending to businesses, it’s because the Fed has made that the more lucrative endeavor.
Our discretionary monetary policy has brought about a rupture between financial intermediaries and the actual engines of productive growth, with high finance operating on a different track than the organic economy. This is undermining growth prospects for the United States and the world; it is distorting the natural process of economic recovery by manipulating price signals. After all, the whole point of capital investment is to channel financial “seed corn” into productive economic enterprise that will yield higher future returns—meaning improved living standards. But the Fed’s activist policies are guiding those resources into government instead.
Monetary policy should not play favorites. And Ryan’s campaign to restore sound money is as much about reasserting the principles of equal rights and equal treatment as it is about reconnecting the value of the dollar to the real economy. “Our currency should provide a reliable store of value—it should be guided by the rule of law, not the rule of men,” Ryan notified Bernanke at a hearing last year. “There is nothing more insidious that a country can do to its citizens than debase its currency.”
It’s an expression of faith in our nation’s founding principles wholly consistent with Jefferson’s own view that the integrity of our currency is a reflection of our commitment to personal freedom under limited government—and that a reliable dollar is the only money unit worthy of the American idea.
Judy Shelton, author of Fixing the Dollar Now: Why U.S. Money Lost Its Integrity and How We Can Restore It, is a senior fellow at the Atlas Economic Research Foundation.