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Thursday, February 7, 2013
Monetary policy is a subject often left to experts, but it affects everyone. It’s the ultimate pocketbook issue.
Whether you’re a borrower or saver, a tea party sympathizer or an Occupy Wall Street zealot, you have a personal stake in the economic outcome of decisions made by the Federal Reserve, our nation’s central bank.
The Fed determines interest rates, controls the money supply and regulates the banking system — providing the nation with “a safe, flexible and stable monetary and financial system,” as stated on its website.
Citizens might fairly challenge that claim. The global financial crisis was largely caused by loose monetary policy; the Fed kept interest rates too low from 2003 to 2005, creating a credit bubble that burst in 2008.
So the Fed is hardly infallible. Indeed, even as economists engage in heated debate over whether the Fed’s current monetary policy is helping or hurting prospects for economic recovery, a movement by citizens for sound money is gaining momentum.
Does “quantitative easing” by the Fed — injecting money into the economy through huge purchases of Treasury debt and mortgage-backed securities from banks — actually induce banks to make productive loans to businesses?
If not, monetary stimulus might backfire. Instead of providing a stable foundation for real economic growth, it could be creating the next bubble, which could lead to financial meltdown with further debilitating economic consequences.
Our current lackluster recovery is frustrating. No wonder people are questioning the Fed’s less-than-omniscient judgment. And there are growing tensions from the disconnect between the world of global finance and the normal money and credit needs of average citizens. Banks earn big profits by speculating on complex derivatives, while individuals earn next-to-nothing on ordinary savings accounts. It’s difficult to plan for retirement when interest income is near zero.
The dilemma goes to basic economic precepts: What is the meaning of money? Is it meant to be a reliable tool of measurement for private enterprise, or an instrument of government policy? Should our nation’s standard of value be subordinate to the discretionary authority of Fed officials?
Thomas Jefferson certainly had a different view. He believed the money unit for the United States should be dependable and constant. Eager to ensure the success of a fledgling nation dedicated to self-government, Jefferson personally took on the task of defining America’s monetary standard of value.
“If we determine that a Dollar shall be our Unit, we must then say with precision what a Dollar is,” Jefferson states in his Notes on the Establishment of a Money Unit and of a Coinage for the United States. For the Founders, the dollar could be defined only in terms of precious metals. The Coinage Act of 1792 fixed the value of the dollar at 371.25 grains of pure silver or 24.75 grains of pure gold.
The Founders were well aware of the potential for excessive monetary issuance through paper currency or credit. The Constitution empowers federal government to “coin” money (Article I, Section 8) but not to issue “bills of credit” that must be accepted as legal tender.
States are prohibited from making “any thing but gold and silver coin a tender in payment of debts” (Article I, Section 10).
Our monetary heritage gives special resonance to a legislative initiative, HJ 590, now making its way through the Virginia General Assembly. Del. Robert G. Marshall, R-Prince William, proposes to establish a joint subcommittee to study the feasibility of a United States money unit based on a metallic standard “in keeping with constitutional precepts and our nation’s founding principles.”
The Fed’s unprecedented actions of late, compounded by the unpopularity of its near-zero interest rates, may well generate considerable interest and support for conducting such a study. Thirteen states have advanced legislative proposals involving the recognition of gold and silver coins as legal tender. In 2011, Utah’s governor signed into law a bill that allows gold and silver coins issued by the U.S. Mint to be exchanged as an acceptable form of payment at their market value, rather than the nominal inscription.
It seems most appropriate that the commonwealth would choose to join the movement for sound money. If Virginia’s legislators agree to undertake the feasibility study, one suspects that Jefferson would nod in approval.
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