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The Fed’s Future Is Political

The Fed’s Future Is Political

(Bloomberg Opinion) -- If confirmed to the board of the U.S. Federal Reserve, Stephen Moore would jeopardize the Fed’s hard-won reputation for fairness and independence. At the same time, his confirmation — or even the debate over it — may be a sign of the inevitable return of monetary policy to the center of American politics.

A longtime conservative pundit, Moore has been an unwavering supporter of President Donald Trump and an outspoken critic of the Fed in general and Chairman Jerome Powell in particular. Nonetheless, and despite opposition from both the left and right, Moore seems to be off to a better start than Trump’s previous picks. Moore’s confirmation would not just install a proponent of conservative supply-side economics at the Fed — it would also embolden progressive support for modern monetary theory, or MMT, which argues that Fed independence is a fiction.

So it’s easy to envision a future where the Fed is as politicized as the Supreme Court, and presidential campaigns are waged on the basis of monetary policy. In this sense, the 2020s could be a lot like the 1890s.

In the late 19th century, monetary policy was a major political issue. Both parties had clear monetary platforms defined by the interests of their constituents. The Republican Party, supported by urban industrialists and financiers, favored a currency backed solely by gold. A gold standard would ease international trade and prevent the value of bonds from being eroded by inflation.

The Democratic Party, supported by rural farmers and ranchers, wanted the currency backed by silver as well. Silver was relatively more plentiful, and the official exchange rate of 16 ounces of silver for 1 ounce of gold would allow far more bills to printed. With more money in circulation, the price of agricultural products would rise, making it easier for farmers to repay their loans.

At the 1896 Democratic convention, William Jennings Bryan delivered one the most stirring speeches in U.S. history. Devoted entirely to denouncing the gold standard, it ended with the line, “You shall not crucify mankind upon a cross of gold.” Although Bryan was selected as the Democratic nominee for president, he went on to lose narrowly to William McKinley (with an electoral map almost the mirror inverse of the 2016 version).

Today the U.S. is just as bitterly divided, and monetary policy is once again crucial to its economic future. Then the gold standard had fueled the rise of industry in the East, but threatened the health of the heartland. Now a commitment to low inflation supports the globalization of U.S. businesses, but also exposes the economy to the threat of deep recessions and long, shallow recoveries.

So it is perhaps inevitable that monetary policy would once again become a political issue. The danger, however, is that contemporary Republicans and Democrats lack a coherent monetary policy platform, and few politicians on either side of the aisle have any experience with monetary policy. Both sides have become accustomed to deferring to the wisdom of officials from the Fed and the Treasury Department.

This is not tenable — especially if the U.S. is entering a new age of monetary politics. Politicians need clear, well-articulated platforms. Macroeconomists need to start hammering out those platforms, and voters need to hold politicians accountable for the consequences of their policies.

It's an admittedly tall order. But there is no alternative. In the last crisis, the Fed took extraordinary measures, and public trust has yet to be restored. The Fed will have even less room to maneuver next time. Without political legitimacy and support, monetary policy will be mired in a state of finger-pointing and paralysis from which the economy might never fully recover.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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