Recently, I numbered among the twenty-some self-styled conservatives, organized by Steve Lonegan, who gathered at the headquarters of the Federal Reserve to meet with Chair Janet Yellen and governor Lael Brainard. (Steve is Director of Monetary Policy for American Principles in Action.) We met for an hour, with a selection of us giving remarks for seven minutes apiece. I was one of those speakers. Here I publish the remarks, verbatim, that I gave, twenty minutes into the meeting:
“Since 1971, and the end of official gold convertibility, the United States has oscillated between two general kinds of monetary policy. The one kind is discretionary. The other kind is identifiable by its salient effect: of freely chosen commodity prices, especially gold’s, staying at low and stable levels in the markets. It is proper to call the second general kind of monetary policy, the kind that conduces to low and stable gold and commodity prices, a ‘classical’ monetary policy, and the discretionary kind ‘less’ or ‘non-classical.’
“Those monetary systems that maintain the de facto nature of convertibility with the unformed materials of the earth, with geology, are those that are more classical than their alternatives. We should be curious about this distinction because of one deep historical reality that is associated with it. This is that since 1971, the more classical the monetary orientation, the greater the economy has performed; and the less classical the monetary orientation, the more the economy has faltered. This is, perhaps, the central generalization that we can make about the relationship of monetary policy to the economy at large in the era since Bretton Woods.
“The oscillation unfolded over the decades as follows. After the end of gold convertibility in 1971, monetary policy came into its discretionary, non-classical season. Then in the 1980s and 1990s, a shift occurred. The run-up in the dollar prices of gold and oil (and land and many other fruits and characteristics of the unformed earth) that had characterized the 1970s reversed course. Commodities and gold settled to low levels and stayed put within a tight range, for 17 years, from 1983 to 2000.
“The second shift, a move to the status quo ante, occurred after the year 2000, when discretion in monetary policy superseded de facto stabilization of gold and commodities. The prices of gold and commodities, in turn, as in the 1970s, shot to new highs and explored new ranges of volatility.
“Over the forty some years since 1971, two sets of two decades mirror each other. The 1970s and the (now long) 2000s have proven eras of monetary discretion, and the 1980s and 1990s were those of classical policy, classical de facto if not de jure. Moreover, just as the 1970s and the 2000s are like to each other in being less classical in monetary orientation, so did the 1980s and 1990s jointly recall the decades of Bretton Woods: both of these eras were more classical in monetary orientation.
“Economically, the effects were startling in their contrasts. In the 1980s and 1990s, growth was high, recessions rare (there was one from 1982 to 2000), entrepreneurialism common, and jobs abundant. In the 1970s and the 2000s (through today), recessions were either frequent or their recoveries slow and shallow, un- and under-employment sampled new high levels, and investment went into primary inputs ranging from oil to land (and gold) to an uncommon degree.
“What can the connection have been all along, between the degree of classicalness of monetary policy and economic performance? In the era of the near-classical monetary standard, the economy enjoyed a long rush of investment into the production of finished goods and services, into ‘real’ purposes that help human beings live better. In the non-classical eras, investment in primary inputs to the exclusion of finished production of other goods was so great that it took on the aspect of a distortion.
“The rush into commodities in the 1970s and the 2000s was, collectively, a move into hedges against the currency, on account of the non-adoption of classical monetary policy. The economic effect was the deprivation of investment in real purposes. The primary harms fell upon wage-earners, who are dependent on real investment for jobs and the affordable provision of real goods and services. The primary benefits (which were proportionately smaller than the harms) fell to those who were well-positioned in one place—in the financial sector—to profit from the new status of currency hedges.
“The push out of commodities in the 1980s and 1990s was thus a push into the real forms of job-creation and goods-and-services production. The de facto targeting of commodities and gold depressed the interest in hedging the world’s major currency, and the great part of investment became ‘real.’ The 40 million new jobs of this era, the ’80s and the ’90s, the vast increases in the real living standards of wage-earners, and the bulging of the middle class were the fruits of there being no widespread interest in hedging the currency. (The 1950s and 1960s, when the middle class also advanced, were as well decades of a near-classical monetary orientation.)
“Non-classical monetary orientations introduce a fundamental distortion to the economy. They drive a significant part of real investment capital into currency hedges. Effects of this phenomenon are the drying up of job opportunities for the laboring classes and the increasing share within the economy of that industry which ministers to hedging: finance.
“Classical monetary orientations, however, reduce if not eliminate such distortion. They calm capital to such a degree that the great portion of it flows to use in real projects. These real projects are especially beneficial to wage-earners, in that the excessive financialization of the economy loses its basis and real work and the production of real products become the economy’s dominant focus. The time is upon us again to revert to an approximation of classical monetary policy.”
We had a good hour of presentation and discussion with the two Fed leaders, and then our group lingered in the room for a short while. I was too lost in an affecting conversation I had just had with Judy Shelton about Robert Mundell to take enough notice of its Americanist beaux-arts appointments. We spilled out of the building, ready for the next moves, which include both developments in Congress and a shadow Jackson Hole meeting in August which will feature not only our group, but Chair Yellen’s predecessor once removed, Alan Greenspan. By dint of incremental effort, surely money will soon return to its natural humble state and strictly serve the real economic actions which make up its only reason for existence.
This essay originally appeared on Forbes.com (March 2015) and is republished here with permission.
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