There’s a lot to admire in Alex Pollock’s Saturday piece in The Wall Street Journal, “It’s High Time to ‘Audit’ the Fed.” Pollock, a longtime chief executive of the Federal Home Loan Bank of Chicago and currently a resident fellow at the American Enterprise Institute, attacks the faulty premise that the supposed “independence” of the Fed should lead Congress to forgo the wide-ranging audit called for in current legislation.
In reality the Fed is a creature of Congress, which in turn is an elected institution specifically tasked in the Constitution (Article I, Section 8) with coining money and regulating its value. Congress deserves criticism for neglecting its role for so long, not for finally making tentative moves to reestablish that role.
Pollock also correctly notes that the Fed is making its decisions based on an economic model that has been wrong again and again (usually in the direction of excessive optimism about its own policies). He also notes that the Fed has repeatedly ignored or distorted the few guidelines recent Congresses have provided, such as fostering “moderate” (as opposed to zero) interest rates and interpreting price stability as a perpetual mild inflation.
Moreover, Pollock has no illusions about the faulty elitist design of the Fed, which he describes as “a prime example of the dream-world that President Woodrow Wilson imported from the theorists of the German Empire—the notion of government based on the superior knowledge of independent experts that bypasses the messy and undisciplined world of democratic politics.” This sounds great until experience teaches us that “the Fed has no superior economic knowledge. It has only forecasts as unreliable as everybody else’s, and theories as debatable. Hence its many mistakes.”
Having all these correct premises, it’s a shame Pollock draws such a lame conclusion: that a joint congressional committee be set up to oversee more closely how the Fed is performing. The same factors that have made the Fed’s forecasts so comically wrong will be no different for Congress and its staff experts: no one person or entity except the free market—also known as the people—has any idea at any given time how much money the Fed needs to print to lubricate the economy.
The gold standard, particularly when it featured domestic convertibility in the bulk of the years leading up to World War I, performed better by all economic criteria than the mess we have had since Richard Nixon inaugurated the era of paper money in 1971. The Fed, set up in 1913 for very limited reasons, is no substitute for a final money that holds its value. Reading between the lines of his shrewd analysis, I suspect Pollock knows this. It would have a great impact if he and many others began to say so.
Jeff Bell is the Policy Director of American Principles in Action.