The Fed chairman was testifying before the House banking committee. When he explained the central bank’s planned course of action, the members reacted with fury. Rep. Frank Annunzio (D-Ill.) shouted: “Your course of action is wrong.” Rep. George Hansen (R-Idaho) railed that the Fed was “destroying middle America.” Rep. Henry Gonzalez (D-Texas) called for the chairman’s impeachment.
That was in July 1981. The Fed chairman was Paul Volcker and the course of action the members were decrying was a further tightening of monetary policy. As the economy fell into recession, public outrage toward the Fed grew. Volcker’s mail included bricks from contractors to symbolize the houses they couldn’t build, and keys from car dealers for cars they couldn’t sell.
Yet the Fed stuck to its guns and ultimately won widespread plaudits for taming inflation. An underappreciated aspect of this episode is that President Ronald Reagan not only refrained from jumping on the anti-Fed bandwagon but also defended the institution and its independent role in making monetary policy. “This administration will always support the political independence of the Federal Reserve Board,” he said in a February 1982 press conference in the midst of recession.
As it happened, Reagan, no stranger to hard-money conservative thought, had doubts as to whether the Fed was actually needed. He’d asked that question of both Volcker and his own economic advisors in 1981. Moreover, the president’s political advisors were largely hostile to Volcker, seeing him as a danger to Reagan’s reelection.
But Reagan put sound policy ahead of political considerations. If we were to have a Fed, he realized, it needed to have an independent ability to make monetary decisions regardless of whether they yielded short-term benefits for incumbent politicians.
Fast forward to the present. The Fed is highly unpopular amid bad economic times. This is the case even though, unlike in the early ‘80s, the Fed is not administering tough medicine to control inflation. On the contrary, it is pumping money into the economy in an effort to stir growth. Conservatives largely oppose this policy as risking a resurgence of inflation.
But that only begins to capture the intense conservative antipathy to the central bank. Ron Paul’s “End the Fed” push has struck a chord with many Tea Partiers. Paul, who is likely to head a monetary subcommittee come January, also seeks to give Congress greater power over the Fed through audits of monetary policy decisions. “I think they’re way too independent,” Paul said of the Fed earlier this month.
Now, it’s possible that the Fed’s hard-money critics are right that the current easing is excessive, and it’s possible that they are wrong. If they are wrong, then any effect they have in restraining the Fed’s policy will be damaging, leading to more economic stagnation and possibly deflation.
But there’s a more subtle danger. Suppose the hard-money types are right and the Fed is unleashing a dangerous resurgence of inflation. What then? Will current-day conservatives follow Ronald Reagan’s path in defending the Fed’s independence to do whatever is necessary, however unpopular, to stop inflation? Fat chance. Having demonized the institution and diluted its independence, the Fed’s right-wing critics will have helped bring on the very scenario they warned against.
At this point, they’ll be shouting more loudly than ever about a gold standard. But ask yourself this: How long would our elected politicians, having sacrificed the Fed to public opinion, actually stick with a gold standard, a policy that was notorious for generating angry, populist opposition?
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