Donald Trump’s Fed

This piece originally appeared in The New York Sun

It’s hard to think of an opportunity quite like that shaping up for President Trump in respect of the Federal Reserve. The announcement Friday by Daniel Tarullo of his intent to resign from the central bank’s board means that Mr. Trump will have three immediate openings among the seven governors to guide the Fed. A year hence, when Janet Yellen’s term as chairman ends, he will be able to name a new chief. Imagine if Mr. Trump were Tom Brady facing a defense without the middle linebacker, two tackles, and one of the ends. Opportunity knocks.

The thing to remember about this moment is that Mr. Trump’s presidency is going to succeed or fail on the economy. The skirmishing over the border, say, the sturm and drang over the attorney general, the contretemps over the Dakota pipeline, or the tumult over the telephone call with Premier Turnball, these are all terrific dramas — but, in the relative scheme of things, small beans. Re-establishing the monetary, regulatory, and fiscal structures to promote jobs and growth, these are the main chance.

All of those three fields of reform are important, but none more fundamental than the monetary system. In a few years we will be at the 50-year mark in the age of fiat money, in which our government issues dollars with no definition in law and without the backing of gold or other specie. These columns are not so ideological that we would oppose such a system if it worked. But the Great Recession has taught us nothing so much as that the Federal Reserve is not, in and of itself, the solution to our problems.

This a moment for governors who are prepared to steer for a smaller central bank with a more modest role — ensuring monetary integrity, a strong and stable dollar, a trustworthy dollar, to use a phrase that is starting to be heard. This would get the Federal Reserve out of the business of quantitative easing, which helped balloon the Fed’s balance sheet by something like $3.3 trillion beyond what is needed to back American currency. The Fed is now holding trillions of dollars in debt of the government that created the Fed in the first place.

The Fed, in order to hold the government’s debt, has taken deposits from banks on terms that give the banks a profit without having to lend to American businesses and individuals. It then imposes on banks such burdensome regulatory rules that the Fed has stalled American growth. This is a recipe of policy error that prompted candidate Donald Trump to criticize the Fed for creating a “false economy” and to remark that Mr. Obama was “the first president in modern history not to have a single year of 3 percent growth.”

The opening created by the resignation of Governor Tarullo is particularly important because it clears the way for the elevation to a Fed vice- chairmanship of a governor inclined to a more modest, pro-growth regulatory scheme. President Obama wanted Mr. Tarullo to take on that vice-chairmanship (and Mr. Tarullo did some of the tasks on an acting basis), but Mr. Tarullo was too left-wing to be confirmed by the Senate. Getting the right governor for that vice-chairmanship will be important.

So will getting into the other two open governorships individuals who understand the logic of monetary reform. The most articulate of these, economist Judy Shelton, we’ve already mentioned as an ideal candidate. Congress has been nursing legislation that could relieve the Fed of its dual mandate so that it could concentrate on a stable and trustworthy dollar as its main mission. How refreshing it would be to have governors of the Fed who did not resent these kinds of reforms. To have a trustworthy dollar it will eventually be necessary to return to a system with a reference to gold, a goal that Mr. Trump himself referred to in the campaign as “wonderful.”