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The Federal Reserve Board and the Unitary Executive:

Marty Lederman and Jack Balkin recently took advocates of the unitary executive theory to task for downplaying the fact that their position implies that the Federal Reserve Board is unconstitutional. Michael Rappaport, a defender of the unitary executive theory, agrees that the Fed is indeed unconstitutional under his approach, but argues that courts should avoid invalidating it because of respect for a precedent that has attracted such broad support that a court decision striking down the Fed would probably lead to the enactment of a constitutional amendment. Just to clarify, Balkin, Lederman, Rappaport and I are all using the term "unitary executive" in the sense I expounded in this post (presidential control of executive branch personnel, including the ability to hire and fire at will), not in the sense sometimes used by the Bush Administration to mean an executive with virtually unlimited wartime authority. As I explained in the earlier post, the unitary executive is a theory of the distribution of executive power, not of its scope. It is perfectly consistent to believe (as I do) that executive power is strictly limited, but also concentrated in the hands of the president.

I think Balkin and Lederman are right in so far as the Federal Reserve really is unconstitutional if you believe in the unitary executive. That theory holds that all executive branch officials must be subject to the orders of the president and be removable by him. Under current law, members of the Federal Reserve Board need not obey presidential orders and can't be fired by the president except "for cause" (with refusal to obey presidential directives not considered a sufficient cause in and of itself).

However, I don't think that the unconstitutionality of the Fed is as powerful an argument against unitary executive theory as Balkin and Lederman suggest. There is good reason to believe that a judicial invalidation of the Fed wouldn't be nearly as harmful as conventional wisdom suggests.

First, as Rappaport implies, the independent Fed now has broad bipartisan support. Even under the highly restrictive requirements of Article V, it is likely that a constitutional amendment legalizing the Fed could quickly be enacted. Indeed, given how long it would take for a case to reach the Supreme Court, the amendment could well be enacted even before the hypothetical case got to the supremes.

Second, as Steve Calabresi has pointed out, even if the Fed were not formally independent, the president would come under heavy political pressure to minimize politicization of its operations. Any sign of presidential manipulation of the Fed would likely draw a negative reaction from the stock market and private banks, thereby increasing the risk of recession. In practice, presidents probably would sometimes try to intervene in Fed operations if they had the power to do so. But they wouldn't do it nearly as often as the doomsayers claim.

Finally, while I'm no monetary economist, I'm far from persuaded that the economy would suffer severe damage in the absence of an independent Fed. The Fed has made serious mistakes in its time, including those that likely played a major role in causing the Great Depression. I'm not at all convinced that giving a small group of insulated government technocrats control over such an important part of the economy as the money supply is really the best available option. No matter how skillful they are, there is always a serious risk that they will commit a devastating error, or even engage in deliberate malfeasance out of partisan motives. I may well be missing something. But I see no reason why socialist central planning of the money supply is likely to be much better than similar central planning of other parts of the economy. As I said, I'm no expert on the subject, but my libertarian instincts suggest that a system of competing privately issued currencies (as advocated by economists such as Lawrence White and F.A. Hayek) would be far less risky. Ineptness or misconduct by the issuers of any one currency could not bring down an entire economy based on free banking. Moreover, as White and Hayek argue, each issuing bank would have a strong financial incentive to maintain the value and reputation of their currency. Not so with our current system, where the errors of the Fed can indeed damage the entire economy, and the members of the Reserve Board cannot profit from making good decisions.

frankcross (mail):
While I think you are correct that the significance of independence may be overstated, there's a mounting amount of empirical crosscountry economic evidence that it does distinctly matter.

Your constitutional amendment argument, though, is probably a pretty good answer.

It's hard for me to imagine that the transaction costs and network loss of competing currencies would not be pretty great.
4.6.2008 5:29pm
Commenterlein (mail):
"Second, as Steve Calabresi has pointed out, even if the Fed were not formally independent, the president would come under heavy political pressure to minimize politicization of its operations."

Monetary history in almost all countries tells us that you are wrong. You may want to read up on the quite extensive literature on political cycles. It's bad enough to have it in fiscal policy, we definitely don't need it in monetary policy as well.
4.6.2008 5:31pm
Ilya Somin:
Monetary history in almost all countries tells us that you are wrong. You may want to read up on the quite extensive literature on political cycles.

Actually, that literature is much more equivocal than you suggest. Moreover, there is some evidence of political business cycles with independent currency issuing agencies as well.
4.6.2008 5:42pm
Bob from Ohio (mail):

not in the sense sometimes used by the Bush Administration to mean an executive with virtually unlimited wartime authority


You just will not give up this "unlimited" fanatsy. Though I am pleased you are now modifying "unlimited" a little. Another hundred or so posts and you will use "broad" or "expansive".

Point to any statement from President Bush or one of his officials where they said that the unitary executive theory justified his war powers.
4.6.2008 5:52pm
Sasha Volokh (mail) (www):
Ilya -- I didn't realize that the Bush Administration used "unitary executive theory" to refer to the scope of executive power. I was under the impression that it was only the uninformed critics of the Bush Administration that used it that way, while the Bush Administration itself only used it in the way you do, to refer to executive control over personnel. Admittedly, that impression of mine wasn't super-well informed. Can you point to a place where the Administration has used the term "unitary executive theory" to refer to the scope of its power?
4.6.2008 6:01pm
bla bla:
Different topic, but still interesting: Intrade's prediction of McCain's chances of winning the Republican nomination is somewhat lower than one might expect. It only gives him a 94% chance of winning the election, which is about 3% less than it was a month ago. I can't think of any explanation for this other than that an appreciable number of Republicans are worrying about the natural born citizen problem.
4.6.2008 6:11pm
Oren:
Sasha, Bob: from the Yoo memos just released:

There can be little doubt that the conduct of war is a matter that is fundamentally executive in nature, the power over which the Framers vested in a unitary executive. "The direction of war implies the direction of the common strength," Alexander Hamilton observed, "and the power of directing and employing the common strength' forms a usual and essential part in the definition of the executive authority." The Federalist No. 74, at 415. Thus, earlier in this current armed conflict against the al Qaeda terrorist network, we concluded that "[t]he power of the President is at its zenith under the Constitution when-the President is directing military operations of the anned forces." Flanigan Memorandum at 3. Correspondingly, during war Congress plays a reduced role in the war effort, and the courts generally defer to executive decisions concerning the conduct of hostilities. (Yoo Memo, March 14, p12, CAUTION: OCRed for searchability so typos may exist!)


He doesn't quite say that the unitary executive leads to a "reduced role" for Congress but the implication is clearly there. Since the paragraph in question has nothing to do whatsoever with the distribution of the executive power within the executive branch, what possibly difference could it make if the executive is unitary or not.
4.6.2008 6:11pm
tarheel:
I love it when someone who admits that he is not well-informed about an issue criticizes someone else's comment on that issue as being "uninformed."
4.6.2008 6:16pm
Ilya Somin:
Sasha,

It is true that the Bush Administration's critics have conflated the issues of scope and distribution of executive power. But it is also true that Administration defenders, including Yoo, have made their own contribution to the confusion by trying to draw on the intellectual capital of the unitary executive theory to prop up their own much weaker arguments for a virtually unlimited scope of executive authority (at least in wartime).
4.6.2008 6:23pm
stunned:
Why bother with your last boilerplate anti-Fed argument? It has nothing to do with the unitary executive one way or the other.
4.6.2008 6:30pm
Soronel Haetir (mail):
I've wondered about his for awhile now, not just with the Fed, but many such agencies exist. The FEC and FCC come to mind. Would an amendment making the Fed constitionalalso include these other independant executive branch bodies?

And if so what would be the point in the challenge?
4.6.2008 6:34pm
peppercorn:
system of competing privately issued currencies (as advocated by economists such as Lawrence White and F.A. Hayek)

Thanks to the recent inflationary policy of the Fed, combined with the advent of more sophisticated computerized commodity derivatives, these currencies may already be emerging. But a variety of legal barriers, as well as the burden it would impose on consumers to keep track of multiple currencies, prevent these private monetary instruments or more straightforward private currencies from being used as retail currencies.
4.6.2008 6:39pm
frankcross (mail):
The political discussion is confused. People criticize Bush's "unitary executive" for things having nothing to do with it. E.g., signing statements. The thesis largely comes from Reagan trying to control the bureaucracy and it clearly would invalidate the FRB, like all independent agencies, if embraced.

Soronel makes a good point. The amendment could be, but probably wouldn't be, limited to the FRB. And it could actually create a much bigger breach in the unitary executive than currently exists.
4.6.2008 6:44pm
Gaius Marius:
Actually, it was Congress that exacerbated the Great Depression, not the Federal Reserve.
4.6.2008 6:45pm
Crane (mail):
competing privately issued currencies?

competing privately issued currencies?

That sounds unbelievably annoying, especially for retailers. And if the government is in charge of making sure all the currencies are worth the same in relation to each other, to avoid giving everybody headaches about the exchange rates, I don't see the advantage of having said currencies issued by private instead of public entities.
4.6.2008 6:47pm
byomtov (mail):
Ineptness or misconduct by the issuers of any one currency could not bring down an entire economy based on free banking.

Why not? Ever heard of a bank panic?

Moreover, as White and Hayek argue, each issuing bank would have a strong financial incentive to maintain the value and reputation of their currency.

Some would. And there would be incentives to cheat as well. The existence of an incentive to do X does not mean there are not also incentives to do the opposite of X. Which set wins will vary from case to case.
4.6.2008 6:47pm
Gaius Marius:
Competing currencies in this day and age would be a hindrance to daily economic transactions. Recall what a hassle it was to travel throughout Europe prior to the adoption of the Euro when one had to deal with each country's local currency.
4.6.2008 6:56pm
Roach (mail) (www):
To paraphrase Murray Rothbard: bring back the bank run.

As for private currencies, one has risen above all others in almost all places: gold.
4.6.2008 7:00pm
peppercorn:
Ever heard of a bank panic?

Panics of private, note-issuing banks never brought down an economy. Government note-issuing is another matter.

Recall what a hassle it was to travel throughout Europe prior to the adoption of the Euro when one had to deal with each country's local currency.

It's not nearly so bad if you use a credit card that automatically exchanges the currencies for you.
4.6.2008 7:10pm
Vermando (mail) (www):
The comments above this one are almost unbelievable, both the defenders of Bush and those with the wacked-out theories of currencies.

More to the point of the post, an interesting tidbit on the issue of the need for a strictly independent fed - one of Joseph Stiglitz's major critiques about our handling of the Asian financial crisis of the late 1990's was that, as part of the conditionality for our and IMF assistance, we demanded that many countries make their Fed independent.

He was incredulous about this because, as you say, the evidence of the benefits of an independent v. non-independent Fed is comparatively scant, particularly across cultural / political systems. Moreover, we were enforcing that policy on a group of countries - the Asian tigers - that manifestly had had extremely successful monetary policies and economic performance for several decades, and on the occasion of a crisis in which the lack of independence of Central Banks had played no demonstrative role in creating. Not surprisingly, since then, all of those countries have built up massive currency reserves, in part so that they will never be placed in that situation again.

This is not at all definitive on the benefits of an independent Fed for us - I have a bad feeling that with the particularities of our political system, we would muck it up really, really quick. Still an interesting contribution to the discussion, though.
4.6.2008 7:13pm
Lgo:

competing privately issued currencies?

competing privately issued currencies?

That sounds unbelievably annoying, especially for retailers. And if the government is in charge of making sure all the currencies are worth the same in relation to each other, to avoid giving everybody headaches about the exchange rates, I don't see the advantage of having said currencies issued by private instead of public entities.


Well, try this:

http://www.calneva.com/italy/money01.htm

BTW, is not there a federal statute prohibiting impersonating federal agency? After all, this "Fed" is not only private, but also unaccountable to anyone in the government, including GAO.
4.6.2008 7:26pm
Peter Wimsey:
It's not nearly so bad if you use a credit card that automatically exchanges the currencies for you.


Except for the 3% charge they impose for the privilege. ;(
4.6.2008 7:27pm
lgo:
4.6.2008 7:32pm
frankcross (mail):
I wish I could put a graph in my comments. There is a very high correlation between central bank independence and lower inflation rates. For one study, see

"Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," by Alberto Alesina and Lawrence H. Summers, Journal of Money, Credit and Banking, Vol. 25, No. 2. (May, 1993), pp. 151-162.
4.6.2008 7:42pm
Oren:
Except for the 3% charge they impose for the privilege.
Most merchants pay only 1.5-2% (for VISA and MC anyway) and there is significant evidence that the efficiency of not having to deal with cash is worth that expense. So much so, in fact, that with only one exception I can think of (Arco gas stations), virtually every merchant voluntarily agrees to accept them.
4.6.2008 7:46pm
Lee David (mail):
For a good general overview of the history of the financial chaos and corruption that prevailed when the U.S. had no central bank, no Fed, and many competing currencies, read An Empire of Wealth by John Steele Gordon. No one in their right mind would want to repeat that mistake. Recessions and Depressions were deep and long.
4.6.2008 7:46pm
Laura S.:
I'm stunned by the blind assertion that Federal Reserve Board is a public institution that is a part of the Federal government. This is false, false, false. The Federal Reserve Board is a private institution incorporated by a special act of congress and owned by the banks of the Federal reserve system.
4.6.2008 7:52pm
Laura S.:

"The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year."

-- www.federalreserve.gov/generalinfo/faq/faqfrs.htm
4.6.2008 7:57pm
Dilan Esper (mail) (www):
Actually, that literature is much more equivocal than you suggest. Moreover, there is some evidence of political business cycles with independent currency issuing agencies as well.

There is, but not with the Fed in the last 27 years since we really figured out countercyclical monetary policy.

Thanks to the recent inflationary policy of the Fed, combined with the advent of more sophisticated computerized commodity derivatives, these currencies may already be emerging. But a variety of legal barriers, as well as the burden it would impose on consumers to keep track of multiple currencies, prevent these private monetary instruments or more straightforward private currencies from being used as retail currencies.

Let's wait until some country proves that you can keep the business cycle under the same control over a 27 year period with this as we have been able to do with the Fed.

Really, there's a lot of people on the libertarian right who don't want to admit that their intellectual heroes were fundamentally wrong (or more likely, had outdated thinking) about a pretty important manner. But yes, independent central banks work better than commodity-backed currencies, and just because you don't like government power very much doesn't change the truth of that.

To paraphrase Murray Rothbard: bring back the bank run. As for private currencies, one has risen above all others in almost all places: gold.

Anyone who thinks a bank panic is a good thing has no business commenting on anybody's monetary policy.

And the US was on the gold standard for a long time. We had more, more frequent, deeper recessions during that time, and there's extensive, basically undisputed (among serious economists) scholarship as to why that happens.

Indeed, if gold were so great, how come just about every successful first world economy has moved away from it and towards fiat currency?

Panics of private, note-issuing banks never brought down an economy.

Anyone who says this is like the last communist who swears even now that communism has never been really tried.

BTW, is not there a federal statute prohibiting impersonating federal agency? After all, this "Fed" is not only private, but also unaccountable to anyone in the government, including GAO.

The Federal Open Market Committee, which controls monetary policy, is not private. It is a governmental agency with members which can be removed by the political branches.

The Federal Reserve Banks, which implement but don't determine policy, are funded by a "share" system that is essentially a banking tax. But they don't have anything to do with monetary policy.
4.6.2008 8:11pm
Le Messureir (mail):
Ilya, I think what you have here is a solution in search of a problem. As for banks issuing there own currency, what are they going to be backed with? Ahhh! Back to the gold standard. Been there, done that. Remember that Hayak was dead when we went off the Gold Standard. "Fiat money" or the "strength" of the issuing bank? Ya, sure. We've already done that, too. What do you propose would be the mechanism to regulate the elasticity of the currency? And how would this system regulate liquidity? These last two are the primary purposes for a central bank. Any discussion of changing the Fed to something else needs to account for this.
4.6.2008 8:19pm
lgo:
4.6.2008 8:22pm
Justin (mail):
" even if the Fed were not formally independent, the president would come under heavy political pressure to minimize politicization of its operations. "

I swear, it's like none of you are even paying attention to the existence of the current administration.
4.6.2008 8:26pm
Bruce Hayden (mail) (www):
Justin - BSD has little to add to this discussion.
4.6.2008 8:49pm
Bruce Hayden (mail) (www):
Whoops, BDS, not BSD. Sorry.
4.6.2008 8:50pm
Oren:
Really, there's a lot of people on the libertarian right who don't want to admit that their intellectual heroes were fundamentally wrong (or more likely, had outdated thinking) about a pretty important manner.
Don't push your argument too far - it's not that they were wrong, it's a disagreement over degree. Libertarianism, as I understand it, counsels that we should strive to have the minimal level of intervention/regulation consistent with a functioning free-market. The debate over the precise level regulation needed, of course, can fill the comment section of the blogs and keeps macroeconomists off the street, year after year.

In some sense, also, the answer is unknowable because the market is a fluid system and, while lacking a central authority did lead to absolute chaos in the 19th century, it might actually be sophisticated and tempered enough to do quite well today. Alas, it might not, and so as a corollary to the Libertarian ethos, I might add the ethos of risk-aversion: so long as the system is not manifestly unjust or completely broken, sometimes we should leave well enough alone.
4.6.2008 8:56pm
Bob from Ohio (mail):
I don't see the Yoo quote supporting your position that the President asserts "unlimited" powers. Unitary executive in that paragraph refers to the type of executive, not the scope of the powers. Unitary executive theory is not discussed in that excerpt. At worst, it is like Pavlov's Bell, Yoo automatically writes "unitary" when he uses executive.

Yoo is saying that in the "conduct" of a war "when-the President is directing military operations of the anned (sic) forces", then in that instance he has his most power. It is a reference to the CinC clause. (You can certainly argue Yoo reads too much into that clause.)

In any event, Yoo is not saying the President has "unlimited" or even "virtually unlimited" power. He says that "during war Congress plays a reduced role in the war effort, and the courts generally defer to executive decisions concerning the conduct of hostilities". That is an unobjectionable statement amply supported by historic examples. For instance, other than voting for money, has Congress in the last 2 years done anything regarding Iraq? The majority in Congress opposed the "Surge" but it happened anyway.

I really don't see why you persist in using "unlimited" as your word of choice. It is just not accurate.
4.6.2008 9:04pm
Elliot123 (mail):
I suspect multiple competing currencies is just a smoke screen for the gold standard. With no single reference currency, each currency will have a unique relationship to every other currency. That might be attractive from an academic perspective, but for those of us actually engaged in commerce, it's a nightmare. So, to bring order, the markets would soon nominate some single instrument as a standard. Gold? Euro? Something would emerge.
4.6.2008 9:07pm
Justin (mail):
Bruce Hayden, despite your cheap insults, this administration has been QUITE adament that neither precedent nor "short-term" political popularity, even on grave events, have bearing at all on this administration's decisions.
4.6.2008 9:14pm
Crane (mail):
Lgo, what exactly is that Italian story supposed to prove? The main point seems to be that if you give people a lot of extra money they'll go on a spending spree. Which is all Prof Auriti did, by the way. Selling his "simec" to townspeople for price x and buying it back for price 2x is only a slightly more complicated method of giving people money.


He goes on to conclude that this debt-based money has roughly half the purchasing power it would have if it were issued directly to the populace, free.


Seriously, this is total nonsense. If the purchasing power of the dollar goes up, that doesn't just apply to prices; wages should drop just as much. The important number is not how many dollars my dinner costs, but how many hours I have to work to afford it.
4.6.2008 9:22pm
SenatorX (mail):
What's not to like about a banking cartel?

Now they will get even more powerful as new regulation comes though. I watched Ben say (paraphrase) "If you give us the job of regulating wall street then what we are concerned about is having enough authority and power to do so".

Anyway I'm not sure what independent means because it looks like everyone always answers to someone. I think the best we can work for is transparency and we aren't going to get it.
4.6.2008 9:52pm
Sasha Volokh (mail) (www):
tarheel: You said:

I love it when someone who admits that he is not well-informed about an issue criticizes someone else's comment on that issue as being "uninformed."

But note that I had said:

I didn't realize that the Bush Administration used "unitary executive theory" to refer to the scope of executive power. I was under the impression that it was only the uninformed critics of the Bush Administration that used it that way, while the Bush Administration itself only used it in the way you do, to refer to executive control over personnel. Admittedly, that impression of mine wasn't super-well informed.

As you see, I was saying that it had been my impression (and, I noted, a not "super-well informed" impression) that it was only uninformed critics of the Bush Administration that had made this conflation.

In other words, far from criticizing these guys as uninformed, I was holding out the possibility that my earlier belief that they were uninformed was wrong!
4.6.2008 9:53pm
wm13:
This post is kind of beside the point, since I don't think Profs. Lederman and Balkin know or care much about the Federal Reserve, per se. Their point is that everyone in the Bush administration is evil and hypocritical.
4.6.2008 9:56pm
ReaderY:
In general, the passage of a constitutinal amendment -- particularly an amendment most people would agree to -- would be an enormously healthy development, it would suggest that the constitutional system is capable of functioning and developing and help restrain the courts from the feeling that the people have abandoned development of their constitution and left its evolution wholly to judges. I think a significant set of changes is long overdue. Even one change would help people realize that change through legitimate constitutional processes is possible and would give heart and hope to the survival of a republican form of government.
4.6.2008 9:57pm
JBL:
Perhaps the Fed should be retained but deprived of its ambiguous dual mandate. Instead of trying to both manage the money supply and further somebody's notion of where the economy should be going, it should just maintain the money supply. Respond to business cycles without trying to direct them. I think that would address most (but not all) of the disagreements.

So the question relevant to the post is who would make that change? Congress? The President? Member banks? Constitutional amendment?

If it's not the President, does that mean that the Fed is unconstitutional under the unitary executive theory, or does it just mean that the Fed belongs under Congress instead of under the President, or wherever it is now?
4.6.2008 10:11pm
Fearless:
My goodness man, why should we care about your "libertarian instincts." Maybe you should stick to your area of expertise and keep your nose out of economics.
4.6.2008 10:19pm
Vermando (mail) (www):
I like how the Bush apologist ignores the fact that the Secretary of State resigned after the election. That event, of course, had an enormous impact on both the conduct of the war thereafter, as well as the willingness of some Democrats to support aspects of the Bush agenda. It's also not Iraq, but in the broader scope of this discussion, I seriously doubt that a Republican controlled congress would have opposed the renewal of the spy bill on the basis of an unwillingness to add the telecommunications spying provision.

All of this, though, suggests why a politicized Fed would be unlikely to be effective in our system. As George Kennan noted, our political system makes us almost incapable of sustaining a long-term and consistent policy in almost any area. We are instead characterized by a herky-jerky back and forth as one group wins power and then another, switching us from one set of policies and then another.

This reality drove Kennan nuts in the field of foreign policy, as he believed that such a consistent, long-term view would be of enormous benefit in the Cold War. It of course applies equally to monetary policy, where swings of policy depending on who has won the last election, as well as drastic changes in personnel and philosophy are frowned on. It also suggests, however, why some countries can operate with a Fed that is not officially politically independent - some countries, such as Japan, somehow and for some reason maintain continuities of power and policy much more consistently over time than do we.

Is it cultural, a consequence of the political system...who knows. What is certain is that it is not a feature of our system, so to the extent that we desire such a policy in our own economic policies, a unitary executive system in which the Fed is responsive to the same political pressures as the other areas of the executive is unlikely to maintain it.
4.6.2008 10:45pm
mls (www):
Regardless of what unitary executive types may say, what is the status of the Federal Reserve under existing Supreme Court caselaw? In other words, would there have to be some change to existing doctrine in order to declare the Fed's independence unconstitutional?
4.6.2008 10:46pm
Sasha Volokh (mail) (www):
mls: Since the Humphrey's Executor case in the '30s -- which basically legalized all the "independent agencies" like (today) the FEC, FCC, FTC, and anything else ending in "C" -- the "unitary executive theory" has not been the law. The unitary executive theory advocates are arguing to go back to the pre-Humphrey's Executor regime.
4.6.2008 10:51pm
Elliot Reed (mail):
I'm not at all convinced that giving a small group of insulated government technocrats control over such an important part of the economy as the money supply is really the best available option. No matter how skillful they are, there is always a serious risk that they will commit a devastating error, or even engage in deliberate malfeasance out of partisan motives. I may well be missing something. But I see no reason why socialist central planning of the money supply is likely to be much better than similar central planning of other parts of the economy.
Without getting into an argument about whether the Fed is a good idea at all, handing control over the interest rate directly to politicians would be a disaster. I would not like to bet the economy on the President's political judgment that the political harms from interfering with Fed independence outweigh the benefits from selling out to interest groups that want to play with the interest rate.
4.6.2008 11:08pm
Gaius Marius:
"It's not nearly so bad if you use a credit card that automatically exchanges the currencies for you."

Credit card companies charge you a ridiculous fee to convert foreign currencies. No thanks!
4.6.2008 11:22pm
Gaius Marius:
"After all, this "Fed" is not only private, but also unaccountable to anyone in the government, including GAO."

The Federal Reserve is not private. The Federal Reserve Act was passed by Congress and although members of the Federal Reserve are appointed by the President, they must be confirmed by the U.S. Senate. You clearly need to sign up for an introductory macroeconomics course at your local community college.
4.6.2008 11:25pm
Gaius Marius:
"Except for the 3% charge they impose for the privilege."

"Most merchants pay only 1.5-2% (for VISA and MC anyway) and there is significant evidence that the efficiency of not having to deal with cash is worth that expense. So much so, in fact, that with only one exception I can think of (Arco gas stations), virtually every merchant voluntarily agrees to accept them."

The original post was not concerning what the merchants pay but what the credit card holder is charged. Read the fine print in your credit card agreement.
4.6.2008 11:28pm
Oren:
Credit card companies charge you a ridiculous fee to convert foreign currencies. No thanks!
Mine does it free although they don't try particularly hard to give you a good rate.

Unitary executive in that paragraph refers to the type of executive, not the scope of the powers. Unitary executive theory is not discussed in that excerpt. At worst, it is like Pavlov's Bell, Yoo automatically writes "unitary" when he uses executive.
That was precisely my point - Yoo tries to interject the structure of the executive branch into a discussion where it's not at all appropriate. The only reasonable conclusion (since we know Yoo is an intelligent guy) is that he is attempting to conflate support with the unitary executive with his arguments about the scope of that power.

Whatever your opinions on the latter are, the structure of the executive branch has nothing to do with and Yoo ought to know that.
4.6.2008 11:33pm
Gaius Marius:
The Federal Reserve resembles the type of national bank envisioned by none other than Secretary of Treasury Alexander Hamilton. It is a quasi-government entity created but not run by the federal government. The foregoing strikes the perfect balance. If the Federal Reserve was run by the federal government, then politicians who are more concerned with being re-elected would make short sighted decisions certainly no better and likely much worse than the Federal Reserve Board.
4.6.2008 11:33pm
byomtov (mail):
Except for the 3% charge they impose for the privilege.

Most merchants pay only 1.5-2% (for VISA and MC anyway) and there is significant evidence that the efficiency of not having to deal with cash is worth that expense. So much so, in fact, that with only one exception I can think of (Arco gas stations), virtually every merchant voluntarily agrees to accept them.


The charge for foreign currency conversion is over and above the fee the CC companies charge merchants. It is usually billed directly to the consumer. Some CC issuers actually break it out on your bill.

Also, credit cards do not totally solve the currency problem. You still need cash for incidental expenses - cab fares, a cup of coffee, etc.

As for merchants accepting them, I don't think that this solely reflects the inefficiencies of cash. The cost of refusing to take credit cards is not just the cost of handling cash but also the business lost as a result of the refusal. In a society where consumers generally expect credit cards to be accepted that can be substantial.
4.6.2008 11:40pm
Cornellian (mail):
I use both credit and debit cards at coffee shops all the time, at least at the chains (Starbucks et al).
4.7.2008 12:04am
Andy Freeman (mail):
The "3% charge" folks seem to have missed the fact that there are credit cards that don't charge for currency conversions. For most people, that "no fee" is not a big deal. Still, it's hard to see why it would go away if it became a big deal.
4.7.2008 12:32am
Laura S.:
Gaius Marius:

The Federal Reserve is not private. The Federal Reserve Act was passed by Congress and although members of the Federal Reserve are appointed by the President, they must be confirmed by the U.S. Senate.


Uh say what? No. The Federal Reserve Act is just like another bill of incorporation passed by the legislature. In this case it established a private entity with public responsibilities. This incorporation bill prescribes that congress and the president may name several officers of the corporation--those seated on the board of the governors.

Each federal reserve bank has additionally a board of directors, elected by the shareholders (the member banks). The Federal Reserve pays dividends to the member banks at 6% per annum of capital held in reserve.

The Fed receives no congressional appropriates and its earnings over expenses are not deposited into the US Treasury (such as is the case for the FCC, Patent Office, etc).
4.7.2008 12:50am
MarkField (mail):

The unitary executive theory advocates are arguing to go back to the pre-Humphrey's Executor regime.


There's more to it than that. Calabresi, at least, extends the argument to assert that the President has co-equal power with the Court and Congress to determine constitutionality, and that the meaning of the Constitution is determined by the dynamic interaction between the three branches. Link. A plausible effect of this argument is to expand Presidential power because the President can determine the extent of his own power and then negotiate it with the other branches instead of being subordinate to them in certain cases as now generally understood.
4.7.2008 12:53am
Jay:
MarkField--Sort of the like the judiciary determines the extent of its own power?
4.7.2008 8:16am
mls (www):
My (admittedly dim) understanding of Humphreys Executor is that it permits agencies that are exercising quasi-legislative or quasi-judicial powers to be independent. My question really is whether the independence of the Fed can be defended on that ground.
4.7.2008 8:34am
Justin (mail):
I'm amused by Freedomwatch.com being the ad on the side as I read this, whose 4th and final silly goal is:

Preventing the degeneration of our society by stopping the legalization of controlled substances.

Congrads Ilya, for having such wonderful alliances.
4.7.2008 9:52am
XON:
It seems to me that the White House isn't using the Unitary Executive theory as a prima facie basis for presidential power. Rather, the administration uses the Unitary Executive theory to undermine and carve off nominally executive oversight functions such as Inspectors General, internal auditors, and structurally constituted 'watch dogs' by, essentially engaging in regulatory capture of them. This is done by populating them with partisan heads, and then dismissing employees who don't accede to the manipulations of the directors. The Unitary Executive tends to insulate the departments' actions, because of the (somewhat tenuous) argument that all federal employees serve at the pleasure of the president; thus giving constructive cover for them to continue to operate in the 'captured' state.

It is much harder for Congress to mobilize the torches and pitchforks needed for remedial forays into the bureaucracy if the supposed watch dogs are saying, "Well, the data is inconclusive, but we find no conclusive proof of wrongdoing here."

BTW, I think it was "This American Life" that just did a really good story about the Border Commission for the U.S./Canada border.
4.7.2008 12:28pm
Elliot123 (mail):
"I'm not at all convinced that giving a small group of insulated government technocrats control over such an important part of the economy as the money supply is really the best available option."

OK. Tell us a better specific option.
4.7.2008 12:45pm
Elliot123 (mail):
"The "3% charge" folks seem to have missed the fact that there are credit cards that don't charge for currency conversions. For most people, that "no fee" is not a big deal. Still, it's hard to see why it would go away if it became a big deal."

They might not put a line item charge on your bill, but you still pay for it. You are using your dollars to buy a foreign currency which is credited to the sellers account. The credit card company buys the foreign currency for $X, and sells it to you for $X + $Y. The $Y never shows up on your bill as a separate line item. Then they tell folks there is no charge.
4.7.2008 12:52pm
SenatorX (mail):
"I'm not at all convinced that giving a small group of insulated government technocrats control over such an important part of the economy as the money supply is really the best available option."

OK. Tell us a better specific option.


How about the obvious one? Instead of having a mysterious cabal of men arbitrarily decide the interest rates we have it set by a market mechanism. These men don't know the price of money any more than they know how to set the price of orange juice.
4.7.2008 1:33pm
David M. Nieporent (www):
mls: Since the Humphrey's Executor case in the '30s -- which basically legalized all the "independent agencies" like (today) the FEC, FCC, FTC, and anything else ending in "C" -- the "unitary executive theory" has not been the law. The unitary executive theory advocates are arguing to go back to the pre-Humphrey's Executor regime.
But as Scalia pointed out, in Morrison, the Court basically tossed out even the Humprey's Executor distinction.
4.7.2008 1:43pm
Thales (mail) (www):
"[A] system of competing privately issued currencies"? But we already have a global system of competing publicly issued currencies, plus commodities markets into which wealth flees when confidence is lost in the integrity of currencies or their related central banks (as is more or less happening with the dollar because of the U.S.'s deficit spending and inflationary expectations). There were regular, periodic and destructive financial panics and bank runs under the private system you describe prior to the greenback. There have been financial panics under fiat money. A non-ideological study empirically comparing the two systems is perhaps merited, but it's market fundamentalism or fictional history to believe that the old system is necessarily better. Re-linking everything to gold or some other commodity of course would reintroduce the instabilities of the discovery of new precious metal supply (responsible for most 19th century and earlier inflation), additional security costs, different fraud risks, and of course, the problems of storage and hoarding/illiquidity.
4.7.2008 2:12pm
Edmund Unneland (mail):
Getting back to the original topic, governors of the Federal Reserve may be removed by the President (12 USC 244), albeit for cause. Does that help to make the Fed's structure less of a constitutional problem?
4.7.2008 2:42pm
Dilan Esper (mail) (www):


That's a distinction without a difference. The Fed manages the money supply to do countercyclical monetary policy, which results in steady growth and low inflation. The Fed responds to business cycles by trying to flatten them out. And over the past 27 years, it's done very well.

Uh say what? No. The Federal Reserve Act is just like another bill of incorporation passed by the legislature. In this case it established a private entity with public responsibilities. This incorporation bill prescribes that congress and the president may name several officers of the corporation--those seated on the board of the governors. Each federal reserve bank has additionally a board of directors, elected by the shareholders (the member banks). The Federal Reserve pays dividends to the member banks at 6% per annum of capital held in reserve. The Fed receives no congressional appropriates and its earnings over expenses are not deposited into the US Treasury (such as is the case for the FCC, Patent Office, etc).

This is misleading. Monetary policy is directed by the Federal Open Market Committee, which definitely is a governmental agency run by political appointees who have some, but not complete, independence from the political process.

The Federal Reserve Banks collect the money that the Fed uses to enforce its monetary policies, and invest the money as the FOMC directs for open market operations. They are "private" in the sense that the US government can't touch their money, which is appropriate because we wouldn't want politicians trying to use the Fed's money to cover the budget deficit. But they don't make policy. So if the Federal Reserve Banks are some kind of "banking cartel", they are a powerless one.
4.7.2008 2:59pm
peppercorn:
It's not nearly so bad if you use a credit card that automatically exchanges the currencies for you.

Except for the 3% charge they impose for the privilege. ;(

If you travel frequently you need to get another credit card. My bank does it for free, and the exchanges rates are almost always better than the local vendors or banks.
4.7.2008 5:09pm
c.gray (mail):

Different topic, but still interesting: Intrade's prediction of McCain's chances of winning the Republican nomination is somewhat lower than one might expect. It only gives him a 94% chance of winning the election, which is about 3% less than it was a month ago. I can't think of any explanation for this other than that an appreciable number of Republicans are worrying about the natural born citizen problem.


I hate to be ghoulish, but ...

McCain is an elderly man with complicated medical history that includes several years of malnutrition compounded by repeated incidents of serious torture, and a fairly recent bout with cancer. He is known to be sharp tempered. He is also running for president full-time, which means enduring a grueling travel schedule and forgoing a lot of sleep. Lots of risk factors there.

It also recently became widely known that he had declined secret service protection. While he changed his mind on the issue almost immediately after that fact received major publicity, the earlier stance shows a decided lack of concern on the part of the candidate for his own personal safety.

So a 1% or so chance of death or medical incapacity per month during the next few months seems like a very reasonable bet. Given what we know, McCain options may even be overpriced at 0.94.

(actually, I kind of like being ghoulish...)
4.7.2008 5:09pm
Virgil Xenophon (mail):
As a political scientist who has a nodding acquaintance with
things lawfully "constitutional" I would advance the opinion
that all we are doing-all of us--is playing in a mental sandbox the construct and parameters of which were designed not by the framers, but by one mind--that of John Marshall. The entire concept of judicial review as espoused in Marbury v. Madison was essentially a fraud insofar as any textual grounding in the exact wording of the Constitution is concerned. Rather it sprang from Marshall's head, like Athena from the skull of Zeus, fully armored and cloaked in the sort of self-justifying verbiage one man needed in order to solve the problem that he (John Marshall) foresaw: namely that in the absence of a final arbitrator, there would be the eternal struggle among the branches to which MARKFELD alludes in his post. And what this case did, of course, is essentially foreordain at the outset of this nation's life that inevitably the "constitution" would evolve into whatever five appointed-for-life "deists in robes" thought "right". And further, Marshall's one man altering of the Constitution also meant that future occupants of the Supreme Court would be mightily influenced by the "zeitgeist of the times" as well as their own personal philosophies a la Marshall. The degree to which the court takes the temperature of the times is shown in the differing ways in which essentially the same court handled the WWII Japanese internment/Nazi espionage cases and the Youngstown Steel v. Truman case during the Korean War.

These cases demonstrate the sensitivity of the Court to current "conditions" and bear on the odds that the FED and the "ABC" agencies will be declared unconstitutional anytime soon. Why did the Court declare everything FDR did to be constitutional and above-board, and why are these cases still "good law"? Yet a few years later why did we see the Supremes cuff Truman around for a far less serious "Imperial" reach? Simply stated the entire Nation--Court and steelworkers included--believed the very existence of the Republic to be at stake in WWII. No one and no Court was going to second guess the President. And no steelworker would have ever thought of striking. By contrast, N. Korea didn't even have a Navy and the ICBM hadn't been invented yet--so the steelworkers, concluding the fate of the Nation was NOT at stake, felt it safe to strike. And for exactly the same reason the Court felt it safe to restrain a President in ways they would not have dared nor conceived of a few short years prior.

The upshot of all this, IMO, is that the Court will move on the constitutionality question when and if--and ONLY when and if, the tenor of the times demands/allow it. As to who makes most effective use of the "bully pulpit" that all elected officials have to one degree or another to shape this "tenor" will largely determine the intensity of public opinion regards this matter--and thus in large degree the courts opinion. As to whether the powers of an independent FED or any of the other ABC agencies SHOULD be reeled in as a policy matter--and to review the mental gymnastics the court has used to justify their independence is a subject for a subsequent post.
4.7.2008 5:32pm
nick:
each currency will have a unique relationship to every other currency. That might be attractive from an academic perspective, but for those of us actually engaged in commerce, it's a nightmare.

Automatic currency exchange with credit and debit cards is just the tip of the iceberg of what is possible with computers and online markets. Even at the retail level currency exchange for the consumer can now be done at very low cost to the bank. A consumer can take advantage of that low cost by putting in the effort up front to shop around for a card with no exchange fee and good exchange rates.

A similar system of automatic exchange for retailers would allow them to keep books in one currency and do transactions at low cost in other currencies. For big international transactions we already see sophisticated currency hedges at very low transaction costs.

The bottom line: with good software and online markets, multiple currencies no longer need to be a "nightmare". Indeed, what is risky and wasteful, but heretofore has been necessary for the small guy, is having all of a business's assets (especially debts) denominated in a single currency and not balanced by the same amount of liabilities of the same currency and duration. In a few years any international business that does not balance the currencies it uses through automated currency exchange and hedging will be as uncompetitive and exposed to risk as any other investor with an unbalanced portfolio. The same software and markets will then allow any currency to be used anywhere, with only obsolete legal restrictions standing in the way.
4.7.2008 5:59pm
Dilan Esper (mail) (www):
The bottom line: with good software and online markets, multiple currencies no longer need to be a "nightmare". Indeed, what is risky and wasteful, but heretofore has been necessary for the small guy, is having all of a business's assets (especially debts) denominated in a single currency and not balanced by the same amount of liabilities of the same currency and duration. In a few years any international business that does not balance the currencies it uses through automated currency exchange and hedging will be as uncompetitive and exposed to risk as any other investor with an unbalanced portfolio. The same software and markets will then allow any currency to be used anywhere, with only obsolete legal restrictions standing in the way.

This is silly, though. American law does not set the medium of exchange, and it certainly doesn't place any limits on what currencies a business may hold its assets in.

US law only does 2 things with respect to the use of currency as a medium of exchange-- it requires a person to accept dollars for an obligation, and it requires obligations to the US government to be paid in dollars.

But if you want to enter into your own contracts in gold (or securities backed by gold), or Euros, or Yen, or anything else, you are perfectly permitted to. Same with respect to how you hold your currency. And if there were really significant advantage to holding one's assets in a currency other than the dollar (i.e., if the Fed's monetary policy were really as harmful as its critics claim), you would see rational economic actors doing so. They aren't.
4.7.2008 6:20pm
SenatorX (mail):
It's almost like where a person falls on one side or the other of are they a socialist or a libertarian. Or if they think the base human condition of an individual is "bad" and needs to be controlled or "good" and can be left alone.

Do you approve of a strong central bank or do you think it's unnecessary and harmful?
4.7.2008 7:31pm
Elliot123 (mail):
"How about the obvious one? Instead of having a mysterious cabal of men arbitrarily decide the interest rates we have it set by a market mechanism. These men don't know the price of money any more than they know how to set the price of orange juice."

Which interest rate? Long term? Short term? T-Bonds? T-Bills? Corporate paper? Passbooks? CDs? Repos? Most are set by the market. It happens everyday.

What makes you say theu are ignornat of interest rates? Who would be more knowledgable?

What makes them a cabal, and what makes them mysterious? The governors of the federal reserve banks are very well known to people in the industry.
4.7.2008 7:59pm
nick:
But if you want to enter into your own contracts in gold (or securities backed by gold), or Euros, or Yen, or anything else, you are perfectly permitted to.

Alas, you're way off the mark when it comes to precious metals and private currencies. Here from the UCC are a few examples, out of a vast number of places where U.S. or state law discourages the use of precious metals or private currencies for payment:

1-201(24) "Money" means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.

This influences a number of other definitions and legal categories, including who the crucial issue of who is a "seller":

2-304:
The price may be made payable in money or otherwise. If it is payable in whole or in part in goods each party is a seller of the goods that the party is to transfer.

In other words, a person who pays in precious metals or a private currency is a "seller" as well as a "buyer", whereas a person who pays in government money is only a "buyer." That radically changes the legal obligations of the buyer who pays in precious metals or private currencies (all considered "goods" rather than "money" under the UCC, since they are not official government currencies).

It's not clear how one can make a negotiable instrument denominated in gold or silver or a private currency, or whether one can be made at all, since the UCC only recognizes negotiable instruments as such if they are denominated in official government money:

3-104:
..."negotiable instrument" means an unconditional promise or order to pay a fixed amount of money...

There are a number of other places in the UCC and a large number of places of other codes, statutes, and regulations where one must use an official government money or else be placed in an inferior legal category. Furthermore, under both the UCC and common law contract a remedy requiring payment in gold or silver is considered "specific performance" and put in a radically different legal category than a remedy requiring payment in dollars ("damages").

OTOH, using gold or a private currency subjects one to most of the burdens of laws with respect to money, for example money laundering laws requiring reports of large or otherwise suspicious transactions: these tend to define "money" far more broadly to include gold and private methods of payment.
4.7.2008 8:08pm
Elliot123 (mail):
"The bottom line: with good software and online markets, multiple currencies no longer need to be a "nightmare".

I agree we can write models and implement them in code. That's part of the nightmare.
4.7.2008 8:30pm
Dilan Esper (mail) (www):
nick:

1. In most jurisdictions, you can contract around the default rules of the UCC (even in sales of goods cases where it applies, and it doesn't apply to anything else) and require payment in a particular form, and potentially get specific performance of that contract.

2. Even where debts are payable in dollars, you can buy gold with the dollars and you can denominate the consideration as being the amount of dollars equal to X amount of gold as of the performance date.

The fact is, if putting one's money in gold were such a smart thing to do, wealthy, smart people would do it. They don't, which tells you something about fiat money.
4.7.2008 9:29pm
nick:
In most jurisdictions, you can contract around the default rules of the UCC

You can't contract around the requirement that negotiable instruments specify payment in an official government money. Try writing checks ordering payment in ounces of gold and getting them processed through the banking system. (For that matter, try doing it and see how you get through the jail system). As for Article 2, rewriting it in order to redefine "money" without causing other problems is a very complex task, far beyond the law firm hours most businessmen can afford, especially the small businessmen who currently can't afford to hedge payment terms in risky government currencies with derivatives. Furthermore, the discouragement in the UCC of precious metals and private currencies as means of payment are just the tip of the legal code iceberg. These create legal risks that are insurmountable for any but the most trivial of transactions. The sum of these legal risks amounts to an effective ban on the use of precious metals or private currencies for payment in non-trivial transactions, unless derivatives are used to hedge a government currency transaction, effectively creating a synthetic commodity-based currency, as explained below.

The fact is, if putting one's money in gold were such a smart thing to do, wealthy, smart people would do it.

The "wealthy, smart people", or specifically the banks and hedge funds they invest in, are despite the legal obstacles, increasingly investing in commodities and commodity derivatives to facilitate exchange and act as a superior store of value to debt denominated in government currencies. That's why you may have noticed, the price of gas and food have been going up, even though oil consumption in the U.S. and Europe has been going down faster than it is rising in China and the rest of Asia. A commodities broker and analyst is quoted in this weekend's Wall Street Journal (page B6): "This [oil] market hasn't been about fundamentals for more than a year. It's about capital flows." In other words, it's about hedging against debts denominated in the legally "encouraged" but economically awful currencies (for example the dollar) with economically sound instruments (commodity derivatives). The synthetic asset (dollar payment + commodity future) cancels out short and long dollar positions, leaving the commodity as the unit of value. In other words, Monopoly money + commodity derivative = real money. By hedging one effectively pays in a private commodity currency. The very rapid increase in the use of commodity derivatives in the last four years suggests that nearly $10 trillion of such payments probably occurred in the last year, up from probably less than $1 trillion in 2004. Those of us not so smart and rich who earn our income in funny money, i.e. from rigid dollar wages, dollar-denominated bonds, or stocks based mostly on dollar-denominated debt, get to witness the economic backwardness of centrally planned currencies firsthand when we take our Monopoly money to the gas pump or visit the jewelry store, and increasingly in other places like the food aisle as well.
4.7.2008 11:46pm
Dilan Esper (mail) (www):
You can't contract around the requirement that negotiable instruments specify payment in an official government money. Try writing checks ordering payment in ounces of gold and getting them processed through the banking system.

But you CAN agree, in a private contract, to pay someone in gold, or in securities exchangeable for gold. You can also agree to accept such securities (or gold bars) in exchange for consideration.

So your real beef is with the banks and financial services firms, for not offering an instrument that would allow you to do this more straightforwardly instead of exchanging securities or actual gold. But that's not because such instruments are illegal; rather, it's because the free market hasn't created any significant demand for them, because intelligent rational rich people don't care about putting their money in gold. Only extreme libertarians and some very kooky and paranoid people want such an instrument, and they aren't enough of a market.

I don't know if you are a lawyer, but I am, and I could write an enforceable contractual provision that requires payment in gold or a gold-equivalent (or in money valued at a certain amount of gold) in 5 minutes. (And I generally do litigation, not transactional work. A transactional lawyer could do it in his or her sleep!)

The sum of these legal risks amounts to an effective ban on the use of precious metals or private currencies for payment in non-trivial transactions, unless derivatives are used to hedge a government currency transaction, effectively creating a synthetic commodity-based currency, as explained below.

This is SO not true. If anything, it's the reverse. If you can find a willing buyer and a willing seller, structuring a significant transaction to allow for payment in gold or a gold equivalent is quite easy. Your problem, again, is that nobody wants your gold because only paranoids, kooks, and extreme libertarians want to do business in gold rather than fiat money. But if you could find someone who wanted to do business with you in such a transaction, it would be very easy to draw up the contracts.

What IS true is that you can't really use gold for TRIVIAL transactions, but that's because there are huge transaction costs with accepting different kinds of currencies (costs that, I might add, will not disappear in Ilya's fantasy world of competing currencies) so it isn't worth it to accept anything other than whatever the legal tender is. But for nontrival transactions (where a gold bug would really want the transaction to be in gold), it's quite straightforward to structure a transaction to require payment in gold or gold equivalent.

The "wealthy, smart people", or specifically the banks and hedge funds they invest in, are despite the legal obstacles, increasingly investing in commodities and commodity derivatives to facilitate exchange and act as a superior store of value to debt denominated in government currencies. That's why you may have noticed, the price of gas and food have been going up, even though oil consumption in the U.S. and Europe has been going down faster than it is rising in China and the rest of Asia.

OK, let me explain something to you. We are going into a recession and we are also experiencing a threat of inflation due to a spike in oil prices. During such times, gold is an excellent investment. For that reason, investors are TEMPORARILY investing in gold. This happened once before, in the 1970's, when gold reached the equivalent of about $2,500 in today's money. But then, when the economic shock ended, gold crashed, and lost 75 percent of its value.

The fact that gold can be a good investment in bad economic times (and ONLY in bad economic times) isn't what we are talking about here. Rather, if there was something inherently wrong and risky with fiat money, we would see RICH PEOPLE, AS A MATTER OF COURSE, MAINTAINING THEIR WEALTH IN GOLD-BACKED OR COMMODITY BACKED CURRENCIES. If rich people demanded payment in gold, businesses would oblige because they want rich people's business. And that simply doesn't happen. The reason it doesn't happen is because fiat money is perfectly reliable as long as monetary policy is made by an independent central bank capable of countercyclical monetary policy.

Indeed, the response of many rich folks to the dollar's recent falls is to keep their money in Euros-- ANOTHER fiat currency subject to the countercyclical monetary policy of a central bank. Obviously the wealthiest people in the world are simply dumber about money and investing than a bunch of folks on the Internet who nobody's heard of who hoard vast sums of riches in gold.

In other words, Monopoly money + commodity derivative = real money.

Just to explain for those following this, advocates of the gold standard like to call US dollars "monopoly money", thinking that makes them look very clever. Of course, unlike monopoly money, the US dollar is accepted just about everywhere throughout the world. But some people can't help themselves and have to look ridiculous anyway.
4.8.2008 12:29am
peppercorn:
Rising oil prices...This happened once before, in the 1970's

You've got your cause and effect backwards. The commodity prices rises of the 1970s (not just oil and gold), like those today, were caused by the Federal Reserve expanding the dollar supply far beyond the demand for dollars. You'll notice that we didn't run out of oil since then, like all the naysayers back then, looking at nominal rather than real prices, warned we would. There was no "oil shortage" then and there is none now. Such increases in money supply screw up price signals, causing economic malinvestment, thus the bad economic times (high misery index) associated with such an awfully run currency. It generally inflates commodities first and other things later.

So your real beef is with the banks and financial services firms, for not offering an instrument that would allow you to do this more straightforwardly instead of exchanging securities or actual gold.

No, my real beef is with the UCC, which does not cover such instruments. Since you brought up kooks, we can observe that you are under the kooky delusion that one can rewrite all of commercial law by contract. Nothing could be further from reality. Negotiable instruments, for example, are not just contracts, and they need to be covered under the standard commercial laws to be effective. The standard commercial law effectively bans negotiable instruments denominated in precious metals or private currencies.

Only extreme libertarians and some very kooky and paranoid people want such an instrument, and they aren't enough of a market.

When all else fails, call names. Apparently extreme libertarian kooks shlepped around about $10 trillion in commodity derivatives last year.

advocates of the gold standard like to call US dollars "monopoly money"

So much for your stereotypes. The dollar literally is monopoly money and I don't advocate gold. For reasons I won't go into here, I think precious metals will not work as well as a basis for money in modern markets than a broad basket of commodities. I advocate private currencies, with commodity derivatives for hedging and government currency transactions being a good first stab at such currencies that we see arising today. I advocate revising the law and government procurement to be currency-neutral, ending the Federal Reserve's monopoly on money.
4.8.2008 1:00am
Dilan Esper (mail) (www):
You've got your cause and effect backwards. The commodity prices rises of the 1970s (not just oil and gold), like those today, were caused by the Federal Reserve expanding the dollar supply far beyond the demand for dollars.

OPEC had an oil embargo that stuck. I know that Friedman said that inflation is always a monetary phenomenon, but in this case, it wasn't. And FYI, when oil does go up in price, you get classic textbook cost-push inflation of just about everything else (because oil prices affect transportation costs).

There was no "oil shortage" then and there is none now.

I guess what you are saying is that if you make up your facts, you can make a case for the gold standard.

In the real world, China and India are suddenly consuming a heck of a lot more petroleum than they were before, we are close to peak oil, and one of the largest oil producing countries (Iraq) is producing well below its capacity.

No, my real beef is with the UCC, which does not cover such instruments. Since you brought up kooks, we can observe that you are under the kooky delusion that one can rewrite all of commercial law by contract. Nothing could be further from reality. Negotiable instruments, for example, are not just contracts, and they need to be covered under the standard commercial laws to be effective. The standard commercial law effectively bans negotiable instruments denominated in precious metals or private currencies.

That's not really true-- one can negotiate gold-backed securities. But negotiable instruments simply make legal transactions easier. It is quite doable to contract to be paid in gold or gold equivalent, even without the benefits of negotiable instruments. The following language is, as far as I know, enforceable in all 50 states including in sale of goods cases under the UCC:

"CONSIDERATION. On the last day of each month for the next 12 months after the effective date, Buyer shall pay seller the dollar equivalent of 3 troy ounces of gold bullion, as determined by the closing price at the New York Mercantile Exchange on the day before the date of payment. Seller and Buyer both understand that they are assuming the risk that a change in gold prices may alter the dollar value of the consideration given hereunder, and knowingly enter into this agreement to value the consideration in this manner."

When all else fails, call names. Apparently extreme libertarian kooks shlepped around about $10 trillion in commodity derivatives last year.

But commodity derivatives are NOT REGULARLY EXCHANGED BY WEALTHY PEOPLE and are NOT HELD BY WEALTHY PEOPLE AS THE BASIC DENOMINATION OF THEIR WEALTH. For those purposes, they use dollars or Euros, fiat currencies managed by independent central banks empowered to do countercyclical monetary policy.

There is certainly a lot of investment in commodity derivatives, especially given we are facing a decline in the value of the dollar and a possible recession. This is normal-- gold does well under these conditions.

But what there isn't is any great mass of people who know what they are doing with their money and who insist on being paid by means of a commodity backed instrument. Indeed, there's no wealthy people I am aware of who have lost confidence in fiat currency. People who know what they are doing and have made lots of money have no problems with fiat currency. You would have us believe that they are all deluded and a bunch of cranks on the internet really know what has value and what doesn't.

The dollar literally is monopoly money and I don't advocate gold.

You need to learn what the word "literally" means. Hint: it doesn't mean "really analogous to".

All snark aside, the dollar is NOT monopoly money. As I said, it is widely accepted not only in the US but all over the world. Monopoly money isn't. People who make this comparison look silly.

For reasons I won't go into here, I think precious metals will not work as well as a basis for money in modern markets than a broad basket of commodities. I advocate private currencies, with commodity derivatives for hedging and government currency transactions being a good first stab at such currencies that we see arising today. I advocate revising the law and government procurement to be currency-neutral, ending the Federal Reserve's monopoly on money.

Wow, how many misinformed statements in less than one paragraph. First, and most importantly, the federal reserve system allows the government to do countercyclical monetary policy, which has produced the smoothest business cycle and the fewest, shallowest recessions in history in the last 27 years. So you are advocating junking a system that works well and replacing it with something that no first world economy uses.

Second, what you call private currencies and commodity derivatives already exist. You can hold them if you want to. As I demonstrated above, you can contract with anyone to use them as a medium of exchange. Your problem is that nobody wants to contract with you, because we all like our fiat money just fine. Now you can say that we are all delusional, our money's worthless, etc. But unless you can find someone to take you up on your offer, you are only cutting yourself off from the economy by not using fiat money.

Privatizing the money supply, in addition to disempowering countercyclical monetary policy and making recessions deeper and more frequent, will also impose huge transaction costs on commerce, because accepting lots of currencies, especially for small transactions, is extremely costly.

Finally, as I said, the requirement that you pay government obligations in dollars is not onerous, and doesn't interfere with your right to contract in commodity backed securities or to hold them. All you have to do is convert to dollars in those few instances when you have to pay something to the government. Your problem is not the government; it's the private sector, which wants the safety and reliablilty of our solid fiat currency system and wants nothing to do with your complex privatized multiplicity of media of exchange.
4.8.2008 1:48am
Laura S.:


This is misleading. Monetary policy is directed by the Federal Open Market Committee, which definitely is a governmental agency run by political appointees who have some, but not complete, independence from the political process.

You're being misleading. The salaries thereof are paid by the Federal Reserve which by all accounts you now concede is a private corporation. The fact is that a private body has been charged with a public function.

The FRS is more like FASB than the FCC--The board of governors lack any manner of judicial, executive, or legislative power. They cannot make rules (laws) against private entities. They cannot enforce policy against private entities. They cannot adjudicate the conduct of private entities.

What they can do is direct the operation of the FOMC which has special rights/duties under charter with the US Government.

FRS is about the worst counter-example to the unitary executive someone could find.

Please stick to the FCC--but then that lacks the punch of endangering independent monetary policy.
4.8.2008 4:11am
Elliot123 (mail):
"I don't know if you are a lawyer, but I am, and I could write an enforceable contractual provision that requires payment in gold or a gold-equivalent (or in money valued at a certain amount of gold) in 5 minutes."

How many hours would be billed for that service?
4.8.2008 12:37pm
Dilan Esper (mail) (www):
You're being misleading. The salaries thereof are paid by the Federal Reserve which by all accounts you now concede is a private corporation. The fact is that a private body has been charged with a public function.

Who pays the salaries really isn't the test of what constitutes a government agency. If you want to be technical, the Federal Reserve System is like Amtrak, a federally chartered corporation with substantial ties to the government. In Lebron v. National Rail Passenger Corp., the Supreme Court held that Amtrak was part of the government. Under the same principle, the Federal Reserve is also part of the government.

However, the Federal Open Market Committee is definitely part of the government. The Committee is appointed by the government and accountable to it. And the Committee decides our monetary policy-- the federal reserve banks (which you can argue are somewhat more "private" than the FOMC, but which aren't private in the sense that Citibank is) don't.

What happens is that "the federal reserve is private" is a TALKING POINT that gold standard advocates use because it makes it sound sinister and wrong, when in fact our monetary policy is made by policymakers who are chosen and can be replaced by the political branches of our government, and this is all that matters.

As I said, however, even with respect to the Federal Reserve Banks (who don't set monetary policy), they really aren't "private" in the sense you are arguing. Rather, banks are required to buy shares in them, whether they want to or not. Economically, that is the equivalent as if we funded the FRB's through a tax on bank deposits. It isn't really "private" enterprise when the government forces you to buy in.
4.8.2008 3:16pm
peppercorn:
And FYI, when oil does go up in price, you get classic textbook cost-push inflation of just about everything else (because oil prices affect transportation costs).

You should at least make a plausible pretense of understanding what you imply that you have read in textbooks. Precious metals, for example, are not significantly impacted by transport costs, yet they have tended to rise and fall alongside oil, as have other commodities for which transport costs constitute only a small fraction of their price. When commodity prices rise across the board, as they did in the 1970s and as they have over most of the last decade, Occam's Razor or basic common sense should tell you that positing simultaneous rises in demand or lowered supply for such a large number and wide variety of commodities is a preposterous explanation. The sane explanation is Friedman's: synchronous changes in the price of all commodities in dollars reflect changes in the supply or demand for the one commodity they all have in common, namely the dollars.

But commodity derivatives are NOT REGULARLY EXCHANGED BY WEALTHY PEOPLE and are NOT HELD BY WEALTHY PEOPLE AS THE BASIC DENOMINATION OF THEIR WEALTH

Oh my, all caps. You've convinced me now. I take that back the facts I observed about hedge funds, banks, and other tools of wealthy people having traded $10 trillion worth of commodity derivatives this past year. And you are just so right when you say that negotiable instruments law does not effectively ban retail use of negotiable instruments denominated in private currencies, and besides that ban is a good idea because only extreme libertarian kooks would ever want to use such instruments. While we're at it, peace is war, poverty is wealth, a large number and wide variety of commodity prices can all magically rise in price at once and that has nothing to do with the currency they are priced in, and the Federal Reserve is God. Your ALL CAPS have convinced me, and I hereby give in to your reality.
4.8.2008 5:24pm
peppercorn:
The dollar literally is monopoly money and I don't advocate gold.

You need to learn what the word "literally" means. Hint: it doesn't mean "really analogous to".

You need to learn what a pun is. Hint: I used lower case.
4.8.2008 5:36pm
Dilan Esper (mail) (www):
Precious metals, for example, are not significantly impacted by transport costs, yet they have tended to rise and fall alongside oil, as have other commodities for which transport costs constitute only a small fraction of their price.

That's because gold is an attractive investment in inflationary economies, because it tends to hold its value better than fiat currency in that situation. Of course, gold's occasional desirability as an investment has nothing to do with whether the fiat currency system is in any sense a bad idea, which is our topic of discussion.

I take that back the facts I observed about hedge funds, banks, and other tools of wealthy people having traded $10 trillion worth of commodity derivatives this past year.

Again, peppercorn, that's investment. Investment in commodities either for speculation or as part of a diversified portfolio is different from demanding that one is paid in commodities backed securities rather than dollars, or holding one's assets in commodities routinely. And no rational rich person is doing that. Nobody denies that commodities can be good investments and reasonable vehicles for speculation. The issue is whether we need to try and push people away from dollars and towards commodities-backed instruments, and there's no reason we need to do that. The Fed's policies of countercylcical monetary policy work fine.

You need to learn what a pun is. Hint: I used lower case.

A pun is where you use a word or phrase with two meanings ironically, or use a sound-alike with a different meaning. It has nothing to do with your improper use of "literally".
4.8.2008 5:53pm
c.gray (mail):

And if there were really significant advantage to holding one's assets in a currency other than the dollar (i.e., if the Fed's monetary policy were really as harmful as its critics claim), you would see rational economic actors doing so. They aren't.


Uhh.....Hasn't the dollar fallen rather dramatically vs. both Gold and the Euro during the past several years?
4.9.2008 12:44am
Dilan Esper (mail) (www):
cgray:

Euros, like dollars, are a fiat currency. So Euros don't enter into this debate.

You, like peppercorn, are missing my point. If gold were such a better form of money than dollars, rich people, who can structure their transactions any way they please because people are dying to do business with them, would demand to be paid in gold, convert all their liquid assets into gold equivalents, etc. The same way in countries with highly inflationary monetary policies, wealthy folks demand to be paid in dollars and Euros. But there's NO evidence that this is happening.

Yes, there is some temporary speculation and investment in gold due to the troubled times we are in. Gold always does well when there is a potential of inflation and recession. But there's no evidence that, say, people in Warren Buffett's or Bill Gates' class are demanding that their obligations be met in anything other than fiat currency and writing that into contracts, despite the fact that this is perfectly legal to do. And the reason is that among people who actually know something about money and investment (unlike posters on the Internet), there is complete confidence in fiat currency over the long term.
4.9.2008 1:32pm
peppercorn:
That's because gold is an attractive investment in inflationary economies, because it tends to hold its value better than fiat currency in that situation.

My gosh, a dose of economic sanity from our local Bernanke worshipper. Now let's draw some logical conclusions from this observation and a few historical facts. When the U.S. went off the gold standard in 1970 gold was $35 an ounce. It now trades for about $930 an ounce. Oil traded at about $5 a barrel, and is now over $100 a barrel. Almost everything else not subject to Moore's law, from college tuition to food to almost ever other kind of commodity, has risen by similar amounts during this period. There is no previous thirty-year period in American history, or indeed in the history of any country at any time under any precious metal standard, where such dramatic inflation has occurred, but plenty of other examples from the 20th century under fiat currencies.

Now a little Economics 101 or Investing 101 question for you: since the dollar went off the gold standard, which has been the better store of value, dollars or gold? Dollars or oil futures? Which two investments would have paid off more than ten times the return of the third investment -- a thirty year bond at 3% denominated in gold, a thirty-year bond at 3% denominated in dollars, or a thirty-year bond at 3% denominated in a commodity index?
4.9.2008 6:00pm
peppercorn:
You need to learn what a pun is. Hint: I used lower case.

A pun is where you use a word or phrase with two meanings ironically, or use a sound-alike with a different meaning. It has nothing to do with your improper use of "literally".

My god, you are seriously dense. No wonder you don't understand economics, you can't even pick up on a simple pun.
4.9.2008 6:03pm