Topic: Finance, Banking & Monetary Policy

A Gold Standard Does Not Require Interest-Rate Targeting

Stephen Moore and Herman Cain, the two recent nominees to the Federal Reserve Board of Governors, have in the past suggested returning to a gold standard (although Moore now says he favors merely consulting a broad range of commodity prices as leading indicators). In response, a number of recent op-eds criticized the idea of reinstating a gold standard. The critics unfortunately show little theoretical understanding of the mechanisms by which a gold standard works, and consult no evidence about how the classical gold standard worked in practice.

I don’t seek to defend the nominees, who I think are poor choices on other grounds that have been enumerated by Will Luther. And I don’t seek here to answer many common criticisms of the gold standard, since I have tried to do that here and here. I want to focus on one novel criticism. It stems from imagining that a gold standard regime works like our present regime in the sense that the central bank uses a short-term interest-rate target to steer the economy toward its long-run goal. The only difference is that the central bank pursues a constant dollar price of gold rather than another nominal goal like a gradually rising price-level or nominal-income path.

Thus a Washington Post reporter, Matt O’Brien, declares that a gold standard is “a disaster” and “might be the worst guide to setting policy.” That he sees the gold standard as a “guide to setting policy” already signals a misconception. O’Brien comes to the “disaster” conclusion by starting from the false premise that the wild price volatility of today’s demonetized gold tells us how volatile the price of gold would be under an international gold standard absent domestic central bank action. To offset that potential price volatility, he supposes, the central bank would have to undertake wild and often inappropriate swings in its interest rate policy. If you look at the track record of the classical gold standard, however, you don’t find such wild central bank policies. In the United States, you don’t even find a central bank.

A Positive Policy Agenda for CFPB Director Kathy Kraninger

The Consumer Financial Protection Bureau has been controversial since its creation. As an executive agency enjoying Federal Reserve funding independent of the Congressional appropriations process—and run by a single director removable only for cause—the Bureau is unusual and possibly unconstitutional. In its first years of existence, the CFPB gained a reputation for its exceptional activism and anti-industry agenda. Curiously, many of its enforcement and rulemaking activities focused on areas that were explicitly outside of its regulatory remit—such as auto lending, federal student loans, and credit providers historically regulated at the state level, such as payday lenders.

When Mick Mulvaney replaced Richard Cordray as CFPB Director, he vowed to stop “pushing the envelope” in its approach to regulation. Progressive fans of the Bureau took this as a sign that Mulvaney would terminate the CFPB’s enforcement activities altogether, an expectation that subsequent developments belie. Still, the financial industry, wary of the Bureau’s exceptional powers, breathed a sigh of relief that the Cordray-era modus operandi of attempting to change industry practices, even legal ones, through threats of lengthy and expensive enforcement actions might be over.

Now Mulvaney’s replacement Kathy Kraninger has the unenviable task of crafting a policy agenda for the CFPB that raises consumer welfare and promotes choice, competition, and innovation in the provision of credit. To assure regulatory certainty, her agenda should fall within the Bureau’s regulatory mandate and be compatible with the rule of law. Kraninger will undertake her task in the face of both Democrat hostility and Republican skepticism that the Bureau should even exist. Added to that, designing effective policy changes will also require Kraninger to keep current CFPB staff motivated and to recruit new economists and lawyers who share her vision.

Despite the challenges, Kraninger’s tenure has started auspiciously. The CFPB’s new Office of Innovation is launching a regulatory “sandbox”—an approach that has delivered moderately successful results in Britain and Singapore—and a revised no-action letter policy. Both may make it easier for lenders to try out new ways of providing financial services. Furthermore, the Bureau intends to create an Office of Cost-Benefit Analysis, which could improve the rulemaking process in addition to serving as a gesture of goodwill toward the consumer credit industry—which the CFPB has long seemed to view as all cost and no benefit.

As Director Kraninger settles into her new role, here are five concrete, positive steps she can take to increase the credit options available to consumers.

More on Commodity Price Targeting

In a previous post, I argued that Paul Volcker didn’t put a stop to inflation by having the Fed systematically increase interest rates when commodity prices rose, and lower them when commodity prices fell. While commodity-price targeting, aka a “price rule” for monetary policy, had some prominent proponents back in the 1980s, neither Volcker nor any other Fed chair embraced the idea.

Today’s post has to do with two things that I didn’t say in that earlier one. I didn’t say that commodity price movements played no part at all in the Fed’s decision-making. And I didn’t say whether they should or shouldn’t play any part in it. I plan here to review studies of the actual role commodity price movements have played in the Fed’s monetary policy decision-making, as well as ones that ask whether the Fed would do a better job if it let them play a bigger one.

This post is, I warn you, both long and very wonkish. But if the Fed is to consider once again the possibility of basing its monetary policy decisions on the behavior of commodity prices, it’s useful to take account of what a substantial body of previous research has had to say on the topic.

Powell’s “Patience” Is No Substitute for a Sound Monetary Rule

Fed Chairman Jerome Powell’s decision in December to raise the federal funds target by 25 basis points, to 2.25–2.50 percent, and to continue raising rates at least twice in the new year, upset financial markets. The Dow and S&P each dropped at least 8.7 percent, logging their worst December declines since 1931.

It looked like the “Powell put” was about to end. However, as criticism of the Fed’s tighter money policy mounted, Powell surprised markets early in the new year.  On January 4, he told several thousand economists at the American Economic Association meeting in Atlanta, “We will be patient [in raising rates and reducing the Fed’s $4 trillion balance sheet] as we watch to see how the economy evolves.”

The call for “patience” was put into action on March 20th when the Federal Open Market Committee voted unanimously to maintain the Fed’s 2.25–2.50 target, while signaling that 2019 would see no rate increases.  Moreover, details emerged on the Fed’s plan to halt its balance sheet unwind.

Given this backdrop, several issues need special attention as the Fed reviews its formulation, conduct, and communication of monetary policy throughout 2019. The major conference at the Chicago Fed this June is just the place to be asking whether patience, reliance on the “dot plot” as a communication tool, and paying interest on excess reserves are the best we can do in trying to create macroeconomic stability.[1]

The Zero Lower Bound Is No Reason to Punish Currency Users

John Maynard Keynes once marveled at “how, starting with a mistake, a remorseless logician can end up in Bedlam.” (Bedlam was the nickname of a London madhouse.) Keynesian or New Keynesian macroeconomists who start with the mistaken premise that a central bank cannot fight recession except by lowering nominal interest rates have been remorseless logicians in Keynes’s sense. In the hope of further empowering central banks to fight recessions, presumably for the benefit of the public, they have ended up like mad social scientists with schemes that would deliberately punish the public for holding currency.

From the premise that nominal interest rates must be cut, together with the fact that nominal interest rates are currently low by historical fiat-currency standards, one readily finds that the “Zero Lower Bound” on nominal interest rates is a looming obstacle to anti-recession policy. At the ZLB the central bank supposedly “runs out of ammunition.” Economist Lawrence H. Summers, thinking of the US Federal Reserve’s policy-making under the nominal Fed Funds Rate targeting approach that it used in previous recessions, has warned that “typically interest rates come down 500 basis points to contain recessions” but “there isn’t going to be 500 basis points of room any time in the foreseeable future.” Thus central bankers “don’t really have the fuel in the tank to respond” to a new recession.

Stephen Moore’s Other Volcker Rule

Of many dubious claims that recent Federal Reserve Board nominee Stephen Moore made in a Wall Street Journal op-ed he published a couple weeks ago, perhaps the most startling was his claim that “to break the crippling inflation of the 1970s,” former Fed chair Paul Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.

Of course it’s true that, in the early 1980s (not the late 1970s), Paul Volcker’s Fed finally reigned-in the U.S. inflation rate. It’s also true that the Dodd-Frank Act’s section 619 implements a “Volcker Rule” barring banks from using customer deposits to engage in various kinds of proprietary trading. But I dare say it will be news to most people, as it was to me, that Volcker’s Fed tamed inflation by following another “Volcker Rule” that strictly geared its policy rate to the observed level of the prices of various commodities.

Instead, the story most of us have heard is that Volcker, inspired by monetarist writings, embraced a version of monetary targeting.  As Ben Bernanke tells it, in October 1979

Volcker adopted an operating procedure based on the management of non-borrowed reserves. The intent was to focus policy on controlling the growth of M1 and M2 and thereby to reduce inflation, which had been running at double-digit rates. As you know, the disinflation effort was successful and ushered in the low-inflation regime that the United States has enjoyed since. However, the Federal Reserve discontinued the procedure based on non-borrowed reserves in 1982.

Whether targeting non-borrowed reserves was equivalent to targeting any (let alone more than one) monetary aggregate, and whether Volcker really cared whether it served that purpose, may well be doubted. Still, it is a long way from targeting any sort of index of commodity prices.

So, just where did Moore get the idea that Volcker had embraced commodity-price targeting? A little sniffing around produced the answer: from his long-time friend, fellow Trump-booster, and frequent coauthor, Arthur Laffer.

On Trump’s Higher Ed Executive Order

President Trump’s hotly anticipated executive order on college free speech—brought to a fever pitch with his comments at this year’s CPAC—is out. It’s actually kinda several orders in one, with free speech on the main stage, but college outcomes data, and a bunch of studies—including of “skin in the game”—on the sides. Here are some quick thoughts on all three parts.

Free speech

Conservatives, especially, have become disgusted with what they have seen as an increasingly aggressive, politically-correct culture on American campuses, and not without some justification. The order, as you could glean from the White House signing event, was almost certainly motivated by that. But as far as the words of the order go, it seems restricted to combatting college policies, not cultures. Free speech zones, administrators prohibiting certain speakers, etc. Crucially, it treats public and private institutions differently, understanding that public colleges are fully subject to the First Amendment, while private colleges are beholden to what they promise their customers. If they say they are going to allow the free exchange of ideas, they need to do that, but if they are forthright about their speech codes, no problem.

The danger lurks in the order’s generality. It directs multiple federal agencies to “take appropriate steps, in a manner consistent with applicable law, including the First Amendment, to ensure institutions that receive Federal research or education grants promote free inquiry.” Sounds good, but it doesn’t spell out what that means. Could it result in agencies saying free inquiry requires intellectual “balance” among invited school speakers, or something similarly intrusive? What if all agencies have their own, differing definitions? And as Sen. Lamar Alexander (R-TN) suggested, isn’t speech protection more the bailiwick of the Department of Justice than Energy, or the National Science Foundation?


The order calls for the Department of Education to create a new website and mobile app so borrowers can easily check data on their students loans, which is fine if you (wrongly) accept that the feds should be in the student loan business. Also, it requires that the College Scorecard, launched during the Obama Administration, add data on program-level, rather than just school-level, outcomes such as graduate earnings.

Data publication is one of the less dangerous things Washington does, but it still has pitfalls, especially the likelihood the data will be politically cherry-picked instead of used to inform.


A longstanding proposal, championed by many people who understand the root problems of higher education, has been for colleges to bear some cost for defaulted loans. As it stands now, most schools have little incentive to turn away federal bucks-bearing students, no matter how unlikely to complete their studies they may be. Schools get paid no matter what, meaning student aid is all upside for colleges. The “skin in the game” goal is to incentivize schools to better vet potential matriculators, or maybe do a better job educating.

Two problems. First, this blames institutions when the crux of the problem is elsewhere: Washington gives bundles of money to just about anyone who wants them, without seriously assessing their ability to handle the programs they plan to enter. It’s at the point of the initial loan where the vetting should occur, to the benefit of both the would-be borrower and the true lender: the American taxpayer. Second, politically favored schools such as community colleges would probably quickly be identified for exemption. Thankfully, as the heading of this section telegraphs, the order just calls for a study of ways to implement such a proposal.

The other areas for study are pretty innocuous, as far as federal education intervention goes. The Secretary of Education is to study and report on better ways to collect on defaulted loans, and to formulate ideas to increase college completion based on what’s worked in states and institutions.


All in all, the order’s not the worst thing we could have gotten, but there are ample causes for concern.