Prospects for fundamental monetary reform.

• Author: O'Driscoll, Gerald P., Jr.
• Position: Column

The intellectual climate has never been more open to a critical analysis of existing monetary institutions both here and abroad. When the Germans agreed to a monetary union, they were promised that they would keep the Bundesbank; only the name would be changed to the European Central Bank. Instead, Gennans with whom I have spoken now think they got the Banca d'Italia. In the United States, before the financial crisis, the Federal Reserve was held in high regard by the public. Now, at least in some circles, "the Fed" has become a term of opprobrium, not unlike "the IRS."

Since the financial crisis, the entire monetary and financial system has come under increased scrutiny and criticism. (1) That includes not only central banks but also the private banking system, which is part of the money-creation process. Central banks are at the heart of the monetary and financial system, however, and they will be my focus.

I do not want to exaggerate the degree of criticism of central banks. Among academic economists at large and in much of the financial system, the Federal Reserve is still generally held in high regard. The latter is easy to understand, since the Federal Reserve bails them out and supplies them with nearly free money. The affection for the Federal Reserve among academics was best analyzed a number of years ago by Milton Friedman (in Fettig 1993) and detailed by Larry White (2005). They noted that a large percentage of monetary economists are employed by the central bank. Many others are consultants and invited to Federal Reserve conferences. People do not bite the hand that feeds them.

Relative even to the recent past, however, the prospects for serious discussion of monetary reform are bright. The work done over the years by scholars, many of whom have spoken at Cato's Annual Monetary Conference, contributed to these improved prospects.

In this article, I make a case for fundamental monetary reform, explain the critical problems that call for monetary reform, examine reform alternatives, and discuss prospects for reform. I also propose a strategy to improve the prospects for fundamental reform.

U. S. Monetary Commissions and Reform

National monetary commissions, like the Centennial Monetary Commission proposed by Rep. Kevin Brady (R-TX), have a long history in the United States. They signify that the demand for fundamental reform has caught the attention of the political system, but that the consensus required for legislation has not yet emerged. Congressman Brady and his colleagues have heard the call for change, but the nature of the preferred change is not yet clear. Further, the monetary system is a highly technical issue and one not readily addressed in the normal legislative process. A commission report can not only provide a path to reform but also provide political cover to make difficult choices.

These factors are evident in the structure of the Centennial Monetary Commission Act of 2013 (H.R. 1176). First, there are 13 "findings" that establish a need to consider reform. Then there is a call to "evaluate operational regimes," of which 6 are listed. The Commission is charged with recommending a course for monetary policy. Then there are the details on membership and reporting. The Act envisions that a Commission Report, which would delve into the technicalities of monetary reform, could form the basis of legislation.

The Act notes that "following the financial crisis known as the Panic of 1907, Congress established the National Monetary Commission to provide recommendations for the reform of the financial and monetary systems of the United States." Those recommendations became the basis for the 1913 legislation creating the Federal Reserve System.

The National Monetary Commission was created by the Aldrich-Vreeland Act of 1908. Republican Senator Nelson Aldrich of Rhode Island was its chairman. At a secret conference of bankers on Jekyll Island, Georgia, in November 1910, a plan for what became the Federal Reserve System was hatched. That plan, dubbed the "Aldrich Plan," was eventually submitted to Congress (Bruner and Carr 2007: 145).

The Aldrich Plan was viewed correctly as a (big) bankers' plan. In 1910 the Democrats took control of Congress, and in 1912 Woodrow Wilson was elected president. Progressives, now in control of Congress and the presidency, were (incorrectly) viewed as hostile to big banks (Kolko 1963). Carter Glass was the chief congressional sponsor of the Federal Reserve Act and naturally did all he could to disguise the Act's origins in the Aldrich Plan. Paul M. Warburg, the true author of the Aldrich Plan, later detailed "the near-identity of the two" (Friedman and Schwartz 1963: 171, n. 59).

Long before the National Monetary Commission, there were earlier efforts at reform. There were alliances, political movements, and even political...