You Have to Choose a Monetary Policy

There is a lot I find obnoxious about David Stockman's epic NYT rant/article. The general premise is that since 1933, economic policymaking in the U.S. have been a disaster. In particular, government deficits and federal reserve policy have distorted and destroyed our economic system, and government officials of both parties are unalterably corrupt. As a result, our society has been left "broke--fiscally, intellectually broke."

This assessment is clearly incorrect. Since 1933--when the recovery from the great depression began--America has been incredibly successful. The post-war years saw wide-spread prosperity for a large portion of U.S. citizens and our economy has been both productive and innovative. In the meantime, we defeated Fascism and Communism, establishing liberal democracy as the preeminent form of government in the process, while also becoming a global hegemon. We have also addressed some of the contradictions in our society, the last 50 years have seen the elimination of state enforced racial segregation and the withering of legal restrictions and social norms that prevented women from participating equally in society. Of course, we still face challenges (climate change, wealth inequality, the legacies of racism and sexism, etc.), and the U.S. government has made a number of mistakes during that time period (Vietnam and Iraq come to mind), but no one in their right mind can claim that the U.S. is in a worse position now than it was in 1932, or that the last 80 years have been one large ponzi scheme.

My own counter-rant aside, one of the things that bothers me most about Stockman's rant is his views of monetary policy. He doesn't explicitly call for a gold standard, but seems to suggest that taking us off the gold standard was the beginning of the end of America. Most economists view the interwar gold standard as a disastrous policy that lead to the great depression, and Roosevelt's ending of it as crucial to the recovery. Stockman chooses not to address those arguments, and doesn't even call for a return to gold, instead he says:

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism. 

This seems to suggest that he doesn't support free banking, but what would our system of monetary policy be? Would the government return to the gold standard, adjusting the money supply so that a dollar is worth a certain amount of gold? In which case, what are the advantages of the gold standard? Does he think depressions were better or worse during the period of the gold standard? Does he believe gold has some intrinsic quality that makes it advantageous? His answers to these questions might be yes, but he doesn't go into this at all!

Where I believe he is trying to hide the ball, is in implicitly pretending that the gold standard is less interventionist than the current inflation targeting regime. This doesn't make a whole lot of sense to me. Any form of monetary policy involves the government declaring a monopoly over the supply of currency and establishing a regime for determining how much of that currency will be available at any given time. These regimes could have more strict or more flexible rules, but the intervention occurs when the government establishes monetary policy, at which point it should just try to establish the least bad regime possible. Remaining on the gold standard should be thought of as just as interventionist as going off it.