Governor Perry and Fed Independence
David R. Kotok
August 18, 2011
For the past twelve years, this writer has chaired the Central Banking Series of the Global Interdependence Center. The purpose of this series is to develop an understanding of central banking and to communicate the different views about central bank policy.
As its principal function, the Global Interdependence Center acts as a neutral facilitator for dialogue, conversations, discussions, explanations, and education. Policy making, research, studies of implementation, alternatives to implementation, distinguishing features among the central banks – all of these are among the items that are discussed and studied during this series.
One of the conclusions reached over the years and affirmed numerous times is the importance for citizens, investors, bankers, individuals – everyone who is concerned with finance and economics – to defend the independence of the central bank and to permit the central bank to function without political interference.
History has a terrible record when it comes to political interference in central banking. Under the worst circumstances, we get hyperinflations, like the Weimar Republic or Zimbabwe. In cases such as these, the central bank is completely folded into the government, succumbing entirely to the political whim of the individual in power. The more politics get involved with central banking, the worse the outcome.
History holds no examples of a benign governmental interference. Over time, there may have been some temporary interludes of positive intervention, but they remained short in length and deficient in output.
The bottom line is simple: the government is best contained by creating a barrier between the executive branch and the central bank of the country.
In the United States, we have now had a new phenomenon injected into our presidential race. A presidential candidate, Governor Rick Perry of Texas, has attempted to intervene and pledged to do so if he becomes president. He has used political campaign rhetoric to threaten the Chairman of the Federal Reserve; and when asked in detail about it, he subsequently affirmed his position.
Governor Perry did not have to do so. He could have said, “I am worried about central bank policy; it is something to be examined. We have to have an independent central bank, but we also need to watch what they do and weigh in on conversation.” That is not what Perry did. Perry reiterated the threat.
There is great danger in this notion that the United States of America could tolerate a president who would use the early stages of his political campaign to vilify the Chairman of the Federal Reserve and to threaten intervention in central bank policy making.
The Federal Reserve Act established staggered fourteen-year terms for the seven governors of the Federal Reserve board. The reason was to attempt to eliminate the interference of the executive branch. We have seen the corruption and destruction of central bank independence in the Federal Reserve appointment process. It occurred under President Bush when Senator Dodd, Chairman of the Senate Banking Committee, held up appointments. It happened again under President Obama when Senator Shelby, senior Republican on the Senate Banking Committee, held up an appointment. We now see additional uncertainty introduced as President Obama attempts to appoint new governors to the unfilled positions.
Readers, please note that the Federal Reserve, the central bank of the United States, has not had a full complement of seven governors during the entire financial crisis and the period following. Not one day did we have the benefit of the full board.
Is it not time for seasoned politicians who want to lead us declare their commitment to independent central banking? This does not mean they give up congressional oversight or the liberty to express their opinions. It does mean they cease to threaten and allow central banking functions to take place as much as possible outside the political spectrum.
Governor Perry of Texas should think about what he has done. I cannot recall any other presidential candidate taking such an extreme position. One exception may be a Congressman from Texas by the name of Ron Paul, who has called for the abolition of the central bank and sponsored the notion of the gold standard. Is Governor Perry claiming he wants to return to the gold standard? If so, let him say so.
David R. Kotok, Chairman and Chief Investment Officer