- The Washington Times - Thursday, July 24, 2008

ANALYSIS/OPINION:

COMMENTARY:

A raging rabble roams Paris. Recognizing the livery of the architect of their angst, they surround the carriage, howling for the head of John Law, the Ben Bernanke of the Regency. Law, ever a showman, flings open the coach door, cries “Vous etes des canailles!” (not complimentary), and leaps into the crowd which parts like the Red Sea before Moses. His amazed coachman draws the wrong conclusion.

France had not recovered from the fiscal folly of the Sun King. Law, who had fled England after killing a rival suitor in a duel, ingratiated himself with the Regency. Son of an Edinburgh banker, Law had studied banking in London and the Continent. Let me print money, he told the Regent, and if you will declare it legal tender you will do what no alchemist could do, you will convert paper into gold. Behind his “currency” in its early days was a promise that it was backed by Royal lands and could be redeemed for gold. His activities - he founded a central bank like our Fed, he sold shares in a company to explore the Mississippi, he took over the tax collection system - made him the darling of the Regency and seemed to invigorate the economy.

America has not recovered from the fiscal folly of the 20th century. Mr. Bernanke and colleagues, while not as colorful as Law, are his equal in printing paper and pursuing power. These bankers believe a federal fiat gives value to paper. In the early days there was a gold standard and one could convert paper into gold and the paper did have value. But even before the Fed was established in 1913, the gold standard had began to unravel and by now - with prices 100 times what they were a century ago - the Fed has accomplished the reverse alchemy of converting gold into paper. Economists refer to “monetizing the public debt,” but that is a euphemism for “printing money.” By now, the Fed prints money for any purpose that keeps it popular with its political patrons. Worried about banks? Don’t worry, we will print enough money to guarantee their liquidity. Worried about thrift institutions, investment banks, hedge funds, equity funds? Don’t worry, we will run the printing press. Worried that we have unemployment? Don’t worry, we will pursue monetary policies so that interest rates are negative (i.e. below the inflation rate) and then business will borrow, produce and hire.

As prices doubled in France, then quadrupled, as people realized the currency was just paper and wanted something that had lasting value, they discovered they could not claim the royal lands. While, briefly, they could redeem paper for gold, soon that privilege perished and laws were enacted that proscribed holding, trading or exporting precious metals. And still the flight from money continued as people disposed of their depreciating currency to buy land, houses, jewelry - anything Law could not print.

Like Law when he facilitated the fiscal excess of the Regency, the Fed is popular when it finances the fiscal excess of our politicians. Worried that terrorists knocked down the Twin Towers? Don’t worry because you can run a deficit and we will buy enough government bonds in the open market so that you can finance a deficit in a period of 5 percent inflation with an interest rate of 5 percent, i.e. you can borrow money for nothing because we are printing it. Worried about Katrina? Don’t worry, we will print enough money to sop up the Gulf of Mexico. And when the terrorists nuke Chicago, it will be no big deal because we will… .

By 1720, realizing Law was the maker of misery and creator of chaos, the Regency decided that Law was “independent” and that the inflation was Law’s and not the Regency’s. Law fled France. Chairman Bernanke, with all due respect, you and your colleagues pursue policies that will give us 8 percent inflation in the next twelve months and more - much more - in the next.

When people stop asking who causes the inflation (Is it Hugo Chavez? Is it the big companies? Is it the farmers?) and start saying it is the Fed, your esteem will vanish. Congress and the administration will proclaim your independence and will distance themselves from you. Have your chauffeur read this:

A mad mob roams les rues. Again recognizing the livery but not knowing the coach is empty, they surround the carriage, howling for the head of John Law. Knowing what to do, the coachman stands, yells “Vous etes des canailles!” and leaps into the crowd. The carriage converts to match sticks, the terrified team gallops through the streets and the coachman dies before he hits the cobblestones.

John Coughlan is president of the CPA School of Washington and has been a professor at Georgetown University, George Washington University, Howard University and Loyola College in Baltimore.

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