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FEULNER: Focusing on the Fed

It’s time to ask hard questions about the central bank’s role

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"I'd prop him up and put a pair of dark glasses on him and keep him as long as I could."

That's John McCain in 1999, referring to former Federal Reserve Chairman Alan Greenspan. The joke was that Mr. Greenspan was so good at his job that if anything were to happen to him, we'd need a "Weekend at Bernie's" solution to extend his reign.

The financial crisis and Great Recession, a portion of which at least can be laid at Mr. Greenspan's door, has taken the bloom off the Greenspan rose and then some. Current Federal Reserve Chairman Ben S. Bernanke has also taken his share of hits. With unemployment high and monetary policy bouncing from one experiment to the next amid inflation fears, the Fed attracts few defenders anymore. Even presidential candidates are making Fed policy part of their platforms.

Some critics, such as Ron Paul and Herman Cain, want the United States to return to the gold standard. Others insist that such a move would prove disastrous. But nearly all can agree with Mr. Cain on one point: "We've got to get back to a dollar is a dollar is a dollar."

The framers of the U.S. Constitution certainly understood the importance of a strong and stable currency. They put Congress in charge of regulating the value of money and said that the states could not "coin Money; emit Bills of Credit; [or] make any Thing but gold and silver Coin a Tender in Payment of Debts."

Presidents have emphasized this need for a safe and reliable dollar. "Nothing is more vital to our supremacy as a nation," Grover Cleveland said, "than a sound and stable currency." Ronald Reagan, while governor of California, declared: "Let us show that we stand for fiscal integrity and sound money and above all for an end to deficit spending."

However it's expressed, it boils down to the natural craving for stability. The American people expect their money to be worth the same tomorrow, next week and next year.

That's why they're asking questions about the Fed. They don't necessarily understand what the Fed does, but they realize that it sets policies that affect prices and jobs. And they're right to be leery of the Fed's power, just as they ought to be leery of power concentrated in any agency or branch of government.

Yet the power exists. The question is how to constrain it, and how best to direct it to advance a free and prosperous nation. That's why we should welcome a debate about the role of the Fed and what our monetary policy should be.

But we have to ask the right questions. For example, do we want absolute price stability over time, or a very modest amount of inflation - say, 2 percent a year? And which prices should be stable: those on goods and services or assets? What if the stock market and housing markets are rising rapidly? Should the Fed pop bubbles even if the prices of goods and services are stable?

Then there's the international value of the dollar. Should we fix the dollar price of gold? Or fix the value of the dollar relative to a basket of currencies? A stable exchange rate, after all, benefits international commerce. But what should the Fed do if the dollar is moving up or down due entirely to events with our trading partners? The exchange rate is as likely to move one way or the other because of what another country does as it is due to domestic policy.

"If the defect is inflation and an unstable dollar," asks Lewis Lehrman of the Lehrman Institute, "what is the remedy?" We can't answer that without a robust and full discussion. Let's hope the hard questions being asked now about the Fed touch off a much-needed debate.

Ed Feulner is president of the Heritage Foundation (

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