How The President Can Fight The Federal Reserve

There’s a weapon the Trump Administration should unleash to begin a huge, much-needed overhaul of the Federal Reserve. The Treasury should issue government bonds linked to gold. These securities would provide a simple everyday metric as to whether Washington is undermining or maintaining the value of the dollar. Noted economist Judy Shelton, in her seminal book Good as Gold: How to Unleash the Power of Sound Money, provides a model for how this would work. Washington would sell a zero-coupon bond with a maturity of, say, five years. The profoundly positive kicker: At bond maturity the investor would make a choice—to get the principal back in either dollars or in gold.

For example, if you bought a five-year gold bond for $1 million, at maturity the bond would permit you to receive cash or a specific amount of gold, in this case, around 280 ounces. If Washington and the Fed misbehaved, as they have in the recent past, you might collect gold worth $1.5 million. Washington would set aside a certain amount of the 261 million ounces of gold it holds to cover its potential liabilities.

The beauty of this is that people every day would be able to see if Washington was messing around with the dollar’s value. A weak dollar would mean Uncle Sam would lose gold. Instinctively, most people wouldn’t like that, as they’d know it was a portent of trouble. The price of these gold bonds would be a great barometer of Washington’s financial health.

For a variety of reasons, gold keeps its intrinsic value better than anything else on earth, and has for thousands of years. It is to stable value what the North Star is to navigation. It’s a fixture. When you see the dollar price of gold fluctuate, that’s mainly a reflection of changes in the value of the dollar, not the yellow metal.

These days, investors hunger for protection against inflation. That’s why they’ve bought some $2.6 trillion in Treasury Inflation Protected Securities (TIPS), even though their nominal interest rate is low compared to regular Treasury bonds.

Gold bonds would also become a weapon against the destructive philosophy that guides Federal Reserve policy—the belief that prosperity causes inflation. The Fed fears that a vibrant economy will send prices higher. The central bank doesn’t distinguish between expenses going up because of natural disasters, pandemic lockdowns or government policies, such as sales taxes and regulations, and the classic inflation that comes when the value of the dollar is reduced.

Shelton rightly makes the point that we need to rule out the central bank’s manipulating the cost of capital to stimulate or restrict economic activity. This socialist-style thinking needs to be countered.

Money measures value the way a clock measures time, a ruler measures length and a scale measures weight. We all know that markets work best with fixed weights and measures.

The Fed should focus only on maintaining the value of the dollar. It shouldn’t keep trying to manipulate economic activity or fiddle with interest rates. It’s absurd that a three-month Treasury bill yields 4.3%; a market rate would likely be half that.

Gold bonds would help highlight how far the Fed has strayed from its true mission. They would be the beachhead for big-time reform.