Former President and current Republican presidential candidate Donald Trump recently renewed his criticism of the Federal Reserve, suggesting that if he returns to the White House next year, he will lobby Congress to pass legislation that would give the president at least a say in the Fed's interest rate decisions.
President Trump believes he has a “better intuition” than Federal Reserve governors about what interest rates should be because he “made a lot of money” in business. President Trump may have better intuitions about how markets work than Federal Reserve Chairman Jerome Powell and his colleagues, but that doesn't mean he's any better equipped than the Fed to know what the “right” interest rates are.
Interest rates are the price of money, and like all prices, the “right” interest rate is set not by a central planner, but by the interaction of free people operating in a free market.
Interest rates, like other prices, send signals to market participants about market conditions. When bureaucrats and politicians manipulate the money supply to change interest rates, they distort those signals. These distortions are why the U.S. economy is plagued by boom-and-bust business cycles.
Politicians like “easy monetary” policies because they create an (illusory) economic expansion. The Fed-created economic expansion helps politicians stay in power. Politicians like low interest rates because they encourage government spending and debt, allowing politicians to support powerful special interests through government spending. The desire to liquidate the federal debt is one, if not the main, reason why central banks keep interest rates low.
The policy of permanently low interest rates favored by politicians would hasten the inevitable collapse of the fiat money system.
Donald Trump is not the first U.S. president to “try to influence” monetary policy. Presidents of both parties have applied varying degrees of pressure to get the Federal Reserve to adopt monetary policies favorable to the president's policies. President Dwight Eisenhower pressured Federal Reserve Chairman William Martin to either increase the money supply or resign. Martin ultimately caved and increased the money supply.
President Richard Nixon and Federal Reserve Chairman Arthur Burns were recorded joking about the independence of the Federal Reserve. President Bill Clinton's first Treasury Secretary, Lloyd Bentsen, had a gentleman's agreement with Federal Reserve Chairman Alan Greenspan that the Federal Reserve would set monetary policy and support Clinton's economic agenda.
An extreme example of a president trying to influence monetary policy was when Lyndon Johnson pushed the Federal Reserve chairman against the wall because the Fed's interest rate hikes were hindering Johnson's ability to spend on the Vietnam War and the “Great Society.”
Since Congress created the Federal Reserve in 1913, the purchasing power of the U.S. dollar has declined by more than 97 percent. This proves that Donald Trump is right about the need for fundamental changes in monetary policy. But it is a mistake to think that Trump himself, or any politician, bureaucrat, or businessman, can know the “right” interest rate. Instead of giving politicians more power to influence the Federal Reserve, the next president should work with Congress to pass legislation that legalizes competing currencies, prohibits the Federal Reserve from purchasing federal debt, and audits and abolishes the Federal Reserve.
Ron Paul is a former U.S. Congressman from Texas. This article originally appeared on the Ron Paul Institute for Peace and Prosperity and is reprinted here with permission.
