The meaning of a dollar

July 27, 2011


The harshest congressional critic of the Federal Reserve faced the toughest internal questioner of central bank policy across a witness table on Capitol Hill on Tuesday. Surely there would be a meeting of the minds. Alas, it was not to be.

As Congress remained stalemated over avoiding a catastrophic U.S. debt default with a crucial deadline days away, Representative Ron Paul grilled a top Fed official over an issue that has been troubling him: Why is the dollar money and gold not? As Kansas City Fed President Thomas Hoenig testified before the House Financial Services domestic monetary affairs committee, which Paul chairs, the congressman told him:

Last week I learned that gold is not money. I’ve been able to put that out of my mind … so I’m still trying to find out what money is.

That, to Paul begged the question: What is a dollar? Some background: Paul, who has long advocated abolishing the Fed and returning to a currency backed by gold or silver, couldn’t get Fed Chairman Ben Bernanke to confirm, at a hearing two weeks ago, that the yellow stuff is the equivalent of cash.

“No, it’s a precious metal,” Bernanke said. Banks hold it because it is an asset that can be sold, he said. Investors hold it as a hedge against uncertain times, which is why its value has hit record levels of late.

In Hoenig, Paul might have hoped to find a more sympathetic spirit. The libertarian Texan had across from him, after all, a Midwestern former bank examiner who is the most outspoken anti-inflation hawk on the Fed and a sharp, if courteous, skeptic of much of the central bank’s strategy over the last decade.

Hoenig believes the Fed stoked a housing and credit bubble by keeping rates too low in the early part of the decade only to see it collapse and pitch economies around the world into mayhem. He maintains the Fed is now flirting with inflation and another boom and bust cycle by keeping rates at rock bottom levels.

Although many of Paul’s fellow-Republicans have trashed the Fed and its easy money policies, they have praised Hoenig as a voice of reason in a central bank full of money printers.

“Dr. Hoenig has been a steadfast independent voice among those in the inner circle,” the chairman of the full committee, Spencer Bachus said, saluting him for his bravery.

Hoenig started off promisingly for Paul, telling the lawmaker, who is running for the Republican presidential nomination, that he has read the outside-the-mainstream Austrian School economists Paul worships and agrees with some of their ideas. But on certain key points, Hoenig was unable to satisfy Paul either. “I do think there is a role for central banks,” Hoenig said.

Paul pressed on. Isn’t the fact that the U.S. can issue at will the world’s reserve currency a risky proposition?

Not necessarily, said Hoenig:

The fact that we’re the reserve currency is the consequence of decades of very good economic policy, the fact that we’ve had an economy that’s grown very important to the world.

That led Paul to the fundamental question: What is a dollar and who says it’s money?

Money is a medium of exchange, a means of payment and a store of value and the dollar fits that description, Hoenig said.

As long as the public and the world understands that the dollar that is produced by the central bank of the United States (serves that function) … it is money.

But Paul still wasn’t buying it, saying that he would keep looking for a definition.

We can create them at will out of thin air and then people sometimes wonder why we have a shaky, rocky economy.



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