Beware "Audit the Fed"

The temptation for Congress to use monetary policy to influence electoral outcomes would almost certainly prove too great to resist. A Congress controlled by one party facing an incumbent president from the other party would have powerful incentives to constrict the money supply and slow growth, perhaps even causing a recession, in the year before the election. Likewise, incumbents facing an elevated unemployment rate — say, above 8 percent going into “the most important election in our history” — would have powerful incentives to take radical and irresponsible steps toward short-term monetary stimulus. It is precisely this political temptation that has led to the creation of independent central banks to implement monetary policy.

While the current crop of Republicans is steadfast on the issue of inflation, there is no reason to assume that this commitment will last forever. For most of American history, populist forces have called for higher inflation to reduce the real costs of paying back loans. During the free-silver movement of the late 19th century, American farmers and their Democratic representatives in Congress called for a debased dollar backed by gold and silver, as opposed to gold alone. At the time, deflation was ravaging the economy, hitting indebted farmers especially hard. A 21st-century middle class suffering from deflation in housing prices and a raft of upside-down mortgages has essentially the same incentives. When inflation is lower than had been anticipated, it makes it harder for people to pay down their credit-card debts, their mortgages, their student loans, etc. Populists would call on the Fed to print more money, and congressional incumbents would have good reason to go along with that.