Thanks in part to high-profile and controversial public policy since the financial crisis, and to a lesser extent politicians such as Ron and Rand Paul, the monetary and financial arrangements of the United States have become a surprising source of public indignation. Monetary and financial policy, previously a subject that would put almost all voters to sleep, has now aroused populist passions. These passions have manifested themselves in outrage against the bailouts of perceived crony capitalists, and even somewhat-mainstream political activity revolving around ‘auditing the Fed’. The underlying narrative seems to be that, led by the Fed, the monetary system of the United States has been coopted by financial and political elites, and is infringing upon the rights of the sovereign People. The People, according to this narrative, have the right to decide the monetary arrangements within which they will act, and to which they will be subject.
But giving voters control over monetary institutions and policy is a very bad idea.
Yes, the Fed has behaved abominably since the financial crisis. Arguably, the entire track record of the Fed is underwhelming, even compared to previously existing, and admittedly flawed, U.S. monetary institutions. Questionable bailouts and excessively easy credit policies by the Fed have long forced taxpayers to underwrite financial excess. But this does not mean monetary policy, or even monetary institutions, should be subject to democratic control.
As scholars such as Ilya Somin and Bryan Caplan have shown, the People are remarkably uninformed about issues of public importance, and they have systematically biased beliefs regarding the way markets actually work. Monetary theory and policy is hard enough for professional economists to get right. Supposing that popular control over monetary institutions and policy is desirable, or even feasible, only makes sense if one embraces a romantic theory of democratic deliberation that bears little resemblance to actual voter behavior.
So if democratic oversight is not the solution to public-private oligarchical dominance of money and finance, what is? I suggest the old, tried-and-true, classically liberal solution: the rule of law. So long as we must put up with a central bank and fiat money, central banks should be forced to follow a rule that they themselves cannot change…and ideally, once decided, would be fairly difficult for anybody to change, so that the rule cannot be exploited for political purposes. (I won’t get in to which rule, which would require far more room than I have here!) For practical reasons, getting this may require Congress, perhaps at the prompting of the People, to rein in the Fed, but let’s not mistake this for some noble fulfilment of democratic-republican virtue. It’s simply a potentially feasible way of making monetary policy more responsible, which may be least-cost because it would take place within existing institutions.
The Fed is a public institution. As such, it is proper and just that it serve the public. But acting for the common good does not mean being regularly subject to plebiscitary procedures. The right to vote is the right to rule, and unfortunately, the People have proven themselves very bad rulers as of late.