Why Trump Should Leave the Fed Alone

In Defense of Central Bank Independence

Trump and Jerome Powell at the White House, November 2017 Carlos Barria / REUTERS

Monarchs of old used to clip currency. Shaving slivers of gold or silver off coins was a crude but effective way to acquire seigniorage—revenue from minting money—which they often used to finance unpopular foreign wars. Nations don’t do that anymore; there aren’t enough gold and silver coins left to make a difference. Instead, they generate seigniorage by printing money to finance debt and allowing the resulting inflation to erode the value of the currency in circulation and, if the inflation surprises markets, to erode the value of the pre-existing debt.

Which brings us to U.S. President Donald Trump and his plan—now hastily modified—to put both Herman Cain and Steven Moore on the Federal Reserve’s Board of Governors. Trump has expressed extreme unhappiness—anger, even—over the actions taken by the politically independent Federal Reserve. He would like to clip its wings by placing sycophants like Moore (and, before he withdrew, Cain) on its board. Economists and businesspeople, almost to a man and woman, think this is a terrible idea.

To see why, look back a few decades to a time when U.S. presidents regularly sought to enlarge the budget deficit while persuading the central bank to keep interest rates low. Economists call that practice “monetizing the budget deficit,” and it tends to raise inflation.

In extreme cases, which the United States has thus far managed to avoid, monetizing deficits leads to hyperinflation; indeed, it’s hard to imagine getting the latter without the former. But even in more modest cases, it still tends to lead to higher inflation, and until fairly recently was practiced on a bipartisan basis by U.S. presidents. Lyndon Johnson tried to do it in the 1960s, but collided with Federal Reserve Chair Bill Martin. Richard Nixon, who had his own man, Arthur Burns, running the Fed, succeeded in doing it in the 1970s. Ronald Reagan made a rather lame effort to do so in the 1980s, but

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