A New Head for the Fed

Here's what new Fed Chairman Kevin Warsh might be thinking about right now.

Published in Law & Liberty.

Being chairman of the Federal Reserve Board, which includes being its chief executive, is one of the very top jobs not only in the country, but in the world. In the US, the Fed is the central bank, money printer, inflation-creator, and emergency lender to the world’s most important economy and financial markets; it is also all of those to the global dollar-denominated system of payments, borrowing and investing. Its new chairman, Kevin Warsh, is highly intelligent and knowledgeable in finance, economics, and politics. He is also very thoughtful. Here are five of the issues he is or might be thinking about.

1. Shrinking the Fed: Chairman Warsh has been clear about his interest in shrinking the bloated balance sheet of the Fed, and in reducing its heavy interventions or so-called “footprint” in financial markets. In the first quarter of this year, the Fed grew by $35 billion, bringing its total assets to $6.9 trillion as of March 31, 2026. That is 7.5 times as big as the Fed was at the end of 2007, when it produced its last historically normal balance sheet. Ever since then it has been in the Ben Bernanke-induced, abnormally inflated balance sheet mode, which Warsh has often rightly criticized. Although Bernanke, when he was Fed Chairman, promised Congress that this would be temporary, it has not been, but has lasted more than 17 years, so far. Can the Fed shrink back to normal?

At the end of 2007, the Fed’s total assets were $894 billion. That was 6.2 percent of nominal GDP and 8.3 percent of commercial banking assets. To get to these same percentages today, the Fed would have to shrink by more than $4 trillion, including selling a couple trillion of long-term Treasury securities. In 2007, the Fed’s investment in mortgage-backed securities was zero, which is what it should be. How the Fed convinced itself to become and remain the biggest investor with the biggest footprint in mortgages is a puzzle indeed. To get back to zero, it would have to unload its $2 trillion in MBS, the purchase of which so distorted the mortgage market and house prices.

Chairman Warsh has of course considered how any material sales of investments to shrink the Fed would make the prices in the Treasury bond and MBS markets go down and their interest rates go up. Should the Fed push bond and mortgage interest rates up, increase the Treasury’s interest cost, and make houses even less affordable? That seems to have no chance of being a political winner.

On top of that, the Fed has a mark to market loss of $546 billion on its Treasury investments and a loss of $311 billion on its MBS. To sell them would be to move such losses from unrealized, “paper” losses, to realized, cash losses, which would have to be reported on its profit and loss statement. The Fed’s total mark to market loss of $857 billion is about 18 times its total book capital of $48 billion. The Fed insists that nobody cares about its losses, but such numbers would be truly enormous, embarrassing, and obviously poor PR.

Shrinking the Fed looks desirable, but is apparently a longer-term, not a short-term, project. Since the Fed’s most important function is to finance the government of which it is a part, I have suggested that a reasonable longer-term target size for the Fed might be 10 percent of the national debt. Today, that would mean a Fed about $3 trillion smaller than it is.

2. The Unknowable Right Interest Rate: Eight times a year we are treated to the melodrama of the Fed’s Open Market Committee meeting to set, and since the Bernanke time, to forecast with their “dot plots” interest rate paths. Upon reflection, it should be clear to everybody that no committee, including this one, can actually know what the right interest rate is, and certainly it cannot know what future interest rates will be. The committee’s forecasting record makes that apparent. As then-Fed Chairman Jerome Powell so rightly observed, “We are navigating by the stars under cloudy skies.” I think this saying should be forever enshrined in Fed lore right next to William McChesney Martin’s famous “punchbowl” line.

Chairman Warsh seems inclined to get rid of the “dot plot” forecasting and any inclination for the committee members to feel committed by their past recorded guesses. This is a good idea. In addition, will he privately brood about the larger question of whether it really makes sense to have a national price fixing committee for interest rates?

3. Perpetual Inflation at 2 percent?: Among the Fed’s heirlooms from the Bernanke years is the notion that the Fed can on its own, without Congressional approval, commit the United States to perpetual inflation at the rate of 2 percent per year—in other words, to quintupling prices in an average lifetime. The inflation targeting regime has given us the historically anomalous experience of central bankers claiming they have to get inflation up. This regime has presided over not only the runaway inflation of 2021–22, but also current inflation at nearly twice the target rate.

It is now 14 years since the Fed unilaterally announced its target of 2 percent inflation forever. It seems like time for a critical reconsideration of it. International financial expert William White has a forthcoming article: “The Inflation Targeting Framework for Monetary Policy Needs to be Challenged.” This seems right to me. Chairman Warsh’s comments on how to think about inflation suggest he may be open to such a reexamination.

4. The Role of the Money Supply: Did the Fed and other central banks somehow forget about the perennial role of creating too much money in fostering inflation and depreciating the currency? It seems that by rejecting a mechanical relationship of money supply and prices, they embarrassingly made the opposite error, which explains their woefully wrong forecasts of inflation and interest rates in the early 2020s.

The British economist Tim Congdon, whose forecasts in this period were based on money supply and were far superior to those of the Fed and the Bank of England, concludes that “the behavior of money growth must be restored to a central position in policy-oriented macroeconomic analysis.” Chairman Warsh might be thinking about whether the Fed should take this advice.

5. Thinking Clearly About the Fed’s Finances: Among other things, the Fed is a giant financial enterprise. It is designed to make money for the government, but in recent years has lost heavily instead, with combined reported net losses for the three years 2023–25 of $211 billion. To this should be added the $857 billion in mark to market losses discussed above.

The Fed reported a net profit of $1.4 billion in the first quarter of 2026, but this modest profit was only possible because the Fed is being heavily subsidized by the US Treasury. The Treasury does this by holding vast interest-free deposits in the Fed—of $893 billion on March 31 of this year. At current interest rates, these will give the Fed $33 billion in profit, which it will not return in remittances to the Treasury this year, only in the hazy future. This increases the current year’s federal deficit and runs up the national debt by the same $33 billion—not a very good deal for the Treasury or the taxpayers. To fix it, the Fed should simply pay the Treasury interest on its deposits, the same way it pays interest to banks.

For clarity, you can divide the Fed into three main functions: issuing currency, which at current interest rates makes profits of about $87 billion a year; the $33 billion in profit from the Treasury subsidy; and then everything else, which includes the Fed’s trillions in underwater long-term investments. This third function appears to be making losses at the rate of about $113 billion a year.

As chief executive of the Federal Reserve and a financial expert himself, Chairman Warsh might be thinking of how to provide rigorous explanations to Congress of the Fed’s financial performance, balance sheet and financial outlook, making these clear to the legislature, which is his boss.

Seven Questions for Kevin Warsh, Newly Confirmed as Chairman of the Fed

And some startling answers from the Sun’s monetary columnist.

Published in The New York Sun.

The Federal Reserve is at the center of the pure paper money system of the United States and the world. As the Fed transitions to a new chairman, it is timely to consider some questions about this remarkable, powerful, dangerous, and allegedly “independent” institution. Here are seven questions for the new chairman, Kevin Warsh, and his colleagues:

Do we need a national price fixing committee for interest rates?

Answer: No.

Nothing is more obvious in free market economics than that having centralized price fixing by the government is a really bad idea. The constant discovery of clearing prices by competitive markets is what is needed. Yet the Fed’s Open Market Committee is a national price fixing committee by another name for one of the most important prices: interest rates. Amazing mistake, if you think about it.

Does the Fed know what it’s doing?

Answer: No.

As the outgoing chairman of the Fed, Jerome Powell wittily and correctly said about the Fed, “We are navigating by the stars under cloudy skies.” So it is, and so it must be. Neither the Fed nor anybody else ever knew or ever can know what the correct interest rates are. To do that they would have to know the future, and the economic future is always uncertain, not only unknown but unknowable. The Fed’s forecasting record is poor because it cannot know what it is really doing.

How much money has the Fed lost on its “QE” gamble — and whose money was it?

Answer: It has lost more than $1.3 trillion of the taxpayers’ money.

The Fed made a gamble on what it called “Quantitative Easing,” or “QE,” described by its chairman at the time, Ben Bernanke, as a “shot in the dark.” It was a macroeconomic gamble that stoked asset price inflations. It was a financial gamble with the Fed’s own earnings and capital.

The huge resulting total losses are the sum of three factors. The Fed reported net operating losses of about $220 billion since 2022. In addition, the QE losses wiped out more than $300 billion in profits the Fed made by issuing currency and holding interest-free deposits from the Treasury.

So quantitative easing’s operating losses exceed $500 billion. On top of that, QE has resulted in mark-to-market losses of $844 billion. In sum, the more than $1.3 trillion in losses mean that the costs will be borne by the taxpayers and suggest that the Fed has lost the entire $47 billion capital of its commercial bank shareholders about 27 times over.

Does the Federal Reserve Act assign the Fed a goal of “price stability”?

Answer: No.

“Price stability” is a tricky term that means, according to the Fed, perpetual inflation at some rate it chooses. It means that overall prices always rise. That is not what the Federal Reserve Act says. The Act assigns to the Fed an objective of “stable prices,” a clear term. It means prices that are stable. In other words, it means average inflation of approximately zero. The Fed was rhetorically clever to use “price stability” in all its presentations when it decided to pursue perpetual inflation, since it obviously was not pursuing stable prices.

Should the Fed have a monopoly in American money?

Answer: No.

As suggested by Friedrich Hayek in “Competition in Currency,” an essay now canonical among cryptocurrency enthusiasts, to control a central bank’s urge to impose inflation on the people, one could create competition in currency. Then the people could use the money they believe will best hold its value. The same essay shows that what Hayek really wanted was a renewed monetary role for gold to evolve from this competition.

Could there be a renewed monetary role for gold?

Answer: We should try to develop one.

The Fed might start by owning some gold to diversify its assets. Today, unlike most major central banks, it owns exactly zero gold and so has missed out on the great gold rally, which was really the great depreciation of the Federal Reserve dollar — by 99 percent against gold since 1971. Various American states have projects to make gold a legal tender, which might allow 100 percent gold-backed electronic currencies to compete with paper dollars.

Should the Federal Reserve be “independent”?

Answer: No.

No part of the government in any branch should be an independent fiefdom. Fundamental to our constitutional republic is that every part of the government must be a part of our system of checks and balances. In the Fed’s case, this means there needs to be much enhanced accountability to the Congress.

Fannie, Freddie, and the National Debt

Published with Edward J. Pinto in Law & Liberty.

Fannie and Freddie are part of the government and need to be included in its consolidated financial statements.

Fannie Mae and Freddie Mac are huge, with $7.8 trillion in assets and $7.6 trillion in liabilities. They are an essential part of the finances of the US government. But we do not find them as part of the government’s consolidated financial statements. We should.

This is due not only to their sheer size but also because of the giant taxpayer risk they represent, the government’s principal ownership of them, the total government control of their operations, and the obvious fact that these conditions are not temporary but long-term and ongoing. We believe that without consolidating Fannie and Freddie, a true and fair view of the government’s financial condition is not possible.

We understand the natural desire of politicians to keep Fannie and Freddie’s $7.6 trillion in liabilities off the government’s consolidated books. Accurately recording these obligations would increase the reported amount of government debt held by the public by about 25 percent—from $30.8 trillion to $38.4 trillion as of December 31, 2025. With Fannie and Freddie correctly consolidated, the total government debt would be $46.1 trillion.

Obviously, it is politically tempting to keep the obligations Fannie and Freddie impose on the taxpayers pushed obscurely down into the footnotes. Indeed, to get Fannie’s debt off the government’s books was the very reason for making it a so-called “government-sponsored enterprise” in 1968, a status later repeated for Freddie. We suggest that this twentieth-century idea has become obsolete.

Fannie and Freddie’s nature has changed radically in this century. When we apply the current facts about them to the governing accounting principles of the Federal Accounting Standards Advisory Board (FASAB), it appears the 2008 decision not to consolidate them is no longer defensible. To summarize today’s reality, Fannie and Freddie are no longer government-sponsored, privately-owned, and managed enterprises. Instead, they are government-owned and government-controlled agencies. Nothing is clearer than that the taxpayers are on the hook for all their debt and risk, and that government officers are fully in command. They are just parts of the government now and should be accounted for accordingly.

The governing “Statement of Federal Financial Accounting Standards No. 47, Reporting Entity,” defines the criteria to decide between a “consolidation entity” included in the government’s consolidated financial statements, and a “disclosure entity” which resides in the footnotes, off-balance sheet. These criteria are whether “as a whole, the organization: a) is financed through taxes and other non-exchange revenues; b) is governed by the Congress or the President; c) imposes or may impose risks and rewards to the government; and d) provides goods and services on a non-market basis.” Note 1 to the US Government Financial Statements adds the view that Fannie and Freddie’s “relationship to the government is not expected to be permanent.”

Taking these in order:

Fannie and Freddie’s financing completely depends on the government.

All of Fannie and Freddie’s revenues and financing depend upon the guarantee of their obligations by the government. Without this guarantee, neither of them could exist for a day. This guarantee means their revenue depends on access to the taxing power of the government. Moreover, the guarantee is provided to them for free, the essence of a non-exchange arrangement. This is a permanent arrangement.

There is no non-government governance of Fannie and Freddie and has not been for more than 17 years.

It is often said that this guarantee is “implicit,” but no informed person doubts that it is real. And everybody is right about this. President Trump, for example, has confirmed the government guarantee of Fannie and Freddie and stated that it will be retained. We feel sure that the reality of this guarantee, essential to Fannie and Freddie’s very existence, is a view shared by the US Treasury, by all Fannie and Freddie’s customers and creditors, and by FASAB, too.

Fannie and Freddie’s equity financing also depends on the government. The government’s stake in their equity is a $367 billion liquidation preference in their combined senior preferred stock. Subtracting this government stake from their total equity of $179 billion would leave them both technically insolvent, with a combined non-government equity of negative $188 billion. On top of this, the government has the right to acquire 79.9 percent of the common stock of both for one-thousandth of a cent per share. This totals to less than $55,000.

Fannie and Freddie are completely controlled by the government.

Fannie and Freddie are entirely subject to their conservator, who is the director of the Federal Housing Finance Board. Under the law, the conservator wields the complete power of their boards of directors and executives as well as being their regulator, and moreover, he has made himself the chairman of both of their subordinate boards. The director of the FHFB is removable by and responsible to the president of the United States. An excellent recent example of Fannie and Freddie’s governance is their instructions from the government to buy $200 billion in mortgage-backed securities. As reported by National Mortgage Professional, “In early January, President Donald Trump said he is ordering his ‘representatives’ [Fannie and Freddie] to buy $200 billion in mortgage bonds to bring down housing costs … FHFA Director Bill Pulte said on X that Fannie and Freddie will execute the purchase.”

There is no non-government governance of Fannie and Freddie, and has not been for more than 17 years.

Fannie and Freddie impose large risks on and offer rewards to the government.

Because it guarantees their $7.6 trillion in obligations, the government remains fully at risk for big losses at Fannie and Freddie, which may occur, just as it did when Fannie and Freddie went broke from bad loans in 2008. The Treasury provided them a $190 billion bailout, buying senior preferred equity that it still owns. Conversely, when Fannie and Freddie have been profitable under current arrangements, the government has benefited by dividends it has received, or by increases in the liquidation preference of its senior preferred shares, in effect, a dividend in kind. Any increase in the value of the Treasury’s option to acquire most of Fannie and Freddie’s common stock for less than $55,000 would also be a reward.

Fannie and Freddie provide financial services on a non-market basis.

Fannie and Freddie operate at extremely high, non-market leverage. Most of their earnings are made possible by their non-market, free guarantee from the government, for which, by the way, neither has ever paid even one cent. We have calculated that if they had to pay a fair rate for their $7.6 trillion of free government guarantee, it would absorb 50 percent to 100 percent of their pre-tax profit. The entire political rationale for Fannie and Freddie’s existence is that they create mortgage financing at interest rates below what the market would offer, possible only because of their deep links to the government, of which they have now become simply a part.

The characteristics that make Fannie and Freddie “consolidation entities” are not temporary, but are long-term or permanent. Having the government guaranty, being financially dependent on the government, imposing large risks on the government, and operating on a non-market basis are all permanent parts of Fannie and Freddie. Being mostly owned by and completely controlled by the government is not temporary, since it has been going on for 17 years, and the situation has outlasted many attempts at legislative reforms or attempted so-called “privatizations.” There appears to be a strong probability that the current situation will simply continue. President Trump has said as much: “I will stay strong in my position on overseeing them as President.”

Considering all these elements as a whole, we conclude that Fannie and Freddie should be consolidated in the US government’s financial statements. As a result, the proper consolidated total of government debt is $7.6 trillion greater than officially reported.

Letter: Here are three things the Fed is actually good at

Published in the Financial Times.

Your Big Read feature “Is Warsh set to be the next Fed fall guy?” (April 20) repeats a myth which should be long dead: that the Federal Reserve’s job includes “the management of the biggest economy on the planet”.

On the contrary. To “manage the economy” would require knowledge of the future that neither the Fed nor anyone else has, or can have.

At its creation in 1913, it was thought that the Fed would prevent future financial crises and panics. Obviously it didn’t.

In the heyday of Keynesian hopes in the 1960s, it was thought that the Fed could be part of ending financial cycles. Obviously it couldn’t.

As Fed chairman Jerome Powell brilliantly observed in August 2023, the Fed is “navigating by the stars under cloudy skies”. So it is and always must be.

The Fed actually is good at three things. One, printing money to finance financial crises. Two, creating constant inflation and depreciation of the currency it creates, and three, supporting the power of the government by monetising the government’s debt.

But “managing the economy” is far and forever beyond its capability.

How Much Should the Federal Reserve Shrink?

Whether our central bank should or could shrink, and if so, how much, has become a topic of public debate. 

Published in The New York Sun.

Robert Higgs, in his book “Crisis and Leviathan,” shows how the size, power, and intrusiveness of the government feed on crises. With each crisis, the government becomes bigger. After the crisis is over, it may shrink some, but it rarely goes back to its former size. 

The bloated balance sheet of the Federal Reserve is a perfect demonstration of this phenomenon. At the end of 2007, before the panic of 2008, the Fed produced its last historically normal annual balance sheet. It had total assets of $894 billion. It owned zero mortgage securities.

During the ensuing years, the Fed vastly expanded its balance sheet to a size that was previously unimaginable. By Peak Fed in March 2022, it had total assets of $8.9 trillion, or 10 times its 2007 level. It had investments in mortgage securities of $2.7 trillion, three times its total 2007 assets.

Since then, just as Mr. Higgs would predict, the Fed’s size has been reduced, but to nowhere near its previous level. As of the end of March 2026, the Fed’s total assets are still $6.7 trillion or 7.5 times their 2007 level and it still owns $2 trillion in mortgage securities, compared to the zero it should have. The Fed has stopped reducing its size — it is now $34 billion bigger than it was at the end of 2025.

Whatever happened to the assurance Chairman Bernanke’s gave in 2011 to Congress that “there will be no permanent increase… in the Fed’s balance sheet”? We can consider it either a memorable broken promise or a fully flubbed forecast. 

The Fed has two basic parts: the mundane job of simply buying Treasury securities with the United States currency it has the monopoly on issuing; and everything else. In 2007, the mundane “Currency Fed” had $792 billion in currency outstanding, so everything else in the Fed’s balance sheet totaled only $102 billion. 

At Peak Fed, the “Everything Else” part of the Fed, which had come to include in effect a giant savings and loan for holding mortgage assets and an even bigger hedge fund for investing in long-term Treasury securities financed overnight, totaled $6.7 trillion. In other words, the activist, interventionist, financial risk-taking part of the Fed had increased since 2007 by 66 times. As of today, that increase is still 42 times. 

The financial results of the Fed’s risk taking are an aggregate operating loss of $224 billion plus a mark-to-market loss of $845 billion, or well over $1 trillion in total. These are costs not just to the Fed itself but to the Treasury and the taxpayers. In addition, the Fed’s mortgage buying spree, by driving mortgage interest rates to abnormally low levels, pushed house prices up to abnormally high levels.

The “affordability crisis” in American housing thus significantly reflects the results of the Fed’s bloated balance sheet. Even though the Fed should get out of its mortgage investments, it certainly does not want to sell them now because doing so would create a more than $300 billion realized loss. On top of that, selling would drive mortgage interest rates up — a politically unacceptable result.

Whether the Fed should or could shrink, and if so, how much, has become a topic of public debate. How much shrinkage would it take to get the current Fed back to the 2007 base case, appropriately adjusted?

In 2007, the Fed’s assets were equal to 6.2 percent of nominal GDP and 8.3 percent of total commercial banking assets. To reach these same percentages, the Fed would have to shrink to $2 trillion in assets. This is not possible because the Fed’s assets must by definition be something greater than its currency outstanding, currently $2.4 trillion.

An essential mandate of the Fed, like all central banks, is to finance the government of which it is a part. Expanding its balance sheet is a way to force the commercial banking system to lend to the government. In 2007, the Fed’s assets were 9.7 percent of the national debt. To return to this level the Fed’s assets would need to fall to about $3.8 trillion, or be reduced by $2.9 trillion. 

A reasonable target for the normalized size of the Fed might be a rounded to 10 percent of the national debt. The Fed’s assets would then be $3.9 trillion instead of $6.7 trillion. Since we know the Fed cannot sell its mortgage securities, however, to its allowed assets might be added its $2 trillion in mortgage securities, provided that these mortgage investments be put and kept in run-off until they reach zero again.

That would suggest a current shrinkage of the Fed to $5.9 trillion, or shrinkage of $800 billion plus however much the mortgage assets run off. Of course, in the next crisis, all bets are off and the Fed’s balance sheet may bloat once more.

Bernanke’s Broken Promise: Is It Time To Shrink the Fed Yet?

Published in The New York Sun.

“It’s a temporary action,” the Federal Reserve chairman, Ben Bernanke, testified before Congress on February 9, 2011, 15 years ago. He was referring to the radical expansion of the Fed’s balance sheet begun under his leadership in 2008 by so-called “Quantitative Easing,” which monetized long-term Treasury debt and 30-year mortgage securities. By 2011, QE had inflated the Fed’s total assets to $2.5 trillion. That was 2. 7 times their $915 billion at the end of 2007, the Fed’s last historically-normal annual balance sheet.

Mr. Bernanke further testified, in what certainly sounded like a promise, “what we are doing here is a temporary measure which will be reversed.” Note that was not “may” be or “can” be, but “will” be. Fifteen years later, it hasn’t happened.  

“At the end of this process,” Mr. Bernanke continued, “the amount of the Fed’s balance sheet will be normalized, and there will be no permanent increase, either in money outstanding [or] in the Fed’s balance sheet.”  That promise, or at least prediction, stands in striking contrast with reality.

Today the Fed’s total assets are $6.6 trillion.  That is 2.6 times as big as when Mr. Bernanke was testifying, and 7.2 times as big as in 2007. 

Among the Fed’s assets all these years later we find $1.6 trillion in Treasury bonds which still have more than ten years left to maturity.  More egregiously, we find $2 trillion in long-term mortgage securities.  

The Fed’s monetization of mortgages, which has massively distorted the housing market, should in my opinion be zero, as it always was from the creation of the Fed in 1913 until 2008. Today the mortgage portfolio alone is more than twice as big as the whole Fed was in 2007.

All this doesn’t sound too “temporary.” Even if one would be tempted to paraphrase President Clinton — “It depends on what the meaning of the word ‘temporary’ is”— one would have to admit that 15 years after Mr. Bernanke’s testimony and going on 18 years after the beginning of the QE program, it does not qualify as temporary.

The question of what is “temporary” was raised by Congressman Scott Garrett in the 2011 hearing.  “What you have is a difference between one’s interpretation of what is permanent and what is temporary,” Mr. Garrett said, insightfully adding, “I imagine no Fed Chairman would ever come to this witness table and say, ‘I am engaging in permanent monetization of the debt,’ [but] describe it as, ‘I’m only taking a temporary action’…. Isn’t that correct?”

Mr. Bernanke replied, “That’s what we are doing.  It’s a temporary action.”  That was doubtless what he intended at the time, but it isn’t what happened. What this “temporary action” was going to do to the Fed’s own risk and financial performance was raised by the chairman of the hearing, Congressman Paul Ryan. “Have you done a stress test on your balance sheet?” he responsibly asked.  “And what level of losses do you think is acceptable as you withdraw?”

The Fed’s most recent published mark to market of its investments, as of September 2025, provides the future answer to Mr. Ryan’s question: There would be a loss of $856 billion required to liquidate the Fed’s long-term investments. To this sum must be added the Fed’s accumulated operating losses of $224 billion since 2022, all caused by the financial risk of QE. If one uses only the losses of the QE program itself, removing the profits made by other parts of the Fed, the QE-alone operating losses since 2022 exceed $500 billion. These are equally losses to the U.S. Treasury.

Would Mr. Ryan have thought that “acceptable”?  Would Mr. Bernanke have?

Here is what Mr. Bernanke answered: “We have done multiple stress tests. Under most likely scenarios, the fiscal implications of the balance sheet are positive… Under most plausible scenarios, this policy will continue to be profitable.” Reality turned out not to be one of the “plausible scenarios.”

It’s too bad that Mr. Ryan did not follow up by asking for a copy of the Fed’s risk analysis for Congressional oversight of the unprecedented risk of QE. For now it appears that the Fed has lost another $2 billion in the first two months of 2026 despite the enormous subsidy it is receiving from the Treasury in the form of over $800 billion in interest-free deposits. These deposits generate income of about $30 billion a year for the Fed at current interest rates. They increase the Treasury’s deficit by the same amount.

Is it finally time to shrink the Fed to its normal size?  Unfortunately, because of the giant market value losses embedded in the Fed’s QE investments, selling them would be far too expensive. So Mr. Bernanke’s “temporary action” will continue into its 19th year.

The Fed Was Built on Non-Ph.Ds Like Warsh

See, for example, the central bank buildings named for Marriner Eccles and William McChesney Martin.

Published in The Wall Street Journal.

“The dumbest criticism,” as your editorial rightly says, of the good pick of Kevin Warsh for Federal Reserve chairman is that he “doesn’t have an economics Ph.D” (“Warsh Is the Right Fed Choice,” Jan. 31). That criticism also displays a total ignorance of Fed history. For example, the Washington headquarters of the Fed are named after Marriner Eccles, who was Fed chairman for 14 years, 1934-1948. Not only did Eccles not have a Ph.D. in economics, he never went to a university, but learned on the job as a successful banker and investor.

The nearby Fed building is named after William McChesney Martin, probably the greatest Fed chairman in my view, who served under five U.S. presidents from 1951 to 1970. Martin had a B.A., having studied English and Latin. The justly celebrated Paul Volcker, central banking hero and Fed chairman from 1979 to 1987, had an M.A. in political economy, but no Ph.D. And as you imply, the new chairman of the Fed will have hundreds of Ph.D.s at his beck and call for whatever studies he may desire.

Alex J. Pollock

Senior fellow, Mises Institute

Could — and Should — the Fed Own Gold?

Published in The New York Sun.

A world-historical financial event was the 1971 default by the United States on its international commitment to redeem dollars for gold, thereby creating a purely paper, Nixonian global monetary system. Since then, the value of the United States dollar in gold has dropped by more than 99 percent. The amount of dollars that an ounce of gold will buy has gone up by about 140 times.

During 2025, the dollar’s value in gold fell about 40 percent. Specifically, it fell from 0.38 ounces to 0.23 ounces of gold needed to buy $1,000. In 2026 so far, that has declined further to 0.20 ounces. In other words, one ounce of gold now buys about $5,000, compared to $35 until 1971. This trend has been highly profitable for the many central banks that hold gold as a classic monetary asset.

The Swiss National Bank, Switzerland’s central bank, reported a 2025 profit on its gold holdings of over 36 billion Swiss francs, or more than $46 billion. The SNB is required by law to mark all its investments, including gold, to market and report the results in its profit and loss statement and balance sheet.

Other central banks benefiting from gold as an investment and a reserve against their liabilities include, among others, the European Central Bank, the German Bundesbank, the Bank of France, the Dutch National Bank, the Bank of Italy, the Reserve Bank of India, the Bank of Japan, the People’s Bank of China, and the Monetary Authority of Singapore.

In comparison, how much profit has the Federal Reserve made on its gold? The answer is not one penny. The Federal Reserve owns no gold at all — not a single ounce. In the terse summary from the Federal Reserve’s official website: “The Federal Reserve does not own gold.”

This situation would have left the authors of the Federal Reserve Act surprised and dismayed. The law required that new Federal Reserve Banks hold gold backing equal to 40 percent of their outstanding dollar bills plus 30 percent of their deposit liabilities. One can imagine the founders of the Fed frowning down in disapproval from legislative Valhalla at the current lack of any gold held by their creation.

The original gold requirement was ended by the Depression-era Gold Reserve Act of 1934, when Congress took all their gold from the Federal Reserve Banks. From the Fed’s point of view, this was the opposite of “reserving” their gold. In exchange, the Fed got claims on the Treasury for paper dollars. With clever rhetoric, these were and are called “gold certificates.”

However, what they really certify is that the gold has been taken. The day after the taking, the dollar was devalued by 41 percent, increasing the dollars one ounce of gold would buy to $35 from $20.67. Since the Fed no longer owned any gold as of the day before, it realized no profit. The Fed has owned no gold since 1934.

The term “gold certificates” has led to widespread confusion. As probably intended by the political rhetoricians of the 1930s, the term has caused many people, even financial experts, to believe the Federal Reserve still owns gold because it has gold certificates. But the Fed’s own website is clear: “Gold certificates do not give the Federal Reserve any right to redeem the certificate for gold.” So much for the certificates and the 1930s.

Coming to today, could the Fed buy and hold gold if it wanted to?  Had it done so, after all, it would have greatly profited as other central banks have. The Fed itself is curiously quiet on this head. It appears that it does not wish to answer it, because the answer would be positive. 

Some commentators cite the 1934 act as preventing current gold purchases, but the relevant provisions of that act were repealed in 1974, more than 50 years ago. Public Law 93-373 of 1974 provides that beginning in 1975: “No provision of any law…may be construed to prohibit any person from purchasing, holding, selling or otherwise dealing in gold.” The term “any person” obviously includes the Federal Reserve Banks.

Moreover, the Federal Reserve Act in its current form provides that each Federal Reserve Bank has the power “to deal in gold coin and bullion at home or abroad.” Congress, which is the superior of the Federal Reserve, should require the Fed to answer clearly two questions: Could the Fed legally buy gold today? And if so, should it join other major central banks in holding gold among its assets?

The Fed, Gold, and Crypto: Freedom and Competing Currencies

Published by The Mises Institute.

This article is adapted from a lecture presented at the 2025 Supporters Summit in Delray Beach, Florida.

Economic freedom should include freedom in money. It’s a freedom even, as we say these days, that advanced economies don’t have. My guiding text for this talk is Friedrich Hayek’s celebrated essay “Choice in Currency.” That is chapter 7 of this excellent book—Hayek for the 21st Century: Essays in Political Economy—that the Mises Institute has published. It’s a classic text, and I hope you’ll all take a look at it if you haven’t.

Now, freedom and money, Hayek suggests, can in concept be created through competition, through freedom of choice in money. That is to say, let the people use any money they want. Let the monies compete with each other, and the superior monies, just like in any competition, will win out. The opposite of this is, of course, a government monopoly in money, which allows the government to inflate.

The point I wish to make is that the ability to control the money is a deep and fundamental source of the power of the state. Each central bank (in our case, the Federal Reserve), of course, is part of the state and a key helper in the project of expanding and maintaining the power of the government over the people. Now, we can think about this. I know you know this already. It’s very simple, but let’s just say it again to remind ourselves. To stay in power, governments have to keep spending money. They need to give money to their friends, to give money to their supporters, to carry out their various projects, and—most expensive of all—to have wars.

In the meantime, people don’t like being taxed, so the politician is put in the position of wanting to spend without taxing. And what’s the answer? Well, you borrow. If the lenders don’t want to lend to you, you simply have a compliant central bank to print up the money that you need, and to buy your bonds, as we have observed over long periods of time now.

That way, you can keep spending. That way, you can maintain your position of power for the government.

Of course, at the same time, you’re depreciating the currency. You have inflated prices, you’ve taken away the people’s purchasing power, which is a kind of implicit taxation, and destroyed part of the value of their wages and their savings. In short, as Hayek writes, “Practically all governments of history have used the exclusive power to issue money in order to defraud and plunder the people.”

Further, Hayek says, “The politician, acting on a modified Keynesian maxim that in the long run we are all out of office”—I think that’s a wonderful line—wants “more and cheaper money,” which is “an ever-present political force which monetary authorities have never been able to resist.”

Well, is it true that the central bank can’t resist? I think it is. On one side of this argument, we had Nobel Prize–winning economist Thomas Sargent, who proposed in 1982 that we just need central banks that are legally committed to refuse the government’s demand for additional credit. In other words, just to say no to financing deficits with newly created money.

So I wish you to picture this. The Treasury has come to the central bank and said, “Here are these bonds. We want you to buy them.” Imagine the head of the central bank saying, “Well, I’ve got your request, but sorry, we’re not buying a penny of your debt with money we create. Of course, we could do it, but we won’t. So just cut your government expenses and good luck.”

I doubt that this would be a winning career move for a politically appointed chairman of the central bank, and I suspect you doubt it too. And I suspect that its probability is something close to zero, don’t you think? Moreover, in a time of war or other national emergency, the likelihood of this response is precisely zero.

So Hayek, in a very creative intellectual move, says that instead of trying to improve the behavior of the central bankers—which we’re all working on, and we ought to keep working on it—here’s something more radical. Let us simply, quoting Hayek here, “deprive governments (or their monetary authorities) of all power to protect their money against competition.”

Let them go ahead and keep printing up their paper money, just as always. Let them buy as many bonds of the government—finance as many deficits—as they want, but don’t let them have a monopoly in this money. So the money they create for deficit financing, to improve the power of the state, has to compete with some other money that will come along.

Hayek continues, “If people were free to refuse any money they distrusted”—in other words, you can’t have a legal tender law—“and to prefer money in which they had confidence,” there could be no “stronger inducement to governments to ensure the stability of their money.” So make the government compete with other monies, and as in other cases of competition, you’ll improve the quality of the product. And this idea of Hayek’s is indeed consistent with a free society.

Hayek concludes, “I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.”

Well, that was 50 years ago and we’re not there yet. But today this thought is especially congenial to those who want private cryptocurrencies to compete with dollars, and this Hayek essay is enormously popular among advocates of cryptocurrencies, and taken as a kind of canonical text for competition in currency. It is a philosophical position consistent with their creation.

I do want to note in passing—because stablecoins have been much in the news of late, and we have the GENIUS Act, very favorable to stablecoins—that this thought does not apply to stablecoins because stablecoins are just part of the dollar system. If the dollar is depreciating, your stablecoin is depreciating, too. It doesn’t achieve the Hayekian purpose of competition in money because it’s just part of the dollar monopoly. So, it doesn’t present a competitive currency.

But Hayek, thinking about the possible competitors to the government’s fiat currency, was not really focused on other things that are themselves fiat currencies, whether they be fiat currencies issued by other governments. You could have the euro competing with the dollar, for example, or private fiat currencies such as bitcoin, which isn’t yet a currency but wishes to be.

Hayek was really thinking of gold. This is something about this celebrated essay I think is not usually properly understood. Hayek’s original speech was given in 1975. That was the year after the United States at long last lifted its oppressive 1933 law making it illegal for Americans to own any gold; that is to say, illegal to protect themselves from the depreciation of the monopoly currency of the government.

This ban on gold was an amazing act by the United States, actually, when you look back on it now. It does show how far a government will go to protect the monopoly of its own fiat currency.

So, thinking about gold in contrast to this, Hayek says, “Where I’m not sure is whether in such a competition for reliability any government-issued currency would prevail, or whether the predominant preference would not be in favor of . . . ounces of gold. It seems not unlikely that gold would ultimately re-assert its place as ‘the universal prize in all countries, in all cultures, in all ages,’ . . . if people were given complete freedom to decide what to use as their standard and general medium of exchange.”

What do you think? If we had free competition in monies, do you think that gold would win out as the preferred competitor and thereby force the governments to issue sounder currencies? An interesting thought.

As Hayek also wrote, famously and correctly, competition is a “discovery procedure.” We find out through competition things we couldn’t know otherwise, and if we had such a competition in currencies, that would give us the answer.

Now, think how much things have changed since Harry Dexter White, the chief American negotiator at the Bretton Woods Conference in 1944 and also, as you may recall, a spy for the Soviet Union, asserted that gold and the US dollar were “synonymous.”

We’ve come a long way from Harry Dexter White’s thought there.

As we know, the price of gold and dollars is over $4,000 at the present time. Just think about that relative to the par value exchange rate of dollars and gold out of Bretton Woods, which was $35 an ounce. That’s a factor roughly of 100 to 1. We didn’t quite achieve Harry Dexter White’s synonymousness of dollars and gold.

Now, it’s equally correct to think about the price of dollars in gold as it is to think about the price of gold in dollars. So, in that sense, the price of dollars is down 99% since 1971. One winner of this is the US Treasury, since the US Treasury is long gold, holding 8,000 tons, which is over 261.5 million ounces. So, the unrealized profit to the US Treasury on its gold position is basically $1 trillion.

It’s not on the books, but it’s the reality of the Treasury’s gold position. Now, this contrasts with a notable opinion piece in the Financial Times from about 20 years ago (April 16, 2004), which had the headline “Going, Going, Gold: The Pointlessness of Holding Bullion Continues to Sink In.”

“The barbarous relic, as Keynes called it, is crumbling to dust,” wrote the Financial Times. “For central banks and governments to hold [gold] is a betrayal of the public.” “Gold is on its way out,” they concluded.

Well, things change in economies, as we know. At the time that article was published, the price of gold in dollars was $400, so it’s more than 10 times that now. And at that point, central banks were, as a group, selling gold. Now central banks are buying heavily, and they’re building their positions with gold as a reserve currency. Sort of interesting. Central banks were selling at the bottom, and they’re buying at what might be the top. But that’s perhaps natural human behavior.

My brother Bruce, who lives in Switzerland, remembers that 20 years ago, when the Swiss central bank was forced to sell gold by its politicians, his friends who worked for the bank literally were crying when they were forced to sell their gold.

But today, many central banks are buying gold and increasing gold in their reserves. Can this central bank market for gold perhaps be considered an example of the free competition in currencies which Hayek envisioned?

After all, whatever the case was right after World War II, now no country can force other countries to accept the monopoly of its currency. And among central banks, there actually is choice in which currencies, including gold, to hold in their reserves. So this movement in gold is extremely interesting in and of itself. But something particularly interesting about it is that it seems to be a case of a Hayekian competition in currencies.

Now, an insightful essay by Anthony Deden suggests that when we’re looking at the gold price today, we’re not really looking at gold going up. We’re looking at the dollar going down, or fiat currencies in general declining. This strikes me as quite correct. Deden continues, “If you hold fiat money, you have a claim on the future discretion of politicians. Whereas if you hold gold, you have a claim on the future indiscretion of politicians.”

I think that’s very nice. Or you might say gold is a hedge against the state’s pursuit of power by monetary means.

We can guarantee that as long as it’s able to, through monopoly fiat currency, the state will continue to maintain and expand its power through monetary means. So the state will prevent the competition that Hayek envisioned from occurring, but it can’t prevent it in this interesting international case of central banks.

I think if we contrast the freedom-of-money case that Hayek makes—which will be hard to do in any domestic context because the state will not sit happily by and allow for competition that will reduce its power (we know that)—with the international central bank case, that sharp contrast, I think, is a major reason to study this justifiably celebrated chapter in this book. Thank you.

What Does the Fed Mean To You?

Hosted by the Mises Institute.

Mises Senior Fellow Alex J. Pollock explains how the post-1971 “Nixonian” paper-money world makes the Fed both the engine of inflation and a prop for an oversized state, urging students to see central banking as the hidden arsonist behind booms, busts, and the erosion of their future purchasing power.

Recorded at Cornerstone University in Grand Rapids, Michigan, on November 1, 2025.

Does the Fed have an ethics problem?

Published in American Banker.

Expert Quote: "When you're in a position that's as influential as working at the Federal Reserve, you're governed by the law of Caesar's wife — be above suspicion." — Alex Pollock, senior fellow at the Mises Institute.

What Have the Inflation-Mongers Wrought?

Our still-young 21st century has already had two bubbles in United States house prices.

Published in The New York Sun.

Is the Federal Reserve an “inflation-monger,” as monetary economist Brendan Brown labels it in his new book, “Bad Money”? Of course it is. The Fed has stuck us with a constant depreciation of the purchasing power of the dollar. With its “inflation targeting” regime beginning in 2012, it promises to continue to depreciate the dollar forever, inflation without end.

Fed representatives have now been known to opine that inflation is too low and they should get it up. That is a radical departure from their forebears. William McChesney Martin, chairman of the Fed between 1951 and 1970, considered inflation “a thief in the night.” Alan Greenspan, the chairman between 1987 and 2006, said that he thought the ideal inflation rate was “zero, properly measured.”

The Fed’s actions have not lived up to its words in this respect, but from Chairman Ben Bernanke on, the Fed has forsaken even the words and changed its tune to inflation-promising. At the same time, the Fed constantly plays the refrain that it must be “independent.”

It is, of course, nonsense to think that any part of a constitutional republic can be a separate and autonomous power, a law unto itself, or a band of platonic philosopher-kings.

If one believed, however, that the Fed truly stood for sound money and would control the inflationist urges of presidents and other politicians, you might feel a twinge of temptation toward the independence line. Yet since the Fed itself is inflationist, its “independence” has no appeal at all, on top of being constitutionally wrong.

The logic of Mr. Brown’s argument should be widely understood. Here it is, in summary:

Good Money displays stable purchasing power and reliable value on average over time. Bad Money always depreciates in value and has shrinking purchasing power, as the government and its central bank impose inflation on the people.

Individual prices must go up and down to fulfil their essential role in resource allocation. But inevitably the overall tendency of prices will sometimes rise, especially when there are wars or other crises which get financed by monetary expansion.

Because prices will sometimes rise, in order for prices to be stable on average over time, at some other times prices must fall. Stated alternately: If prices don’t fall sometimes, you can’t have stable prices.

Yet should overall prices ever be allowed to fall? That is what the inflation-mongers want precisely to prevent. They wish to reinflate any periodic tendency for prices to fall. Under this doctrine, every time prices go up, they create a permanently higher level, and then continue inflating from there.

The inflation-mongers always emphasize changes in the rate at which prices are rising, not the ever-higher level of prices that is so obvious to ordinary consumers. When the rate of increase in prices is 3 percent instead of 4 percent, they can announce that “inflation is down.”

Yet “inflation is down” entails “prices are up.” At 3 percent inflation over an 80-year lifetime, prices will multiply by a factor of more than 10. A dollar will become nine cents, but we would be told that “inflation is stable.”

Inflation-mongers suffer from the fear of any fall in average prices, or “deflation phobia.” This probably arises from memories of the 1930s, but a knowledge of longer economic history gives a wider view.

While a debt deflation in the wake of a collapsed bubble is indeed bad deflation, periods of major innovation and increasing productivity in a competitive economy naturally cause prices to fall, thereby improving the standard of living. This is good deflation.

There are three kinds of inflation: Monetary inflation by the central bank; inflation of goods and services prices; and inflation of asset prices. If the economy is benefitting from good deflation resulting from innovation and productivity, but the inflation-mongers offset this by monetary inflation, the resulting inflation rate in goods and services may still look acceptable, but is greater than it looks.

If it has been moved, say, to +2 percent in goods and services from a natural -1 percent, the move has actually been 3 percent. The monetary inflation would likely also flow into asset price inflation and recurring asset price bubbles.

Our still-young 21st century has already had two bubbles in United States house prices. Both reflected among their key causes artificially low interest rates from Federal Reserve monetary inflation, which stoked artificially high house prices.

The first housing bubble ended in a terrific collapse, the second has caused a crisis of unaffordability and now appears to be topping out far over the peak of the first. This the inflation-mongers have wrought.

Even 2% Inflation Is Too Much

Published in The Wall Street Journal.

As you suggest in “Getting Used to 3% Inflation” (Review & Outlook, Oct. 25), 3% is a lot of inflation, much worse than 2%, which is already too high. At a sustained 2%, which the Federal Reserve promises, average prices will nearly quintuple in 80 years, and the dollar will shrink to a value of 20 cents. At 3%, it’s worse: Average prices will multiply more than 10 times, and the dollar will reduce to 9 cents. Neither satisfies the goal of “stable prices” assigned by the Federal Reserve Act. As the great Paul Volcker wrote in his autobiography, “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation.”

Alex J. Pollock

Mises Institute

Lake Forest, Ill.

Hayek’s Last Hurrah, So To Speak: A Choice in Currency Emerges Among Central Banks

Many are scrambling to purchase the precious metal as the gold value of the greenback plunges to new lows.

Published in The New York Sun.

Since 1971, in the Nixonian monetary era, the American government has enjoyed a power derived from the pure fiat paper money that its central bank can print in unlimited quantities to finance the government’s deficits. Simply put, politicians naturally like to keep passing out money to stay in office. It’s convenient, politicians reckon, to have a compliant central bank to buy government bonds with printed money — especially if the Congress is spending more than taxes bring in.

Of course, this scheme depreciates the currency, taking away the people’s purchasing power and the value of their savings and wages. As Friedrich Hayek observed in his essay “Choice in Currency,” “Practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.”

Hayek argued that the essential problem is that the government’s central bank has an “exclusive power” to print money, or in other words, a monopoly on money, so it can impose its depreciating currency on the people. He suggested that since there is no hope of reforming the central bank, instead we should focus on taking away its monopoly. Thus:

“Let us deprive governments [and] their monetary authorities of all power to protect their money against competition.” Then “if people were free to refuse any money they distrusted and to prefer money in which they had confidence, [there] could be no stronger inducement to governments to ensure the stability of their money.”

In other words, let choice in currency and competition among currencies discipline the government and its central bank. If they produce an inferior money, that money would lose out to the better one supplied by someone else. This was an innovative application of classic market logic to the problem of money, one notably consistent with a free society.

Hayek concluded, “I hope it will not be too long before complete freedom to deal in any money one likes will be regarded as the essential mark of a free country.” A recent introduction to Hayek’s thought observes that this essay “is enormously popular among advocates of cryptocurrencies.”

Hayek, in any event, was not most concerned with competition for the government’s fiat currency by other fiat currencies, whether those of other governments or private currencies. He was really thinking of gold. “It seems not unlikely,” he suggested, “that gold would ultimately reassert its place as the universal prize if people were given complete freedom to decide.”

Hayek’s essay originated shortly after the American government at long last lifted its oppressive 1933 prohibition of Americans owning any gold, which it had made into a criminal offense. All Americans were prohibited by their government from protecting themselves with gold from the ongoing depreciation of their currency by the Federal Reserve.

That may seem amazing to us now, but it clearly shows how far even a democratic government will go to protect the monopoly of its own fiat currency. The chief American negotiator at the 1944 Bretton Woods Conference, Harry Dexter White, claimed that for international use, “the United States dollar and gold are synonymous,” as Benn Steil reports in “The Battle of Bretton Woods.” We are a long way from there.

With the value of a thousand American dollars currently at about one-quarter of an ounce of gold, as compared to the old Bretton Woods price of 28.6 ounces, the value of the dollar has depreciated by 99 percent against gold. White’s view did not hold up, and neither did the confident assertions of this Financial Times editorial from 2004:

“The barbarous relic is crumbling to dust,” the FT’s editors wrote. “For central banks and governments to hold it as a reserve asset is a betrayal of the public. Given the pointlessness of holding gold, gold is on its way out as an investment and as a reserve asset.”

Today, in contrast, many central banks are buying gold and increasing the allocation to gold in their reserves, and the unrealized profit of the U.S. Treasury on its gold has reached about $1 trillion. The Fed, meanwhile, owns no gold, and adding together its operating and mark to market losses has a total loss of around $1 trillion.

The international market for central bank reserves cannot be monopolized like a domestic currency can. Perhaps in this central bank market we are now seeing Hayek’s scenario of choice and competition in currencies actually playing out. Gold seems to be winning this round.

How Congress Should Reform the Fed

The Human Action Podcast

Alex Pollock joins the Human Action Podcast to explain his recent Congressional testimony on the Fed’s growing insolvency and mandate overreach. The Fed now admits to $243 billion in operating losses and nearly $1 trillion in mark-to-market losses, leaving it with negative capital of about $197 billion. Pollock explains how the central bank transformed itself into “the biggest 1980s-style savings and loan in history” — funding short while buying long, and bleeding cash as interest rates rose.

• Read the Congressional Testimony: Mises.org/HAP523a

• Read More from Alex Pollock: Mises.org/HAP523b

As Fed mulls the end of QT, what lessons have been learned?

Published in American Banker.

Expert Quote: "You can argue about whether it's good or not. I think it's okay to do emergency things in times of crisis, but you have to stop doing them when the crisis is over." — Alex Pollock, senior fellow, Mises Institute.

2025 Supporters Summit: Freedom in Money: Hayek’s Competing Currencies, the Fed, Gold, and Crypto

Hosted by the Mises Institute.

Dr. Alex Pollock explains how monopoly money empowers the state to finance deficits and wars, and why legal tender laws should give way to free choice in money. He explores why genuine competitors—likely led by gold—would discipline issuers, noting central banks’ renewed appetite for bullion as an emergent currency competition.

Sponsored by Yousif Almoayyed.

Recorded at the Mises Supporters Summit in Delray Beach, Florida, on October 17, 2025.

Interview: Alex Pollock on the Fed and Gold | Part II

Published by The Institutional Risk Analyst.

October 10, 2025 | In this special edition of The Institutional Risk Analyst, we feature Part II of the discussion with Alex Pollock, Senior Fellow at the Mises Institute, that we first published on October 3, 2025. You may read Part I of the interview (“Interview: Alex Pollock on the Fed and Gold”). As we noted in Part I, Alex provides thought and policy leadership on financial issues and the study of financial systems. He was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004. We spoke with Alex from his home in Lake Forest, Illinois.

Pollock: Can I give you a great quote on this? An excellent private memorandum on gold viewed in the long term says: “A higher money price of gold is best read as a symptom of a weaker currency. It isn't really the gold going up, it's the dollar or fiat currency in general going down.” That seems to me to be right. And then he says further: “The value of gold lies in being independent from political discretion. Fiat money is a claim on the future discretion of politicians.” Isn't that good?

The IRA: That is a great comment about gold. In the book of Deuteronomy, Moses commands that there be “one measure” of value, something that Fred Feldkamp and I wrote about in Financial Stability: Fraud, Confidence and the Wealth of Nations.” Basically what Moses said was that you have to deal at a mid-market price, no built-in profit from a bid-ask spread. So of course, Jesus of Nazareth points this out in the temple and the money changers, who used a particularly wide bid-ask spread, crucify him. Jesus did not commit any particular religious offenses, he simply outed the money changers in the Temple for violating the laws of Moses and also not paying taxes to Rome on their hidden profits. Forty years later, the Roman legions destroyed the Second Temple down to the last stone to find the hidden gold. In this way, Jesus’ prediction in Matthew 24:2 that the Temple would be utterly destroyed and “not one stone would be left upon another” came true.

Pollock: I didn't know that about Deuteronomy. That's interesting. It's hard to have a dealer market with no spreads, Chris.

The IRA: That depends. In the late 1980s at Bear, Stearns & Co in London, our head trader Paul Murphy made a mid-market price in Canada 9s and the 10-year Treasury every morning to get the customers stirred up. A mid-market price means that if you get lifted by a buyer who has superior knowledge, then you immediately have to adjust. A pure free market. But going back to the earlier point about the Roosevelt era reforms to the Fed and the centralization in Washington, our view is that we need change to make Trump’s reforms meaningful. We’d get rid of the Board of Governors in Washington, make Cleveland a branch of Chicago, convert four branches into new reserve banks in the west, and make all 15 of the Federal Reserve Bank heads presidential appointments with Senate confirmation. We’d take the references to the FOMC out of the statute and let the Fed organize its operations as before 1935.

Pollock: Well, in doing that, you're undoing the fundamental political deal of the Fed which you know very well. The stock of the Federal Reserve is not owned by the government or the Treasury, but by the private member banks. I just read a very good and very knowledgeable book in which the author said, however, that the government owns the Fed. Well, at least the government doesn't own the stock of the Fed. The private banks own 100% of the Fed stock and have since the original Federal Reserve Act.

The IRA: That “ownership” is not enforceable privately because of the very argument you made about Congress and the power to coin money. The federal government retains dominion over the Federal Reserve System no matter who provided the initial capital. To paraphrase Supreme Court Justice Louis Brandeis in the 1925 case Benedict v. Ratner, a transfer of property meant to be security for a debt is "fraudulent in law and void as to creditors" if the transferor retains the right to control, or reserve dominion over, that property. Congress created the Fed and sold stock to the member banks. The fact of private capital didn't prevent Franklin Roosevelt and his New Dealers from stealing the gold that private banks contributed to the original capital of the Fed.

Pollock: That's right. Some people still say that the Fed owns gold. What they mean is the Fed owns something called “gold certificates,” which is simply proof of confiscation by the Treasury, which took their gold and gave them in exchange a paper dollar claim. All the subsequent profit from the devaluation of the dollar against gold in the thirties or anytime goes to the Treasury, zero goes to the Fed. This profit is the origin of the Exchange Stabilization Fund of the Treasury, an exceptionally handy slush fund for the Treasury and the President when they want to do things and don't want to have to get Congressional approval.

The IRA: You mean like bailing out Mexico and banks like Goldman Sachs in the 1980s and 1990s or Argentina today? We used to rail against the use of the ESF to bail out dictators, but nobody in Congress cares today.

Pollock: Yes, like they bailed out Mexico in 1994, etc., as you say.

The IRA: We wuz there, helping Cuauhtémoc Cárdenas run for president in Mexico. So the Fed and the banks could claim that the gold in Fort Knox belongs to them and obviously it does. But when you touch the government, of course, you know that they're going to steal your money. The example of Fannie Mae and Freddie Mac since 2008 is another case in point. Since the 1930s, the Fed and Treasury have essentially been short gold in a sense that policy was directed at avoiding any reference to gold. As you noted, unlike other central banks, the Fed has not been buying gold, even though now since the repeal of the Depression era gold laws they could. If Governor Steven Miran really wants to adjust the dollar lower, shouldn’t the Fed be a buyer of gold for its own account?

Pollock: If you are a seller of paper currency, dollars or any paper currency, then you drive the other side up. All prices are exchange rates, and the price of gold or equally stated, the price of a dollar expressed in ounces of gold, is an exchange rate. Of course, you can move the exchange rate by selling one and buying the other, like the Fed did when massively buying mortgage bonds, more than $2 trillion of them, during QE. The Fed drove up the price of mortgage-backed securities and drove down the yields on mortgage loans financed by simply printing up the money, resulting in much higher home prices.

The IRA: That's right. But if we're Governor Miran and we are concerned that the dollar is overvalued don't we then sell paper and buy gold? Like FDR, we're going to buy gold and essentially devalue the dollar until we get it to where we think it needs to be. Don’t you think it's surprising that nobody in government of either party over the past several decades has even thought about the dollar and gold until President Trump?

Pollock: Yes. The other part of that story is the potential revaluation of the Treasury's gold, the government's gold taken from the members of the Federal Reserve Banks, which is on the books at $42.22 an ounce. The statutory definition of the official price of gold owned by the United States government is “42 and 2/9 dollars per ounce.”

The IRA: The U.S. government's official book value for its gold reserves is $42.2222 per fine troy ounce, a statutory price set by Congress in 1973 that remains constant for accounting purposes. What do you think would be the symbolic impact if we changed the official price?

Pollock: As you say, the official gold price is a matter of law, as established by the Act to Amend the Par Value Modification Act of 1973. You'd have to get Congress to act to change this. If you did get Congressional action, you should just say, as I have recommended, that the official price of gold is “the fair market price of gold as certified by the Secretary of the Treasury” Today that is over $4,000 an ounce. Then you would've a tremendous writeup of the price of gold. The Treasury Exchange Stabilization Fund would get a lot bigger. Like FDR in the 1930s, they could monetize the market value gain by creating new gold certificates, depositing them in the Fed and writing checks on the Fed.

The IRA: I seem to recall that Senator Carter Glass ridiculed FDR in public for this accounting charade. But in a system so dependent upon confidence and inflation, perhaps that is overmuch concern.

Pollock: The gold certificate is a deposit of the Treasury at the Fed, the Fed credits the Treasury's account for the gold certificates, which are already authorized by law. If you change the law to have the Treasury's gold valued at its fair value as opposed to its 1973 value, then Treasury could just write checks and, in effect, borrow the new market value of the gold from the Fed. You could have another nearly $1 trillion of new fiat cash right now. The Eisenhower administration used this gold certificate strategy back in the 1950s, by the way.

The IRA: We don't want to say that too loud. People will get the idea. But the Treasury and the Fed could buy gold for paper. Imagine if you have Kevin Hassett at the Fed. He could start buying gold and force the dollar significantly lower. As you said, it is the dollar that is falling in terms of the gold-dollar exchange rate, not the value of the metal rising.

Pollock: The seizure of gold in 1933 was a profit to the Treasury and an economic loss to the Fed under the Gold Reserve Act of 1934. The Fed had to turn in all its gold and couldn't buy any more. That law was reversed in 1974 in an amendment included in the International Development Association Appropriations Act of 1975 sponsored by Senator Jesse Helms (R-NC). The government stopped the incredibly despotic action of forbidding its citizens from owning gold. I think it's true that the Fed, also from 1974, could have bought gold for itself again. Of course, that would be the opposite, as you point out, of its whole ideology, which is to run the world on fiat paper dollars.

The IRA: Have we not come full circle, Alex? We've gone from the FDR confiscation of gold and all of these laws that were passed to prevent Americans from even thinking about gold. But the Russians and the Chinese particularly have turned this around. The opening of the Shanghai Gold Exchange in 2002 ended the embargo on gold as a reserve asset. Today gold seems to be back in the ascendancy. Was this just bound to happen or was it the US frittering away their franchise with a lot of deficit spending that forced this issue and sanctions and all the rest of it too?

Pollock: I think that is true about deficit spending hurting faith in the dollar. Nor has the United States helped itself in this sense by weaponizing our dominant currency to punish people. It does make the rest of the world less willing to hold dollars as assets and as their central bank foreign currency reserves. Now we see this very interesting move to a new reserve allocation around the world, central banks buying gold. Interesting to think that just a generation ago, the central banks were selling gold.

The IRA: Then-Chancellor of the Exchequer Gordon Brown sold a large portion of the UK's gold reserves between 1999 and 2002, a major financial blunder because it happened at a 20-year low in the gold market, just before the price began a massive, sustained rally.

Pollock: The Bank of England, the Bank of Canada and others all sold gold. A friend of mine in Switzerland told me that he knew officers of the Swiss National Bank, the Swiss Central Bank, when they were forced by the politicians to sell some of the bank’s gold along with the other countries in the nineties. The Swiss literally cried, he said, when they were forced to sell. And they were selling at the bottom, although of course the central banks were in the aggregate making the bottom by selling. That really looks bad in retrospect. Now needless to say, they're buying again. But the central bank buying also seems to be making this top if it is a top, at least making this very high price over $4,000 per ounce– getting close to 100 times the official US price and more than 100 times the old Bretton Woods par of $35.

The IRA: The central banks have been buying in volume. They were indifferent to the price. They just told their people to go out and buy, particularly the Chinese but many other central banks as well.

Pollock: And many want to get out of dollars or at least stop accumulating dollars and accumulate gold instead.

The IRA: It is hard to make a case for holding dollars when we look at the behavior of the Fed and Treasury over the past decade. The Fed bought $7 trillion worth of securities during and after COVID and did not stop buying until 2022, after interest rates had gone up. Fiscal policy was likewise running full tilt. Powell's FOMC provides one of the most egregious examples of procyclical government behavior in modern economic history, perhaps the single best reason for Congress to reform the Fed.

Pollock: The Fed led the housing market into a giant house price bubble with prices rising very rapidly. It was still buying and stoking that bubble in 2021 up to early 2022. Unbelievable. To my mind, an amazing blunder. But part of the mystique of being a central bank is you never admit you made a mistake. It must be that when you enter the secret society of central bankers, you have to pledge never to admit to making a mistake.

The IRA: Well, do you think if they confirm Kevin Hassett as Fed Chairman that he's going to betray Trump like all the other Fed chairman have done?

Pollock: I know Kevin personally from our days together at AEI. He is a very smart and knowledgeable guy. There is, of course, the most famous historical story of betrayal. When Harry Truman was President, he forced out Fed Chairman Thomas McCabe in 1951 to make room for a new appointment. Former Chairman Marriner Eccles stayed on the Board as governor to support McCabe and thwart Truman. Eventually the President got Chairman McCabe to resign. The issue was that the Fed would not commit to keep on buying Treasury bonds to peg the yield at 2.5% to finance the Korean War. While these negotiations were going on, the US Army had just retreated 200 miles south down the Korean peninsula. So you have got to have some sympathy for President Truman. He was losing a war.

The IRA: Reminds us that President Trump’s efforts to remove Chairman Powell are not unique in recent US history.

Pollock: After McCabe’s departure, Truman put in William McChesney Martin, a great Fed chairman and the longest serving one. He was appointed by Truman from the Treasury because it was assumed that Martin would follow the Administration line. Martin didn't. Chairman Martin believed in sound money.

The IRA: And Martin defended the independence of the Temple. Hassett is already starting to make noises about the challenges of inflation. Everyone who is confirmed by the Senate as a Fed governor defends the Temple.

Pollock: There's one point when Martin was now Fed Chairman that he runs into Truman, by the Waldorf Hotel in New York. President Truman looked him in the eye and said one word, “traitor!”

The IRA: Well, given all of that, the Trump administration has articulated a lot of things they would like to change at the Fed that would greatly limit the central bank’s ability to do creative things. How do you think that would change things given the deficit and everything else?

Pollock: It would be very dangerous, of course. My view of Fed “independence," if you talk about absolute independence, it's nonsense. You can't have one piece of the government that becomes an autonomous power running around doing whatever it wants. That's ridiculous. But the Fed should be independent of the President and the Treasury. The reason why this is completely clear was explained by none other than William McChesney Martin: The Treasury is the borrower. The Fed is the lender. You can't have the borrower telling the lender what the lender has to do. I think that's wonderful logic, and so true. Instead, the Fed reports to the Congress and telling the Fed what to do is the responsibility of Congress.

The IRA: Unless your President is a former real estate developer.

Pollock: But all presidents wish to control the Fed. Of course.

The IRA: Of course. Thank you Alex.

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Interview: Alex Pollock on the Fed and Gold | Part I

Published by The Institutional Risk Analyst.

October 3, 2025 | In this special edition of The Institutional Risk Analyst, we feature a discussion with Alex Pollock, Senior Fellow at the Mises Institute. Alex provides thought and policy leadership on financial issues and the study of financial systems. He was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004. We spoke with Alex from his home in Lake Forest, Illinois.

The IRA: Alex, thank you for taking the time to speak with us today. We were at the Lotus Club yesterday talking about Inflated: Money, Debt and the American Dream. One of our former colleagues from Bear, Stearns attended.

Pollock: Know something you and I have in common?

The IRA: Tell us.

Pollock: You worked for Bear Stearns. I worked for Continental Illinois. Two firms that are no longer with us. Educational experiences.

The IRA: We were looking at the FINRA record while doing CE. It now lists JPMorgan as our first employer instead of Bear, Stearns. Well, so technically we worked for Jamie Dimon once upon a time. Thank you for sending over your latest testimony on the Federal Reserve, “How Congress Should Oversee the Federal Reserve’s Mandates.” It provides an interesting counterpoint to the essay by Treasury Secretary Scott Bessent in The International Economy about reforming the Fed. We don’t think that anything will happen on reforming the central bank before the Republic has another financial crisis, but there you are. We are very happy to be living in Westchester County, though, instead of New York City. Leaving Gotham in 2021 was a good move and cut our living expenses by more than half.

Pollock: I feel the same about Lake County, Illinois.

The IRA: Despite the political and fiscal troubles in Chicago, we see that the developers are all scurrying back into greater Chicago. This despite the carnage for the banks. Developers must do development or they'll be out of business. Somebody just took Bank OZK (OZK) out of their misery in Lincoln Yards. But we digress. Let’s spend a little bit of time talking about the Fed and then we can switch gears and talk about gold if that works for you. Or maybe we’ll just talk about gold.

Pollock: Two highly related topics.

The IRA: What questions and comments did you get from the Financial Services Committee members when you were up on the hill talking about the Fed? Do you think any of them understood some of the points you made in your excellent testimony?

Pollock: The testimony was to a task force of the Financial Services Committee. We got some very good questions, including questions on what is the chief thing the Fed is supposed to do. I like the idea that the guiding fundamental principle should be that the first responsibility of the central bank is to provide a sound currency. I recommended that the Financial Services Committee in the House and the Banking Committee in the Senate should both have subcommittees devoted solely to the Fed. The monetary system is so overwhelmingly important that that would make a lot of sense. And then you would get a focus and a buildup of expertise over time. Members of Congress, if they serve on a committee long enough, become quite knowledgeable. Incidentally, the hearing last month was held in the Wright Patman room...

The IRA: Oh, of course. Rep Wright Patman (D-TX) was a long-serving and populist politician from Texas. Known as a "fiscal watchdog," he served in the House for 24 consecutive terms, from 1929 until his death in 1976. Henry Reuss (D-Wisconsin) succeeded Patman in 1975. We can recall appearing before another great Texas populist, Chairman Henry B. Gonzalez (D-TX), years later. Gonzalez, who thought there was gold hidden below the Federal Reserve Board, became chairman in 1989. Chairman Gonzalez was responsible for discovering the secret FOMC transcripts.

Pollock: Wright Patman chaired what was then the Committee on Banking and Currency for 12 years. He was a big believer in the responsibility of Congress to oversee and direct the Fed. It was the Democrats in those days who thought that Congress should watch the Fed’s operations closely. Did you enjoy my quote from former Democratic Senator Paul Douglas to William McChesney Martin? –the one about, “I've typed out your saying that the Fed is an agency of the Congress. I'm giving you a piece of scotch tape so you can tape this up on your bathroom mirror and look at it every morning.” I got a big kick out of that.

The IRA: Does the Congress really have any operations? I thought they were delegating all of the operational aspects of government to the executive branch.

Pollock: The Fed should and does have oversight and policy guidance from Congress. Congress does not need to operate the central bank. Congress instructs their agency, the Fed, which as is often said, comes under the money power, the constitutional money power under Article One, Section 8. As you know, the Constitution says “coining” money, which we read these days metaphorically.

The IRA: In those early days of the Republic, it was an acute need for an exchange medium that drove the Framers to give Congress power over money. Americans used barter for most exchanges and Spanish “pieces of eight” and pounds sterling for money in the 1700s.

Pollock: The Constitution then says “and regulate the value thereof.” Well, regulate the value of money is a congressional duty, in my view, not just a power. It is a duty under the Constitution and overseeing the Fed as part of that. That power is solely a congressional power and not an executive branch power.

The IRA: The central bank is clearly a peculiar institution because of the Constitutional empowerment regarding money, something that was extremely controversial at the end of the 18th Century. The fact that the Framers gave Congress this first mandate does not receive enough attention and supports your call for greater congressional oversight.

Pollock: Congress ought to want to take it seriously, the way Wright Patman and Henry Gonzalez did in their day. But the Democrats flipped and said, well, we ought to let the Fed do whatever it wants. It's very historically interesting, that flip. Anyway, there's another power though that's very relevant and that is the taxing power. The power of taxation under the Constitution is given solely to the Congress, in that same article of the Constitution. Inflation is a tax. Inflation is simply taking purchasing power away from the people and giving it to the government. The Fed creates inflation. The Fed is taxing. The Fed is responsible to Congress for its taxing activity.

The IRA: As Robert Eisenbeis of Cumberland Advisors taught us years ago, the Fed is always an expense to the Treasury when you net out all of the cash flows. The Fed gives the Treasury back its own money earned from securities, less operating expenses. And you are correct that the Fed is a taxing unit, an instrument of financial repression. But the Bernanke Fed onward with QE expropriate the assets of the Treasury without congressional authority and proceeded to lose money on their speculations! They also mismanage the Fed’s assets and liabilities.

Pollock: Those losses are also a tax. When the Fed created a giant savings and loan type balance sheet on its own books, and has now lost $242 billion as a result, that is taxation, that is spending the taxpayer's money in a fiscal action without authorization of Congress. It comes right out of the remittances to the Treasury.

The IRA: Ben Bernanke and Alan Greenspan before him figured that Congress had no idea so better just do what is necessary to keep the ship moving forward. But Alex, don't you think the evil goes back to 1935 when FDR created the Board of Governors and brought all of this to Washington? Since the New Deal, the Fed has taken on the role of a state planning agency like the Soviet GOSPLAN. Bernanke creates quantitative easing, where the Fed buys trillions in Treasury securities and also mortgage bonds, driving up home prices. And this is all done under the rubric of the Elastic Clause in Article I, Section 8, “necessary and proper”. The Fed is basically free riding on that part of the Constitution.

Pollock: The 1935 Banking Act centralized the power of the Fed under FDR. Senator Carter Glass (D-VA) in his day used to ask witnesses before the Senate Banking Committee if the United States had a central bank. The answer he wanted was, “No, it does not. It has a federal system of regional reserve banks.” That was the Jeffersonian idea of Glass until 1935. And as you are saying, they flipped this around and centralized the power in the Board of Governors in Washington–the name was changed as a symbol of the power shift. The heads of the regional reserve banks were originally called “governor,” the Governor of the Federal Reserve Bank of New York or Chicago or whatnot. Also, Congress created the Federal Open Market Committee as a statutory body in 1935. It was originally a committee of the Federal Reserve banks themselves.

The IRA: FDR turned the Fed into a unitary central bank a la Europe.

Pollock: The Fed became a centralized body dominated first by the Board of Governors, but really by the chairman. So you got two centralizations going on here in the Fed after 1935. One is a centralization of power out of the rest of the country into Washington, into the Board. And the second is the centralization of power in the office of the Chairman of the Federal Reserve Board, who is the chief executive of that agency and for whom all the staff works. All the hundreds of PhD economists and everybody else all work for the Chairman. And so you get this much increased power of the Chairman hitting a peak, I will say, in the days when Greenspan became “The Maestro.”

The IRA: Clearly some of the Governors and Reserve Bank presidents were unaware that transcripts of meetings were being stored by Greenspan. We first reported on Chairman Gonzalez catching Greenspan obfuscating regarding the FOMC minutes in 1993 for the Christian Science Monitor. Now the Trump White House may not allow the reappointment of Reserve Bank presidents unless they toe the MAGA line on interest rates.

Pollock: Greenspan had become enormously powerful, a kind of a media star. But then as you point out, the Fed’s mission creep hit another peak in the days of Bernanke and quantitative easing, manipulating the bond market, manipulating the mortgage market by buying a couple trillion dollars of 30-year fixed rate loans, which never were historically and never should be on the books of the Fed.

The IRA: The Fed may own those securities for decades to come. The Fed’s MBS have such low coupons that the average lives for the securities may be close to 15 years. There are a lot of lenders who would like the Fed to resume buying MBS. And I'm a little worried that Trump, who's not really a conservative, may want to go there if he puts Kevin Hassert in as Fed chairman. Having the Fed buy MBS will just push home prices higher.

Pollock: A central bank in principle can buy anything–not necessarily legally, but in principle. For example, as you know, the Central Bank of Switzerland has a giant equity portfolio. It's a big investor on the New York Stock Exchange. The dollar investments in Switzerland were part of their keeping down the Swiss franc. But they also of course own gold. We're going to get to gold later, but how much gold does the Fed own?

The IRA: None.

Pollock: Zero. Not one ounce. I think it's one of the few major central banks that doesn't own any gold.

The IRA: But the absence of gold was part of the American management of the post Bretton Woods period, when US officials poo-pooed gold and didn't want anybody to talk about it. As we can now see, that strategy ultimately failed and gold is again the largest reserve asset in the world. If you look at the timeline of all of the official actions that were meant to discourage people from talking about or owning gold, ultimately they failed in the late 1960s. The US withdrew from the London gold pool a year before Nixon shut the gold window in 1971.

Pollock: There is a great story in Paul Volker's autobiography, Keeping At It: The Quest for Sound Money and Good Government. Volcker was at the Treasury under Nixon and they knew they had a big problem with dollars and gold. They knew that they were going to have a lot of trouble maintaining the $35 peg. He tells the story in the book they were having meeting after meeting over what are we going to do, coming up with scheme after scheme to somehow prop up the dollar and hold down gold and so on. And he said there was an old Treasury guy who'd been at the agency for decades, and he would sit in these meetings when they'd come up with some scheme or other, and at the end of the discussion, this guy would say, “It won't work.”

The IRA: You mean like selling gold to force the dollar down? Thats Steven Miran’s idea. The history of the United States suggests that selling paper and buying gold is a better strategy. But then again, many of these same people think that crypto tokens are the future of money. Americans are the only people dumb enough to think we can use buttons as money.

Pollock: Well, the guy in Paul Volcker’s story was right. There was nothing they could do. By that time the dollar peg to gold was on the way out. By then the game was already lost. I guess maybe they could have devalued instead of simply defaulting on the commitment of the American government to redeem dollars for gold at $35 an ounce. You could have devalued and set a new price, but it would've been a big devaluation, like $70 or even a hundred dollars an ounce, something like that.

The IRA: The dollar is already down below the lows of Trump I. But that's the history of the fiat currency. On the one hand, the legal tender fiat dollar is the greatest invention ever. But if you don't have some degree of fiscal restraint, and you can't in a democracy, then ultimately it doesn't work to the point of the Treasury official in Volcker’s story. That's where we're are today.

Pollock: Where we were and maybe where we are again. Can I give you a great quote on this? An excellent private memorandum on gold viewed in the long term says, “A higher money price of gold is best read as a symptom of a weaker currency. It isn't really the gold going up, it's the dollar or fiat currency in general going down.” That seems to me to be right. And then he says, “The value of gold lies in being independent from political discretion. Fiat money is a claim on the future discretion of politicians.” Isn't that good?

The IRA: Indeed. Thank you for your time Alex

END PART I

We'll feature the second part of the discussion with Alex Pollock regarding the Fed and gold in a future issue of The Institutional Risk Analyst.

Do We Really Need a National Price Fixing Committee for Interest Rates?

Published in The New York Sun.

The Federal Reserve’s own chairman says it’s ‘navigating by the stars under cloudy skies.’

What if the Federal Reserve did not exist? Would there still be interest rates? Would there still be a bond market, a market in short term paper, banks paying interest on deposits and charging interest on loans, and the Treasury still issuing debt to investors? Would the interest rates still reflect the economic outlook? Did these things exist before the Fed was created in 1913?

The answer to all these questions is “yes.”

As the Federal Reserve’s Open Market Committee gets ready to meet this week, the press yet once again treats us to endless discussions about what this government committee will decide interest rates should be. How will it react to increasing inflation, employment issues, and White House politics? Should interest rates be changed by exactly one-quarter of one percent or by exactly one-half?

It is as if people have somehow come to believe that no one would know how to establish interest rates if the Fed didn’t tell them what to do. It seems like many people really believe that this committee somehow knows best what interest rates should be. The question to think about, though, is: Do you believe it?

Acceptance of this centralized price fixing is an odd and anomalous feature in a country that knows that markets using price signals produce vastly more efficient economic outcomes than government central planning can, in particular than the government can do in respect of fixing prices.

There is no doubt that for the government to set up a national price fixing committee is in general a really bad idea. No centralized committee, no matter how intelligent, experienced, and educated its members may seem to be, or how many computer models they may run, or how many economics Ph.D.s they employ, can possibly know enough to do this.

They cannot cope with how countless interacting factors, including the effects of innovation and entrepreneurship, are changing and adapting, or will change as unpredictable shocks occur and trends reverse, as expectations and hopes or fears about the future shift. In short, the Fed’s efforts, no matter how sincere, share with all attempts at government central economic planning the inescapable knowledge problem: the impossibility of the requisite knowledge ever being in one place.

This was intellectually demonstrated by Ludwig von Mises and Friedrich Hayek a century ago and has been confirmed by much sad experience since, from the continuous failure of socialist economies to the two government-promoted house price bubbles the United States has already undergone in the first quarter of the 21st century.

An example particularly relevant to the Fed’s meeting this week, and every time, is the unknowability of the “natural rate of interest.” The Fed must worry about how whatever interest rates it commands into being relate to the natural rate, mathematically written “r*” and pronounced “r-star.”

This is the theoretical inflation-adjusted rate at which the economy will operate at full employment and stable inflation, neither too stimulated nor too constrained. It is, according to the New York Fed, “a critical benchmark for central bankers.” Unfortunately for these price-fixers, it is a purely theoretical interest rate, which can never be observed.

Thus estimates of this “critical benchmark” are always uncertain. This fundamental problem gave rise to a great aphorism of Chairman Jerome Powell of the Fed Speaking of the uncertainties the central bank faces, and referencing the question of r-star, Mr. Powell was addressing the 2023 central bankers bash at Jackson Hole, Wyoming. With admirable candor and sharp wit, he told them: “We are navigating by the stars under cloudy skies.”

I think that deserves to be preserved in Federal Reserve lore right up there with William McChesney Martin’s famous line about “take away the punchbowl.” It concisely displays why we should pity the members of the Federal Open Market Committee as they meet this week.

They must know in their hearts that they do not and cannot know the economic and financial future, and that they thus cannot know what interest rates should be. Yet they must play their parts in a public drama on a world-wide stage. Based on what they do and say, all subject to deep uncertainty, a lot of money can change hands and large unintended results can occur. Yet: “The show must go on.” Or must it? Do we really need a national price fixing committee for interest rates?