On election night, former New York mayor Rudy Giuliani told MSNBC interviewer Chris Matthews that Donald Trump’s victory, after a campaign against the elites and insiders, was like Andrew Jackson’s first presidential victory. At the end of his first term in office, Jackson cut the federal government’s ties to the Bank of the United States (by vetoing an Act to renew its charter), an institution that was in some respects the Federal Reserve System of its day. Might Donald Trump’s presidency have equally dramatic consequences for the Federal Reserve?
During his campaign, candidate Trump mulled an idea for thoroughgoing reform of our monetary system: a return to the gold standard. As Ralph Benko noted, Mr. Trump told a New Hampshire television station in March: “We used to have a very, very solid country because it was based on a gold standard.” He added that a return would be difficult because “we don’t have the gold. Other places have the gold.” He similarly told GQ magazine that “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”
It should be pointed out to the president-elect that in fact the US government does have enough gold in Fort Knox and its other depositories, at least if the US Treasury has been reporting its holdings honestly. At the current market price of about $1,280 per fine Troy oz., the U.S. government’s 261.5 million ounces of gold are worth $335 billion. Current required bank reserves are only $168 billion. Looked at another way, $335 billion is just a bit more than 10 percent of the $3,347 in current M1 (the sum of currency and checking account balances), which is more than a healthy reserve ratio by historical standards. In that respect, restoration of the gold standard is eminently feasible. After unwinding the QEs, the Fed could swap commercial banks’ required reserves for gold, and hold gold against its own currency liabilities, Federal Reserve Notes, which would once again be made redeemable in gold. Better yet, the federal government could allow commercial banks to issue their own currency again (or, if it’s already technically legal, promise not to penalize them).
Whether restoration of the gold standard will be politically feasible depends of course on how serious the new president will be about pushing it, and how receptive the Republican majorities in Congress will be.
Regarding reforms of Fed policy that keep fiat money in place, candidate Trump’s position seemed to evolve. In an April interview, he told Fortune that “The best thing we have going for us is that interest rates are so low,” and that the prospect of rate hikes was “scary.” During an October debate, by contrast, he accused Fed chair Janet Yellen of keeping interest rates artificially low for political reasons, namely to keep the recovery chugging along until the election and so to help the incumbent party. Even back in the April interview, when he thought that Yellen had been doing “a serviceable job,” he was already saying that “I would be more inclined to put other people in.” Thus it would be a surprise for Trump to reappoint Yellen as Fed Chair when her four-year term expires in February 2018. What he would look for in a new Chair is less clear.
As president, Trump will immediately have the authority to nominate two new Governors to the Federal Reserve Board, thereby to the Federal Open Market Committee. Normally the FRB has seven members, including the Chair. Currently it has only five members, all Obama appointees. Senate Republicans have deliberately left the two vacancies open by refusing to hold hearings on Obama’s latest nominees. The FOMC’s makeup is thus currently 5 Obama-appointed Governors plus 5 regional Federal Reserve Bank presidents, who tend to be more hawkish on inflation (apart from the New York Fed president, the only regional Bank president who is permanently on the FOMC). A pair of thoughtful nominations by the Trump White House could increase the hawkishness of the median (tie-breaking) voters on the FOMC.
In his October criticism, Trump said that the Fed was “keeping interest rates so low that the next guy or person who takes over as president could have a real problem.” He said elsewhere that artificially low rates were creating a “very false economy.” In these remarks Trump appeared to have recognized that overly low interest rates can misdirect investments and create unsustainable asset bubbles. He might then be favorable to Congressional proposals made in recent years, particularly by Rep. Jeb Hensarling, for fastening a monetary policy rule on the Federal Reserve. A Taylor Rule with teeth, for example, would mandate automatic adjustments in the Fed’s interest rate target based on publicly observable variables. Such a rule would strip discretion from the FOMC and avoid the problem of politically tinged policymaking.