Commentary

The Federal Reserve Board was born 110 years ago this month. On Dec. 23, 1913, Congress passed the Federal Reserve Act—creating a new national bank to match those already existing in Europe—and President Woodrow Wilson quickly signed the Act into law at 6:02 p.m. that night, with four gold pens.

The Fed has made its share of big blunders over the last 110 years—many in its first 20 years, causing a Great Depression—but the Jerome Powell era may be remembered as one in which the Board and its 400 Ph.D. economists seldom fathomed monetary realities until they had gone way too far—in every direction.

Forgetting their early (2018) blunders, in early 2021, in the first month of President Joe Biden’s reign, when the new president was passing inflationary stimulus bills into an already bustling post-COVID economy, a congressman asked Chairman Powell about the 25 percent year-over-year surge in the broad money supply (the highest since the 1940s), and the chairman dismissed these concerns, saying that such a big surge in the broad money supply wouldn’t have any important economic or inflationary implications, saying that we may have to “unlearn” the idea that monetary aggregates have any important impact on the economy.

Mr. Powell was marching to the president’s orders, since President Biden campaigned on Modern Monetary Theory, saying that the fabled monetarist Milton Friedman “isn’t running the show anymore.” His Board agreed.

In April 2021, Barron’s interviewed San Francisco Fed President Mary Daly, who said that the Fed’s main goal was to get inflation UP to 2 percent, when it was already within a whisker of that goal (1.8 percent), and then she blithely added that if the Fed overshot that goal, “we have the tools to bring it back down.” Oh, really?

That article caused me to pen a column titled, “Inflation Will Roar Again—and Probably Soon,” saying that those “tools” Ms. Daly referred to were draconian—as instituted by Paul Volcker in 1979–1982.

Specifically, I wrote this on April 13, 2021: "In a Barron’s interview ('A Central Banker on a Mission,' April 12, 2021), San Francisco Fed President Mary Daly, a voting member of the FOMC this year, said, 'We have struggled for a whole decade … to get inflation up to our 2% goal.' Then she promises, 'We always have the tools to pull inflation down if it gets too high.' File that promise away for future review—or review Paul Volcker’s experiences in 1979–82 to see how he struggled to rein in double-digit inflation: We had to suffer two recessions that felt like a Depression."

Then, all during 2021, the Fed’s Amen Chorus called rapidly rising inflation “transitory” until December, when Mr. Powell reluctantly retired the “T” word. The Fed then panicked—and procrastinated. Although they said inflation was serious in late 2021, they waited until April 2022 to raise rates from near zero—by just a quarter point—finally citing inflation as their biggest problem. Then they started raising rates in 50- and 75-basis point giant steps while reducing M2 money so fast that they created a banking crisis in March 2023.

The dollar had been rising, and stocks falling, until October 2022. Since then, the U.S. Dollar Index is off 10 points (-9 percent), and many major central banks have been exchanging their weak dollars for strong gold. As a result, gold recently set a new record high in U.S. dollar terms, above $2,100, but gold had been in record territory in several other currencies for several years, including since 2019 in the euro currency.

Central bank gold demand in 2022 was the strongest in 55 years, since the gold crisis of 1967, when the British pound was devalued and the United States was hemorrhaging both gold and silver. This year’s central bank gold buying is on pace to beat 2022 after a record-breaking first half of the year and third-quarter official central bank buying of 337 metric tons, making year-to-date gold demand of 800 tons, 14 percent above 2022.

The People’s Bank of China is the largest recent gold buyer, and it is likely buying much more “off the books” in clandestine purchases. The National Bank of Poland (NBP) is No. 2 in recent demand, adding 57 tons in the third quarter to its 48 tons of gold purchases in Q2, and it may not stop there. At least 10 central banks bought at least a ton of gold last quarter.

The world has at least 160 currencies, of which four or five constitute foreign exchange currencies—the dollar, euro, yen, and pound, with China’s yuan knocking at the door—but no paper currency can hold its value over the long-term to gold, since governments are constantly tempted to turn to the printing press.

As Lyn Alden wrote in her recent book, “Broken Money,” gold provides something paper money can’t: All of the newly gold mined each year (about 1.5 percent of the above-ground supply) roughly matches global population growth; hence, gold represents zero inflation of global per capita hard-money (gold) supply.

“Scarcity is often what determines the winner between two competing commodity monies … [A]n important concept is the stock-to-flow ratio, which measures how much supply there currently exists in the region or world (the stock), divided by how much new supply can be produced in a year (the flow). For example, gold miners add about 1.5% new gold to the estimated existing above-ground gold supply each year, and unlike most other commodities, most of the gold does not get consumed; it gets repeatedly melted and stored in various shapes and places. Gold does not rot, rust, or corrode as readily as most other materials do. It is chemically inert and … practically indestructible,” Ms. Alden wrote.

As opposed to the Gold Rush era of the 1800s, when gold supply would soar or shrink, the supply of new gold is steady and predictable now. In his 2022 book on inflation, Steve Forbes wrote: “Experts estimate that some 7 billion ounces have been mined worldwide and almost all this gold is still accounted for.”

The Gold Standard Put the 'Great' in Britain and America

As Mr. Forbes and his co-authors of “Inflation” (2022) wrote, a solid and reliable gold standard helped create the greatness that turned a small island into Great Britain and made the United States even greater:

• Britain: “In 1717, Sir Isaac Newton fixed the value of the British pound to gold at three pounds, 17 shillings, and ten-and-a-half pence (3.89 British pounds) an ounce, a ratio that held for more than 200 years. Britain’s commitment to unchanging, gold-based money formed the foundation for the country’s rising wealth and its emergence as a global financial center. ... The reliable British pound helped turn that small island from a second-tier nation to the mightiest industrial power on earth.”

• America: “More than 70 years after Newton fixed the pound to the price of gold, Alexander Hamilton established a financial system for the young United States that emulated Britain’s example by pegging the dollar to gold and silver. ... The era of the classical gold standard saw an explosion of trade and innovation that, in many respects, remains unequalled. ... During the gold standard years between 1950 and 1970, real GDP per capita grew by an annual rate of 2.77%. But over the past five decades, with a slowly declining fiat dollar, this growth rate has dropped significantly, to 1.71 %. ... If the nation had the same growth rate today as we did in the 1950s and 1960s, per capita income would be 72% higher.”

Someday soon, Jay Powell’s Fed may have to stumble onto a Newton-like formula for a golden dollar.