Under President Reagan, Congress reformed the income tax code and balanced pay-as-you-go Social Security despite deep partisan divisions. Yet by Reagan’s self-assessment, the Reagan Revolution was incomplete when he left office.
We believe the monetary and budget reforms left unfinished in the 1980s now seem finally doable.
“When a conservative says it is bad for the government to spend more than it takes in, he is simply showing the same common sense that tells him to come in out of the rain,” Reagan had remarked in a February 1977 address outlining his presidential strategy.
He was restating in common language the first principle of successful economic policy that went back to George Washington and Alexander Hamilton: Don’t print money to fund the federal budget.
Yet after leaving office, Reagan assessed the result this way: “With the tax cuts of 1981 and Tax Reform Act of 1986, I’d accomplished a lot of what I’d come to Washington to do. But on the other side of the ledger, cutting federal spending and balancing the budget, I was less successful than I wanted to be. This was one of my biggest disappointments as president. I just didn’t deliver as much to the people as I’d promised.”
Double-digit inflation was brought down, but the monetary system, which is still based on monetizing U.S. public debt, was not reformed, and has led to a series of monetary, financial, and fiscal crises.
Why is it possible now to achieve what Reagan could not? In 1980, Reagan’s advisers agreed that it is necessary to limit the power of the Federal Reserve governors who make monetary policy. But they disagreed about the policy “rule.”
“Domestic monetarists,” following Milton Friedman, proposed that the Federal Reserve regulate the quantity of bank reserves and the money stock. Many “supply-siders” advising then-Rep. Jack Kemp, R-N.Y., proposed instead to make the value of a paper dollar equal by law and convertible into a weight of gold, as it was for most of the 200-plus years of U.S. history.
But “global monetarists,” following Robert Mundell, advocated at least a temporary return to the 1944 Bretton Woods gold-exchange system, while others heeded Jacques Rueff’s warning that only restoring a multilateral gold standard without foreign exchange reserves would be effective.
On June 29, 1984, Jack Kemp introduced H.R. 5986, the Gold Standard Act of 1984, which would have defined the dollar as a fixed weight of gold, restored gold convertibility of Federal Reserve notes and deposits, and provided for gold coinage.
Kemp’s explanatory statement and Lewis E. Lehrman’s Wall Street Journal op-ed column of that day, which Kemp inserted into the Congressional Record, remain valid.
Though they often disagreed, Friedman and Mundell exhibited colossal integrity in acknowledging that changing circumstances had made their earlier proposals unfeasible.
As Friedman summarized in a June 7, 2003, Financial Times interview, “the use of quantity of money as a target has not been a success. I’m not sure that I would as of today push it as hard as I once did.”
And, according to a recent Wall Street Journal interview with Judy Shelton, Mundell believes that “it would not be possible today to forge a monetary system with the dollar as the key reserve currency, as President Franklin Roosevelt and Treasury Secretary Henry Morgenthau did in the 1940s. ‘To be fair, America’s position is not nearly as strong now,’ he concedes.”
As Rueff showed, the essential requirement is that the major countries agree to replace all official foreign-exchange reserves with an independent monetary asset that is not ultimately some particular nation’s liability: gold.
Lewis E. Lehrman is chairman of the Lehrman Institute, and was appointed by President Reagan to the U.S. Gold Commission. John D. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center, and is the author of Redeeming Economics.