Reform Conservatism Needs an Anti-Inflation Plank

Sound money. It’s not just for Ron Paul anymore.

Ross Douthat notes two distinct tendencies in what I’ll call ‘nextgen’ conservatism: a “reform conservative” strand (think: Marco Rubio) marked by a focus on helping ‘the middle class,’ and a ‘libertarian populist‘ strand (think: Rand Paul) marked by a focus on personal freedom and privacy, and a more decentralized, constitutionally limited central government. (I prefer to call the latter strand federalism or decentralism.)

Both strands, of course, are a big improvement on ‘compassionate conservatism,’ the ideological cul-de-sac that provided the opening for Barack Obama and all his works.

We should welcome reform conservatism, to the extent that it overlaps with decentralism, and especially in its admirable emphasis on ending crony government and repealing special favors for business.

Some conservatives, including me, have been skeptical of reform conservatives’ heavy emphasis on helping families with children. Not because families with kids don’t need help, but rather because reformocons’ way of going about it — a large new, lump-sum-per-child tax credit — is problematic as a policy matter.

But I have two much larger concerns about reform conservatism, and they are: (1) its dropping of balanced budgets as a goal of conservatism, and (2) its eerie silence on inflation. Surely these issues are vital to the interests of the ‘middle class’ and families with children?

The Missing Plank: Sound Money

Of the two issues, fiscal and monetary, I think the latter may be the more important. To be truly serious, reform conservatism needs an anti-inflation plank.

Standing for sound money is politically wise, for the same reasons that standing for things like affordable health care and energy and education is wise.

Sound money is indispensable to political liberty. Limitations on government power can’t be sustained without protecting the right of individuals to honestly acquire and hold private property. If the government can take our property without a vote, our property and freedoms are not secure. When the government inflates the currency, it takes our property without a vote.

That’s why the Founders took care, in the Constitution’s money clauses, to prohibit the states and Congress from issuing worthless “bills of credit,” i.e., a paper currency unbacked by anything of value. More specifically, they sought to bar the federal and state governments from infringing the right of the people to freely conduct their private business using gold and silver as money.

Alas, those intentions have been frustrated by a combination of three policies:

  1. Legal tender laws that force taxpayers to use a specific kind of government-issued money to pay their taxes and private debts.
  2. Taxes on potential rival currencies, and specifically on gold and silver coins — treating them as ordinary articles of commerce, rather than as money.
  3. A monopoly central bank, the Federal Reserve, with power to print unlimited quantities of legal-tender “bills of credit,” unbacked by anything of value.

Together these policies — the first dates from the Civil War, the other two from the New Deal — have enabled our federal politicians to inflate the currency and thus help themselves to our property (i.e., levy a tax) without a vote. Another word for this is “theft.”

Inflation is in all but name a tax. And an especially opaque one, hidden in the price of everything. And starkly regressive, falling most heavily on the poor and on people living on fixed incomes.

Inflation Is Coming

As Sean Davis and others have pointed out, inflation is on the rise, surely thanks to more than a decade of historically large federal deficits, facilitated since 2009 by massive amounts of money-printing (‘quantitative easing‘) by the Fed. Paul Krugman and other leftwing political commentators deny this. Inflation is low, they point out. And they’re right. It is low, for now. But it will rise, because it has to.

Right now, trillions of dollars of Fed-printed money are sitting idle in no-interest bank accounts, or offshore, or stuffed under people’s mattresses, because the Fed is keeping interest rates artificially low. When interest rates rise, as eventually they must, that excess liquidity will pour back into the economy and saturate it like a sponge. Prices will rise until the liquidity is wrung out, most likely via a rise in unemployment.

Reform conservatives seem to be in denial about the inevitability of an inflationary spike. Maybe they’re right. Maybe inflation has somehow been banished from the world along with smallpox and the whalebone corset. But they would do well to remember what happened during the late 1970s. Inflation spiked and was only subdued following a sharp rise in interest rates, accompanied by the worst economic contraction since 1945 (prior to 2008).

Any brand of conservatism that wants to appeal to working Americans must have an answer for inflation that doesn’t entail tanking the economy.

The most ardent of Ron Paul’s followers urge us to repeal the legal tender laws, abolish the Fed, and restore a self-regulating gold standard. Economically, historically, and constitutionally, that prescription is right. But politically, it could be quite disruptive if imposed overnight. Easy money is a thousand times more addictive than heroin and a million times harder to quit. Going cold turkey could kill the patient.

Mike Lee’s Prescription

Senator Mike Lee, Utah Republican, has identified an elegant way to begin weaning ourselves from our easy money addiction. His ‘Sound Money Promotion Act‘ (S.768) would treat gold and silver coins used as legal tender in the same manner as Federal Reserve Notes for purposes of taxation. Specifically, it would prohibit the taxation of gold or silver coins that are declared legal tender by Congress or a state. Those last three words are critical.

Article I, Section 10, Clause 1, of the Constitution declares that ‘No state … shall make any thing but gold and silver coin a legal tender in payment of debts.’ This prohibition entails a privilege: states have a right to declare such coins to be legal tender within their borders. Implicitly, it also means Congress has a duty not to infringe that right. Ergo, as a constitutional matter, Congress may not tax state-recognized legal-tender coins (and by logical extension, notes backed by them).

Lee’s bill would enforce the Founders’ intention.

Today Federal Reserve Notes (“greenbacks”) are not taxed, as such. Neither are U.S.-minted fractional coins (dollars, half-dollars, quarters, dimes, nickels, pennies). Under Lee’s bill, legal-tender precious-metal coins would join these monetary items as non-taxable. Of course, the taxation of our incomes, estates, etc., would go on; and people would still pay their taxes in Federal Reserve Notes. But now we would be able to use sound money in private transactions, as the Founders intended. 

As tax cuts go, the reform is trivial. As a monetary reform, its effects would be far-reaching and overwhelmingly beneficial. It would liberate people in states that have declared gold and silver coins to be legal tender to conduct their business with sound money, without being discriminated against. To date, four states have declared U.S.-minted gold and silver coins to be legal tender: Idaho, Missouri, Oklahoma, and Utah.

With the legalization of a superior alternative to Federal Reserve Notes, even in just a few states, the federal monetary monopoly would be broken. Sound money would come to prevail, in stages. First, in the declaring states, a few people would insist on using legal tender coins in preference to Federal Reserve Notes. Then privately issued notes backed by legal tender coins and denominated by weight (e.g., ounces) would begin to circulate as money. A system of floating exchange rates would develop between metal-backed notes and FRNs. More and more individuals and businesses would come to prefer metal-backed notes, which would begin to penetrate into all parts of the Union. Eventually banks would want to be depositaries for this new currency, and more states would opt into the club.

Momentum would gather, finally culminating in a movement in Congress itself to allow, and, I predict, eventually to require, that U.S. taxpayers use sound money for the payment of taxes, in lieu of its own depreciating greenback currency. FRNs would begin to gradually be replaced with new U.S. notes backed by the precious metals. Voilà! Sound money. Without pain.

And that’s not all. After this transformation was complete, Congress, no longer free to cheat its creditors with easy money, would be constrained to get its fiscal house in order.

Sound money would thus lead to balanced budgets. And this revival of fiscal common sense would in turn strengthen the dollar and create favorable conditions for real economic health without inflation.

All that, from a one-page bill.

Let the Fed Wither on the Vine

As for the Fed, there’s no need to abolish it. We can let it wither on the vine. In a world of sound money, there’s no harm in letting the Fed help the Treasury Secretary manage (and in time, one hopes, extinguish) the national debt. And there may even be value in letting it continue to serve as a emergency lender of last resort in the occasional financial panic. (The frequency and intensity of such panics can be reduced by a prudent deregulation of the financial sector.)

The fact is governments can only regulate the money supply by one of three means: a central bank, a gold standard, or a central bank that emulates a gold standard (by rigorously pursuing “price stability”).

Today’s Fed is an inflationary central bank. Many Republicans want to transform it into one that emulates a gold standard, by tightening its charter to focus solely on price stability (and not also on “maximum employment”). And that would be an improvement over the status quo. But a ‘single mandate’ would do nothing to ensure that the Fed actually complies with its mandate. The reform lacks an enforcement mechanism.

Lee’s elegant one-page bill would provide the needed mechanism. By liberating millions of private citizens to “vote with their currency,” it would set in motion a slow but inexorable progression from inflationary central bank to price-stabilizing central bank to a simple and self-regulating metallic standard—without upheavals.

Why Not, Reform Conservatives?

Another bout of inflationary fever is inevitable. But that fever can be broken more quickly, and less painfully, if we act now to inoculate ourselves with a sound-money alternative.

Senator Lee has offered a reform that imposes no new taxes or regulations, is completely optional for states and individuals, and threatens nobody’s existing financial arrangements, and yet would in time benefit everyone. The only people truly threatened by it are those who wish to take our property without our consent.

Reform conservatives loudly praise Senator Lee’s bill to expand the per-child tax credit. Shouldn’t they also embrace his bill to promote sound money?

Dean Clancy, a former senior budget official in the George W. Bush Administration and health policy advisor to congressional Republicans, writes on U.S. budget, health care, and constitutional issues. Follow him at or on Twitter @deanclancy.



The Constitution’s Seven Money Clauses

One Reply to “Reform Conservatism Needs an Anti-Inflation Plank”

  1. Interesting piece. People who want to transact in gold should be free to transact in gold. Why can’t the argument stop there? Why is a one-world currency movement politically interesting? The most secure asset on the face of the earth is a U.S. Dollar. That’s not changing anytime soon, and I think it has a nice political ring to it. Massive, lightning speed foreign exchange markets enforce this coldly. Add gold to the currency-competition market? Sure. Sounds good.

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