Fiscal and Monetary Policies Are Intertwined

By Matt Hawes
Below is Congressman Paul's opening statement from his House Monetary Policy Subcommittee hearing earlier today on the relationship between the Federal Reserve and government debt.

I am very pleased to hold this hearing today. For far too long, monetary policy and fiscal policy have been viewed as completely separate issues. Congress controls fiscal policy, the Federal Reserve controls monetary policy, and never the twain shall meet.
The truth, however, is that fiscal and monetary policy have always been tightly intertwined. In fact, the Federal Reserve has served as the enabler of bad economic policy for many decades. Without the Fed's relentless expansion of the money supply during both the Greenspan and Bernanke eras, the U.S. Treasury never would have been able to issue the staggering sums of debt that now threaten our economic well being. This Treasury debt is the very lifeblood of deficit spending, permitting one Congress after another to spend far more than the Treasury collects in taxes. It is precisely this unholy alliance between the enabling Fed and a spendthrift Congress that I hope our witnesses will address today.
Until 1971 the United States operated on a gold exchange standard, meaning dollars could be redeemed in gold by foreign governments. The dollar was thought to be "as good as gold" because the U.S. would never renege on its gold exchange commitment. The U.S. had to keep that commitment or risk gold outflows that presumably would keep the government from engaging in loose fiscal and monetary policy.
Unfortunately, the system did not in fact keep government spending in check. The federal government ran large budget deficits throughout the 1960s, with the Federal Reserve duly covering the gap and inflating the money supply. Foreign creditors understood that the dollar was being devalued, and increasingly began to exchange their dollars for gold. Rather than bring monetary and fiscal policies back into balance, however, the federal government under President Nixon defaulted on its obligations by closing the gold window in August of 1971.
Despite this, the United States' position as the world's largest economy and the de facto leader of the Western world enabled the dollar to maintain its position as the world's major reserve currency. We've also enjoyed having OPEC price oil in dollars, creating enduring worldwide demand for our currency. But without any effective structural restraints on Congressional spending or Fed monetary expansion, our unchecked fiat paper money system has led to an explosion of debt over the last 40 years....

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