A Hint of How New Fed Nominee Views Monetary Policy
President Reagan last week nominated Wayne D. Angell and Assistant Treasury Secretary Manuel H. Johnson Jr. to be governors of the Federal Reserve System. Mr. Angell is a farmer, chairman of First State Bank of Pleasanton, Pleasanton, Kan., and has been a member of the board of the Federal Reserve Bank of Kansas City since 1979. The following is an essay by Mr. Angell, which Sen. Robert Dole, R-Kan., distributed after the nomination. It sheds some light on Mr. Angell's views on monetary policy.
IN EFFICIENT monetary system is essential for achieving the full benefits of a free enterprise economy. An efficient and fair international trade environment depends on a reliable international monetary system. Monetary systems can be pegged to a single commodity, follow fixed rules written into a constitution, or can be discretionary as in our Federal Reserve System.
Discretionary monetary policy has a great potential to do extensive harm and provide significant disruption to what might otherwise be healthy growing economies. Disruption is most apt to be avoided when the focus of monetary policy is confined to the objectives that are achievable rather than attempting to do what monetary policy cannot do.
Proper Goals of Monetary Policy
1. The primary aim of monetary policy is to achieve a stable price level. A stable price level for consumer goods and services is the most apparent goal. In a service economy, stable consumer prices to beyond what monetary policy can immediately achieve. Consumer price inflation will tend to disappear with minimum disruption to the agricultural and manufacturing sectors when monetary policy is focused on stabilizing a commodity price level.
Improper monetary policy will show up first through inflation or deflation of commodity prices. Consumer price level changes and changes in inflation or deflation expectations follow. The most erratic price changes then occur in so-called inflation hedges -- agricultural lands and other real estate.
The Federal Reserve Board of Governors should consider making it a first priority that a selected market basket of commodities will not be permitted to increase or decrease more than 10% from a base price level. Errors should not be allowed to become cumulative.
2. The U.S. dollar is not only a domestic currency but the primary means for all international payments and the source of international inflation and deflation. U.S. monetary policy should then focus on providing a stable relationship between the dollar and a market basket of internationally traded currencies. If the U.S. dollar has relatively constant purchasing power in international commodities, it will tend to stabilize the exchange rate between the dollar and other currencies.
When U.S. monetary policy moves from "ease" to relative firmness, the international demand for dollars can be expected to soar as the dollar becomes an even more perfect international monetary instrument. During such adjustment periods, it is impossible to follow a monetary growth rate rule -- unless one is willing to precipitate an international depression. …