The democratic mandate of the incoming Trump administration, along with Republican control of Congress and a confrontation of wills between the President-elect and the Federal Reserve Chairman make ending the Fed a bit less unthinkable. Jerome Powell accurately stated, in a slightly defensive tone, that it is not (currently) lawful for a President to fire a Federal Reserve Chairman. Where some see obstacles others see a challenge, and where Powell sees bullet-proof glass, I see a window of opportunity.
The law can be amended, but if the administration is willing to spend some political capital to touch this sacred cow, why not go all the way? A realistic plan to end the Fed would need to be careful and pragmatic, yet decisive. There is no shutting it down overnight. That would cause undue panic. The most important thing for a monetary regime transition is credibility, and credibility does not grow on trees. It must be earned through doing the homework and delivering results. This means balancing the budget through spending cuts. This also means putting institutional safeguards in place to ensure the budget continues to be balanced in the future and the quantity of money remains stable.
There are several workable and desirable alternatives for the end monetary regime to adopt. The monetary base may be frozen or a commodity standard may be adopted. The key to a good base money is to avoid discretion and arbitrariness. Banks may be allowed once again to issue their own redeemable notes and they may or may not be allowed to hold fractional reserves on deposits. The key to good banking policy is to make them compete and allow them to fail before they become too big to fail. As for interest rates—lacking the mechanisms to control them—they must be allowed to find their natural level, at which they will balance saving and consumption, and will cultivate a sustainable structure of production. Alchemy and interest rate manipulation must be left in the past, where they belong.
The US would do well to import the Argentine playbook for the transition. If it was good enough to save a cripled economy from the precipice of hyperinflation, it would probably work well to put the largest economy in decline back on the right path. The team to undertake this task should include (Austrian) economists as well as finance professionals, but, above all, they will need to have the full confidence and backing of the President. Hesitation would be fatal.
