#BTColumn – An Ode to Thomas Hoenig (Part I)

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by Adrian Sobers

“In September and October, the dissenters wanted slower money growth or higher interest rates to lower inflation.” – (Allan Meltzer, A History of the Federal Reserve, Volume 2, Book 2) Peter Canellos (The Great Dissenter) reminds us of the importance of dissent in detailing the story of John Marshall Harlan. “As a justice of the Supreme Court,” writes Mr. Canellos, “his life’s work in revealing what he considered the almost religious providence of the Constitution was largely ignored by white jurists and legal historians as long as his opinions were shrouded in dissent.”

Even when shrouded, like its close ally, the truth, dissent still does its work. Blacks welcomed Justice Harlan’s dissent; Frederick Douglass called him a “moral hero”. The dominant black newspaper at the time, The Washington Bee, put it this way when Justice Harlan died, “There is no man in this country to whom the colored race is more indebted.” The black community came out in their thousands to mourn his death.

Justice Harlan’s dissenting opinions helped pave the way for blacks. Thurgood Marshall, a young black lawyer, armed with nothing more than Harlan’s dissenting opinion in Plessy v. Ferguson, travelled “the back roads of the South, trying to persuade victims of segregation to step forward as plaintiffs in a fresh appeal for equal rights.”

Charlan Nemeth (In Defense of Troublemakers) makes the case for the value and power of dissent. Even when wrong, it serves a valuable purpose: “It breaks the blind following of the majority. People think more independently when consensus is challenged.” However, she is quick to point out that we should not create dissent for dissent’s sake.

The dissent of Thomas Hoenig, President, Federal Reserve Bank of Kansas City (1991–2011), is the most important in recent history, not just for the US domestic economy, but the global economy as well. His story is documented in Christopher Leonard’s, The Lords of Easy Money. Mr. Hoenig’s story is a reminder that even soft-spoken, civil, rule-following folks have their limits.

As Ms. Nemeth’s title suggests, dissent is often equated with troublemaking; but to dissent is not to disrespect. But, even the most cordial dissent – “Respectfully, no” in Mr. Hoenig’s case – is interpreted as such.

As Hoenig explains, “There’s not a manual that says you don’t vote against the [Fed] chairman. But there is kind of an uneasiness you see in the room if you’re voting against the chairman.” Although his dissent didn’t change Fed policy, it served the greater good of putting the public on alert.

He explained his issue with the continuation of the Fed’s quantitative easing experiment: “The point was to get people willing to take greater risk, to get the economy started again.

But it also allocates resources. It allocates where that money goes. I think of it more as planting the seeds of a briar patch that we will have to deal with not in a year from now, but three or four years from now, as we have in the past.”

The lone dissenter was right. If we are to extricate ourselves from this briar patch we must not confuse the symptom with the underlying malady. As the late, great Walter E. Williams explained, “Increases in money supply are what constitute inflation, and a general rise in prices is the symptom.”
Politicians focus on the symptom so they can blame “greedy capitalists” and “price-gougers”.

Mr. Hoenig’s dissent refocuses our attention on the underlying cause, namely, the size of the monetary base which is controlled by the government via the central bank. Politicians who “look into” high/rising prices do so at the literal expense of the public, while avoiding the root cause, and more importantly, accountability to the electorate. For having distracted the public with emotionally satisfying narratives, they can continue to finance deficits by printing money.

As a result of the Fed’s quantitative easing – sedative masquerading as “stimulus” – the monetary base saw an unprecedented expansion. Far from stimulating anything, we are limping from one crisis to the next. In response to the previous crisis, the US monetary base rose by $720 billion between November 2010 and June 2011.

In seven months the Fed injected more money into the financial system than it did in the thirty years prior to 2008. (Read that again.) The bill is literally coming due for this desecration of reality (and the yield curve). As Allan Meltzer explained, eventually the Fed will have to absorb a large volume of reserves.

The Great Inflation the Fed created in the 1970s is here today in a grossly exaggerated form. “No less important,” writes Meltzer, “Volcker believed the task of lowering inflation was important for the country and the world.”

The same is true of the sequel. When told that an expansion of the money supply only leads to inflation in the long-run Milton Friedman replied, “I have seen the long run, and it is now.” The long-run of now has been here for a while and, at root, has nothing to do with supply chain disruptions or nefarious capitalists. This becomes clearer when we consider the other side of inflation that Fed’s lone dissenter was most concerned about, which we turn to next.

Adrian Sobers is a prolific letter writer and commentator on social issues.