Who Controls the Printing Press?

5 min read

Every currency depends on one quiet act of restraint: that the people who create money will not create too much of it to suit the politicians of the day. This summer that principle came under open pressure in Washington. What happens to the independence of the US Federal Reserve matters well beyond America. It goes to the heart of what any paper currency is worth.

A summer of pressure

Through July the President repeatedly called on the Federal Reserve to cut interest rates sharply, at times by as much as three percentage points. He criticised Chair Jerome Powell in personal terms and attacked the cost of renovating the Fed's headquarters, which the central bank puts at $2.5 billion. On 24 July he toured the building in person, a rare presidential visit to the Fed.

On 30 July the Fed held its key rate at 4.25% to 4.5%. Two governors, Christopher Waller and Michelle Bowman, voted for a cut. It was the first time two governors had dissented at the same meeting since 1993.

Then came 1 August. The US economy added only 73,000 jobs in July. Earlier figures for May and June were revised down by a combined 258,000. Within hours the head of the Bureau of Labor Statistics, which publishes the figures, was dismissed. The same day Fed Governor Adriana Kugler announced she would step down early, opening a seat on the board. Mr Powell's term as Chair ends in May 2026.

Each of these events can be explained on its own. Taken together they form a pattern. The people who set interest rates and the people who measure the economy are both under pressure from the same direction. That is why markets have paid such close attention.

Why independence matters

A central bank that answers to politicians faces a constant temptation. Lower rates and easy money make the economy feel better before an election. The cost, higher inflation, arrives later and falls on savers.

History is clear on this. In the early 1970s the White House leaned hard on the Fed to keep money loose. The decade that followed brought double-digit inflation in America. In Britain, where the Treasury set interest rates until 1997, prices rose by more than 25% in a single year in 1975. The pound lost most of its buying power within a generation.

What the Nixon tapes revealed

We do not have to guess how that pressure works in practice. The White House taping system recorded it. A 2006 study in the Journal of Economic Perspectives used those tapes to show how President Nixon pressed the man he had chosen to run the Fed.

Arthur Burns took office as Fed Chair on 1 February 1970. As the 1972 election drew closer, the President pushed him again and again for easier money. In December 1971, when Burns reported that the discount rate had been cut to 4.5%, Nixon replied: "Just kick 'em in the rump a little." In February 1972 he told Burns he did not much care what the Fed did after April. The study reads that as a hint that only the months before the November vote really mattered to him.

Money growth sped up. The American economy grew by 7.7% in real terms in 1972, the election year. Then the bill arrived. Consumer price inflation went from 3.6% in 1972 to 9.6% in 1973 and 11.8% in 1974. A recession ran from November 1973 to March 1975.

Repairing the damage took years. Paul Volcker became Fed Chair in 1979. To squeeze inflation out of the system, interest rates were pushed to extraordinary levels, with the federal funds rate reaching a weekly average of 15.61%. Unemployment stayed above 10% for ten months. Savers paid first through inflation. Workers paid next through lost jobs. This is why independence is guarded so closely today.

How Britain took the decision away from ministers

The Bank of England was given control over interest rates in 1997 precisely to take that temptation away from ministers. On 12 June 1997 the Chancellor set the Bank a target of 2.5% for inflation. The Bank of England Act 1998 then put the new arrangement into law. It received Royal Assent on 23 April 1998 and came into force on 1 June that year.

The Act created the Monetary Policy Committee, a group of nine. It is made up of the Governor, two Deputy Governors, two members appointed by the Bank and four appointed by the Chancellor. A Treasury official may sit in the room but cannot vote.

The split of duties is simple. The government sets the inflation target. The Bank decides how to hit it. Ministers keep a reserve power to give orders on interest rates, but only where the public interest and "extreme economic circumstances" require it. The bar is set high on purpose, which is why the arrangement has lasted for almost three decades.

The Bank's next decision is due this week. Independence is not a technicality. It is the main defence a modern currency has.

What the market is telling us

In May we wrote that volatility is the price of admission, describing how gold set a new record in April when the President publicly questioned Mr Powell's position. The same pattern has played out again. After the weak jobs report and the turmoil that followed, gold rose again and moved back towards its April record.

Markets are not only pricing a rate cut. They are pricing a risk that the guardians of the dollar may become less willing to say no.

Gold sits outside the system

Paper money is a system managed by people. Its value depends on the judgement and the independence of those who control the supply. When that independence is questioned, so is the currency.

Gold has no such weakness. No committee sets its supply. No politician can order more of it into existence. New mining adds only a small fraction each year to the stock already above ground. That is why central banks themselves hold it. As we noted in July, gold is now the second largest reserve asset in the world, ahead of the euro.

The European Central Bank's figures make the point clearly. At the end of 2024 gold made up about 20% of global official reserves, against 16% for the euro and 46% for the dollar. Central banks now hold around 36,000 tonnes, close to the peak of roughly 38,000 tonnes they held in the mid-1960s.

What it means for British savers

The pound is not immune. Sterling is priced against the dollar every second of the day. Decisions made in Washington flow through to British interest rates, inflation and savings. A saver holding only cash is relying on the restraint of central banks on both sides of the Atlantic.

Holding some wealth in gold means part of it does not rely on anyone's restraint. UK legal tender gold coins such as the Britannia and the Sovereign carry a further benefit: gains on them are exempt from Capital Gains Tax for UK residents.

Someone will always have a hand on the printing press. No one has a hand on the supply of gold.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.