Since September 2007, when the British Government and the Bank of England bungled the Northern Rock affair, one government after another has sent in the boy scouts in an attempt to douse what has become an international economic wildfire. Their efforts haven’t worked. Indeed, they have often made matters worse – much worse – and the fire remains uncontained.
Heads of state continue to rush from one meeting to the next. Worryingly, they (and the army of pundits that follow them) continue to focus most of their rhetoric on whether fiscal austerity or more fiscal stimulus is the right strategy to contain the crisis and turn things around. Instead, they should be focusing on the money supply. As history shows us, money and monetary policy trumps fiscal policy.
When the monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.
In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was the most austere president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.
Since the crisis commenced in the early fall of 2007, most countries have applied huge doses of fiscal stimulus, and – with the exceptions of China, Japan, and Germany – taken contractionary “monetary” stances. How could this be? After all, central banks around the world have turned on the money pumps. Isn’t that simulative? Well, yes, it is.
But, central banks only produce what Lord Keynes referred to in 1930 as “state money”. And state money (also known as base or high-powered money) is a rather small portion of the total “money” in an economy. Even after the Fed more than tripled the supply of state money in the wake of the Lehman Brothers collapse in 2008, state money in the U.S. still accounts for only 15% of the total money in the economy.
... While the Fed's easy-money policies have not produced many jobs, they have produced a persistent, low rate of inflation that is choking the American middle class. Since the asset purchases began five years ago, the average American family has experienced rising prices and stagnant wages. The resulting decline in living standards explains why voters ranked rising prices nearly tied with unemployment as their top economic concern during the 2012 election.
... It is difficult to interpret [Jeb] Hensarling’s declaration to hold hearings on “the entirety of their hundred year history and what America has looked like since adopting a fiat currency” as anything but an intention to bring the Commission up for a vote. Hensarling promises to process vast amounts of information. The constraints on a committee hearing, and on a committee staff, cannot do such a huge topic justice. As Rep. Kevin Brady put it in his own remarks at Cato, a “brutally bipartisan” Commission — with Hensarling a Commissioner — is called for.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
The Problem of the Quantity Theory of Money
Rueff’s first work in monetary theory, Theorie des Phenomenes Monetaires (1927), was devoted partly to examining the theories put forward by Irving Fisher in The Purchasing Power of Money (1911). Rueff himself owed a large debt to Fisher, as does all of economics, for ideas like the modern understanding of income and capital. But Fisher is best remembered for his famous Equation of Exchange:
MV + M’V’ = PT
where M is the supply of money, M’ the supply of bank credit, and V and V’ referred to the “velocity of circulation” of money and bank credit, respectively.
"By means of the lawful stamp of convertibility to gold, a near-worthless paper was suffused with a monetary life of its own. It circulated in place of coins and bullion because it was even more convenient, equally divisible, and above all secured by the substance of real money. Moreover, convertible paper and deposit currencies conserved still further the scarce mineral, labor, and capital resources previously invested in the production and circulation of precious bullion or coins. One sees in the evolution of this extraordinary commercial institution of exchange that money became a unique conservator, and the effective mechanism of growth of a civilization born of scarcity."
Venezuelan President Nicolás Maduro rules by degree. His own puppet legislature is apparently not sufficient reliable. His latest decree lowered the prices of electronic appliances to populist-appealing levels.
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This cartoon cleverly presents the tension between the proponents of the classical gold standard and the prairie populists demanding "the free coinage of silver."
Image courtesy of authentichistory.com via BigThink.com
In the mouth of the "silver dog with the golden tail" is a bone, labeled Election.
The 1896 election, which the gold standard...