Economic Theory better informs Public Policy for the Economy

There are many responsibilities of government in the United States that have important economic components and effects upon all residents of America.  None are more important than the only economic power assigned by the Constitution to the federal government, “To coin Money, regulate the Value thereof, and of foreign Coin;” Article I, Section 8, Clause 5.  From the beginning, the Congress was over its head with respect to understanding how to regulate the value of money; they might have been more equal to the task if they were to regulate surgery, for there was at least one physician, Benjamin Rush, who would become known as the first practitioner of American psychiatry.  From the time of the first Congress in 1790, there was no basis for Congress to “regulate the value of money” nor was there in any other country.  It was understood that gold and silver represented the value of money, and governments had as their objective to obtain as much gold and silver as could be produced by mining, plunder and trade with nations paying with gold or silver (this concept was called “mercantilism”).  A person that discovered gold or silver could bring it to the government and have it minted into coins bearing the government’s denomination of its value in gold.  This increased money in circulation.  Buying goods of foreign origin (imports) resulted in losses of money. Spain had the largest store of gold and silver from taking it from their South American colonies; England and the Dutch had the next largest store of gold and silver from trade and plundering Spanish ships returning to Spain with cargos of gold.  In the United States, between 1785 and 1975 there were 43 recessions recorded.  There have been only six thereafter, including the current Covid-19 recession.  Thus one every 4.4 years prior to 1976, and after 1976 there were six, one for every 7.7 years, the last not being a monetary recession.  Most of these instances were called “panics” as sudden impulses of the population to load up on gold and silver.  Think of it like the game of musical chairs, and the music stops suddenly.  

What accounts for the difference in the two periods of time – before 1976 and afterwards?  The dividing line is my estimate of the period when monetary theory was explained and proven by Milton Friedman and Anna Schwartz in their 800 page book, A Monetary History of the United States 1857-1960, and adding approximately a decade for it to become widely accepted among economists, and Friedman’s Nobel Prize awarded in 1976.  It completely changed economic thinking.  Beforehand it was entirely understood on the basis of John M. Keynes’ monetary thesis, The General Theory of Employment, Interest and Money (1936).  Part of the thesis was that people don’t have strong stable preferences about how much money they hold.  It turns out that economists did not recognize the money supply was decreasing throughout the United States during the Great Depression (1929 through 1940) because they did not believe it made a difference.  The Friedman/Schwartz tome confirmed that, “Inflation and deflation are everywhere and always a monetary phenomenon.”  Inflation and deflation have roots in too large an increase in money supply (inflation) and too large a decrease (deflation) are what starts a “panic” and thereafter economic activity contracts until the crisis passes.  Earlier panics at the turn of the century were often diminished by New York banks, particularly under JP Morgan’s leadership with other banks to restore liquidity of money (He was acting in self-interest too).  Friedman and Schwartz explained why that worked, and other matters as well.  For instance most people maintain cash at a fixed amount, and also they spend on the basis of their perceived permanent earnings. These finding had not permeated the new Federal Reserve System (established 1913) until much later.  By the time of the 2008 Great Recession knowledge was supplied by Federal Reserve Chairman, Benjamin Bernanke, who had studied Friedman/Schwartz in his university training.  He acknowledged Friedman specifically for his being able to know how to combat the problem he was charged with solving.  In a Democracy, only a government policy of stable prices will level the playing field for both creditors and debtors alike.  Almost everyone is one or the other at any point in time.  There is no need today for the President or Congress to steer Federal Reserve policy, and to attempt to do so would be dangerous.  The Fed is actually independent from the federal government except to have the President choose the Chairman and Board of Governors, who are thereafter confirmed by the Senate.  The Fed receives no appropriations from Congress, and has its own revenues, mostly from its portfolio of United States Treasury bonds, and investments needed to regulate money’s value.  

Members of Congress and the White House staff have professional economic advice available from permanent staff for Congress, and in the White House the President chooses an economics team.  There is thus no reason the 435 members of Congress and the President and Vice President are not better economically informed than they appear to be when questioned by the media.  In fact no president and very few of Congress’ members during the last twenty-five years have an earned degree in economics.  The heart of the problem is that just because economic theory informs a particular approach to policy does not mean it will appeal to the White House or individual members of Congress.  What they want is based on an entirely different frame of reference.  Too many of our representatives are rooted to their own individual best interests and not to what is good for the nation.  What is good for the nation is a stable money supply, where money is defined as coins, currency, bank checking and savings accounts, money market funds, and possibly a few other instruments having immediate conversion.  Democracy depends on stable money for the economy, and the betterment of all. November 2, 2020