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“On Oct. 6, 1979, the Federal Reserve embarked on a fierce campaign to restore the dollar’s value, both in terms of inflation at home and in the global currency markets. It meant extreme actions, culminating in short-term interest rates reaching the unprecedented heights of 20 percent. The U.S. economy sank into what was then the longest period of sustained 9 percent-plus unemployment since the Great Depression.After inflation was finally crushed, the economy embarked on the longest expansion ever known, interrupted only by two trivial recessions until the great credit collapse began in 2008. Since then, monetary policy has been the polar opposite.” So noted Randall Forsyth in Barron’s of Oct. 11, 2010.
Charles Evans, president of the Chicago Federal Reserve Bank, in an interview published by the Wall Street Journal on Oct. 6, 2010, saw a need for “negative interest rates” to induce households and businesses to part with savings and borrow and spend more.
V. Kurt Bellman in his “Viewpoint” of Nov. 9, 2010, went beyond the pros and cons of fiat and commodity monies and argues for the debasement of money through inflation. Despite Bellman’s claim, there is no near unanimity of the desirability of inflation. Back in the 1950s there was a group of economists led by Sumner Slichter dubbed the “limited inflationists.”1 They argued that some inflation was good for the economy and that the Federal Reserve should encourage a gradual rise in prices.
“In a hearing on Capitol Hill, his views drew a famous rebuke from Fed Chairman William McChesney Martin, but Slichter’s ideas gained currency in the 1950s and 1960s and eventually laid the groundwork for the not-so-gradual inflation of the 1970s.”2
Bellman did not state what inflation rate would be desirable. Starting in the mid-1970s the USA endured an inflation rate that was considered destructive and beginning in 1979 through the 1980s the Federal Reserve worked to reduce the inflation rate to an informal target of less than 2 percent.3
The Federal Reserve has now undertaken Quantitative Easing 2. Many agree with the Wall Street Journal that “The case for QE-2 assumes that the problem with the economy is merely a lack of money. But trillions of dollars are already sitting unused on bank and corporate balance sheets. The real problem isn’t lack of capital but a capital strike, as businesses refuse to take risks or hire new workers thanks to uncertainty over government policy, including higher taxes and regulatory burdens.”4
Joseph Stiglitz, 2001 Nobel economics prize recipient wrote an article entitled “Why Easier Money Won’t Work.”5 He argues that devaluing the dollar to spur exports won’t work as other nations will counter USA moves. “Under the gold standard, there was supposed to be automatic adjustment mechanism, as a country with a trade surplus would see an inflow of gold and an increase in prices, leading to an automatic real appreciation of its currency. It never worked as smoothly as it was supposed to, but in the modern economy with fiat money, the adjustment processes can be shortcircuited even more easily.”
He noted that QE-2 will cause equity prices to rise but said, “Nor will most Americans, burdened with debt and diminished retirement accounts, likely embark on much of a spending spree. Nor should they. Doing so would only delay the deleveraging that is necessary if we are to have sustainable growth going forward.”
Bellman makes several comments on the role of money and savings which need to be addressed. He states that “Money supply regulation is not about wealth maintenance for those holding wealth; its about encouraging economic activity and employment.”
A stable money supply, that is zero inflation, is not wealth maintenance per se as a nation’s wealth is mostly in real assets, that is properties of various sorts not its money however broadly defined.
Bellman also states, “If prices are steady or downward trending generally, and interest rates are positive, so that you get your ‘store of value’ and it actually increases over time while doing nothing to put that wealth to productive use, you’ve lost whatever small incentive that still exists to innovate and invest and take risk and create jobs.” He is implicitly discussing interest bearing cash accounts. He is wrong; if interest is being paid, then some entity is borrowing money and putting it to productive use.
Bellman argues that tying money’s value to a commodity is not a free market policy. I’ll note that the Federal Reserves current policy of artificially depressing interest rates the last several years is not a free market policy either. When the U.S.A. was on a gold exchange standard, the Fed had latitude in how much of the money supply had to be gold backed. The Federal Reserve Board had discretion to respond to economic conditions.
Bellman states, “To me, gold bugs, or ‘store of value’ ideologues, are motivated by an I’ve got mine, you’re on your own mind set that is societally dangerous.” My retort is to ask why is it wrong to wish to keep what one has honestly earned? He explicitly stated the few in government should through inflation destroy people’s savings and investments to paradoxically encourage investment. Inflation, coupled with artificially depressed interest rates as the U.S.A. now has discourages cash accounts and lost cost capital for lenders.
How is it moral or good public policy to punish those who have saved in order to provide for themselves? The poorer a nation, the less it can provide for its disabled and unlucky. There is not a fixed amount of wealth; wealth is created, that is products are created. This is best done by rewarding thrift to encourage capital formation so that people can provide for themselves through savings and investments.
Charles Schwab, founder and chairman of the Charles Schwab Corporation, has criticized the destructive effect of the Federal Reserve’s artificially low interest rates. Schwab wrote, “The Fed’s super-loose policy has driven down the security and spending power of savers, particularly those in retirement who played by the rules during their working years and now depend on the earning from their savings for a decent quality of life. As a result, savers and investors are being forced to take more risk with their mo
ney as they hunt for higher yields.”6
The argument that inducing inflation spurs economic growth is false and provides a justification for accommodation of profligate government spending. In addition to taxes and borrowing, inflation is the other method to cover government spending. Promoting inflation for economic growth is illusory and is the economic equivalent of a perpetual motion machine for the economy. I agree with former Fed chairman Martin who appeared before the Senate Finance Committee to argue against those who promoted inflation as desirable. Martin thundered, “There is no validity whatever in the idea that any inflation, once accepted, can be confined to moderate proportions.”7 Martin, who retired in 1970 was shown to be right by the disastrous inflation of the 1970s.
1. Wall St. Journal Oct. 8, 2010
2. WSJ Oct. 8, 2010
3. WSJ Oct. 6, 2010
4. WSJ Oct. 8, 2010
5. WSJ Oct. 23, 2010
6. WSJ Oct. 2, 2010
7. WSJ Oct. 8, 2010
This Viewpoint was written by Don Markay, a reader from Fargo, N.D. The opinions expressed here are not necessarily those of Numismatic News. To have your opinion considered for Viewpoint, write to David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Send e-mail to email@example.com.