We take for granted the government’s ability to print money and to provide credit to banks and other third parties. Those powers evolved from political struggles nearly 200 years ago, and that episode in our history carries a message for those who argue against an independent Fed or for policies such as MMT to fight inequality.
Judy Shelton, whom President Trump has nominated to serve as a Federal Reserve governor, has written about the virtues of the 19th century gold standard and expressed her eagerness to join the central bank in managing the nation’s money supply. That would have been an unacceptable position for anyone supporting the Constitution’s specie standard for money in the 1830s.
The independence of the Federal Reserve Bank is not a new issue. The role of the central bank in regulating credit and the money supply goes back at least 200 years, to the administration of Andrew Jackson.
Foreign trade ends up being cleared through international money – a currency that the world accepts as final payment, even in places where it is not legal tender.
The growth of personal savings and investment in China of the last few years has a parallel in the boom in the “old Northwest” of the U.S. following the War of 1812. The parallel carries a fateful lesson for the future of China.
Article I, section 8 of the Constitution states that Congress “shall have the power…to coin money, regulate the value thereof, and of foreign coin.” Let’s look at the historical origin of this clause.
The recent revival of import tariffs by the U.S. has created a puzzle. Why, in the midst of this “trade war,” has China not used the weakness in its exchange rate to offset the effects of President Trump’s tariffs?
Since the financial crisis, households have de-levered while federal debt has marched upwards. But the net cost of the combined debt, measured as the “cost of carry,” is at a level that historically signals an oncoming recession.
We take for granted the Federal Reserve’s unique powers that, like that of other central banks, include being the sole issuer of currency. But those powers were not always so, and their origin traces to the foresight of Alexander Hamilton.
Central banks use a common set of policy tools to achieve their inflation and employment goals – regulating the money supply and interest rates, and occasionally implementing measures such as quantitative easing. That toolkit can trace its origins to the intellectual contributions of David Ricardo, one of the earliest opponents of a gold standard.
If the debt of the public or private sector were viewed the same way we measure that of a corporation, no alarms would be sounded. Given its low cost of carry, that debt is unobjectionable.
Critics of the federal deficit should recognize the imperfect nature of the debt-to-GDP ratio. By a more reasonable measure, our fiscal indebtedness is not high by historical standards.