avatar

An Introduction to US Monetary Policy

by Steve Horwitz April 2nd, 2013 9:48 am

That's the title of a new paper of mine released today by the Mercatus Center. It is intended to de-mystify monetary policy in a way that the layperson can understand.  It might be useful in the classroom as well.  Here's the abstract:

This study examines the history and operation of the Federal Reserve System (“the Fed”). It explores the Fed’s origins in American economic history and emphasizes the political compromises that produced it. It seeks to provide an accessible explanation of how the Fed attempts to change the money supply and of the structural challenges it faces as it attempts to get the money supply correct.. The paper uses the framework thereby developed to examine recent monetary policy, including quantitative easing. Inflation and deflation result when the Fed creates too much or too little money, and the study discusses the causes and costs of both in some detail. The paper concludes with an examination of alternatives to central banking, including the gold standard and a system of competition in money production known as free banking.

2 Responses to “An Introduction to US Monetary Policy”

  1. avatar Rick says:

    "One argument that proponents of central banks often make is that only central banks have the tools to step into macroeconomic and financial crises and solve them, and that without central banks, we would be prone to severe and lengthy crises and depressions. The problem with this argument is that it ignores the possibility that such crises are almost always *caused* by central banks. So when central banks argue that only they can solve such problems, they may be like an arsonist disguised as a firefighter who claims only he can put out the fires he started.23"

    Reminded me of Fire Marshall Bill from "In Living Color:"
    http://www.youtube.com/watch?v=PlLPogmB8M8

  2. avatar joe bongiovanni says:

    Thanks for a very decent presentation of the background and present dilemmas of our monetary system.
    One point I want to ask about is this.

    “In 1971, President Nixon decided to end redemptions in gold for foreign central banks (“close the gold window”) in order to preserve the gold stock………. Until Nixon’s action, the Fed at least had to consider the cost of losing gold when foreign central banks redeemed Federal Reserve notes. “

    Perhaps a colloquialism. But wasn’t the Bretton Woods’ gold-exchange settlement process related to the current account balances held by foreign banks/corporations, expressed of course in terms of $US, but in no way related to the actual exchange of the paper currency? I always thought that true.

    Second, to perhaps add another consideration. I do so as a money system reform advocate.
    Except for the ‘free-banking’ option, the other options are not really regime changers. They are more about adding or changing policy options within the existing structure.

    So what about the Kucinich proposal. (HR 2990)
    http://www.govtrack.us/congress/bills/112/hr2990/text

    While the policy option considered here is GDP-targeting, what it is really about is having an informed, knowledge-based point of reference – also known as a wild-ass-guess - for the policy-free potential level for the GDP, and enabling that GDP-potential to become reality.
    Once everyone is working(nominally) at general price stability, policy mechanisms would need to change, perhaps reverse to braking the GDP to its workable inflation/employment balance.

    It’s not about banks creating the credit. That is banker work. It’s about creating the balances that ensure an adequate supply of exchange media, so the banks can make all the good loans. It’s why Friedman stood by his “Fiscal and Monetary Framework” proposal and his “Program for Monetary Stability” proposal for the many years after his ‘pushing on the interest rate string to control the money supply’ thinking had passed.
    He wanted a transmission mechanism from policy objective to outcome in terms of a stable money supply. So do we.
    Kucinich pretty much mimics the Friedman ideas on controlling the supply of money.
    What do you think?
    Thanks.

Leave a Reply

You must be logged in to post a comment. Login now.