NICOMAQUE

moi: :/ à bas les cigarettes :/

What is Monetary Policy?

It’s concerned fundamentally with what happens to the quantity of money. What’s money?  There’s no again no natural definition of money.  The first thing, money is whatever you use to engage in transactions, whatever it is that people are willing to accept; not because they want it, but because they know that somebody else will accept it in return for something they want. 

And you know, in the history of the world you can hardly name a commodity that has not been used as money at one time or another.  There’s an island in the Pacific which uses great big stones as money–the island of Yap.  There are parts of Africa and India which for many centuries used used cowry shells, little shells that you pick up on the beach, as money.  The colonies–Virginia, North Carolina, those southern colonies–for many years used tobacco as money.  But of course the most the thing that has mostly been used as money historically have been silver and gold, as metals.  But we’ve gotten beyond that and now we use pieces of paper as money. The pieces of paper in your pocket–the equivalent of those the deposits you have in your bank on what you think you can write checks and other people will accept your checks, or you can go down to an ATM and withdraw some cash. So, that’s a sum of the paper you carry around your pocket. 

The question is who determines how much money there is? 

And the answer is, in our present system, there are nineteen people who sit around a table in Washington once every two weeks who have the power, the unlimited power, to double the quantity of money over the next year or to cut it in half over the next year.  Those nineteen people are the seven members of the Federal Reserve Board and the twelve presidents of the Federal Reserve Banks, of the Regional Federal Reserve Banks.  Only five of those twelve presidents have a vote on that Open Market Committee anytime, but all twelve attend every meeting and influence the action that occurs.  They have the unquestioned power to do this.  And it was the way they exercised that power during the Great Depression that was responsible for the depths of the depression.  It was the way they exercised that power during the 1970′s that was responsible for the inflation during the 1970s.  And is fundamentally responsible for the Savings and Loan debacle. So how they exercise that power makes an enormous amount of difference.  And in my opinion–I shouldn’t say opinion because I spent much of my life studying this–the Federal Reserve over the whole of its existence has done much more harm than good. 

The main thing I have always argued for–and I’m not sure it’s the best way and indeed a former student of mine who suggested what I now think is a better way–is requiring him to keep the quantity of money growing at a steady and relatively slow rate.  Now, that’s they’ve departed from that and every single mistake is connected with the departure from that.  Almost always.  There are one or two occasions on which the departure was justified, but most of the time it has not been. The problem is how do you get that rule in law and how do you make it accountable?  How do you make it in the self-interest to the members of the board to follow the rule?  As I say, there are various other ways that have been suggested but that’s the essential problem is to impose rules which will keep the quantity of money from either growing very rapidly or declining very rapidly. Either the one or the other is bad. If it grows too rapidly you have inflation, if it declines too rapidly you have depression.  

What we ought to aim for is a rate of growth of the money supply which gives you relatively stable prices.  They’re always shifting their rhetoric.  You have to distinguish rhetoric from substance.  They’ve often talked about paying attention to money growth, but they almost never have done so.  And that’s because they come out of a banker mentality.  And the banker mentality is to look at the Fed there’s a credit instrument and as having something to do with interest rates.  It would be too complicated for this present purpose to explain that, but it’s a major mistake in my opinion.  I believe the Fed can influence interest rates but it can’t determine them.  It can determine what the quantity of money is.  That’s the one thing it can really control and it ought to be judged on the basis of how well it does that one thing.  

It doesn’t have a positive effect on in our economic life. It eliminates a negative effect.  Fluctuations in the rate of growth of the quantity of money produce uncertainty.  They go up and prices start to go up, and no individual businessman knows whether the price rise is because his product is in more demand and he should reduce it or because there’s more money around and there’s going to be general inflation.  He will learn about that he won’t learn about that for months.  

What I think is a proper kind of a metaphor: consider listening to the radio.  The problem that bothers you is static. What matters for the economy is what happens to relative prices and relevant demands.  What you want is a system under which if people suddenly decided that they want more of one thing unless of another–they want more computers and fewer automobiles–that’s reflected in prices, relative prices.  The price of computers goes up, the price of automobiles goes down.  The producers of computers have an incentive to produce more computers the producers of automobiles have an incentive to produce fewer automobiles.  That’s what the price system is like and that’s what it’s for.  Now the effect of these fluctuations in the quantity of money is to introduce static into the signals that are coming out from the price system. It’s as if when you listen to the radio, somebody is deliberately introducing static into that thinks that you can’t hear anything very clearly. And that’s exactly what these fluctuations in the money supply don’t do.