Don’t trust politicians with the money supply
St. Joseph News-Press

In Venezuela, the government lopped five zeros off its currency, the bolivar, to avoid the embarrassment of locals hauling banknotes in wheelbarrows to make basic purchases. At one point, a raw chicken went for 14.6 million bolivars in a country where runaway inflation followed years of printing money to cover budget deficits.

Venezuela’s experience provides an extreme example of what happens when a nation’s money supply becomes degraded. Closer to home, no wheelbarrows were needed, but today’s millennials could ask their parents what it was like buying a chicken, let alone a house or a car, with inflation hitting 14 percent in 1980.

These anecdotes come to mind following comments from U.S. Sen. Jerry Moran, a Republican from Kansas, calling for the independence of the U.S. central bank. Moran, a member of the Senate Banking, Housing and Urban Affairs Committee, appeared on cable business programs last week advocating for the U.S. Federal Reserve’s ability to set monetary policy free of political interference.

His remarks come after President Donald Trump criticized to Fed for moving too fast to raise interest rates, possibly putting a damper on economic growth. “It is important that decisions be made not at the whim of a person,” the Kansan said.

Trump isn’t the first president to express annoyance at the political fallout of the Federal Reserve’s monetary policy. President George H.W. Bush complained that his re-election bid was doomed when the Fed didn’t move fast enough to cut interest rates in the early 1990s.

In this case, Moran is right. The Fed, which operates under a dual mandate to pursue full employment and price stability, should continue to operate free from political pressure.

This is not because independence is good or bad for Trump, but because politicians — Democrats and Republicans — have made a hash of fiscal policy for decades now. After running up a $779 billion budget deficit last year, do we really want any Congress or any president to get their hands on the currency printing press?

One could engage in wonkish debate on full employment and argue that the Fed should pull back on rate increases. But there’s no debating Congress and the president repeatedly choose political expedience over tough choices when it comes to taxing and spending, in effect passing the buck to future generations.

A similar lack of discipline with the money supply would lead to the kind of price increases that Americans haven’t experienced since Moran was in law school and Trump was just a real estate tycoon.

Economist Milton Freidman sums up the impact of rising prices for those who don’t remember: “Inflation is taxation without legislation.”

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