Tuesday, January 13, 2015

Yes, the Federal Reserve has enormous power over who is president


The arc of the political universe is long, but it bends towards monetary policy.

That's the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. That's why every big ideological turning point—1896, 1920, 1932, 1980, and maybe 2008—has come after a big monetary shock.

Think about it this way: Bad monetary policy means a bad economy, which gives power back to the party that didn't have it before. And so long as the monetary problem gets fixed, the economy will too, and the new government's policies will, whatever their merits, get the credit. That's how ideology changes.

In 1896, for example, Republicans completed their transformation from being the anti-slavery party to the anti-inflation one. Back then, the U.S. was on the gold standard, but there wasn't enough gold. Miners had found so little of it that global prices were falling, which was particularly bad news for anyone who'd borrowed money. That's because wages fall if prices do, so debts that don't become harder to pay back. The result was two decades of slower-than-it-should-have-been growth where the economy was in recession more often than not.

Democrats, for their part, finally came up with a solution: stop crucifying mankind on a cross of gold, and use silver as money, too. They were four years too late, though. Gold discoveries in South Africa in 1896 and the Yukon in 1898 made the gold standard sustainable just in time for the Republicans, who had become the party of the financial elite that stood to lose a lot of money from inflation, to rally to its defense. Wall Street threw more money, as a percent of gross domestic product, into defeating the pro-silver Democrats than has been spent in any presidential election before or since. And it worked. Republicans won, the gold standard survived, and a new old era of conservative politics, of balanced budgets and low inflation, was ushered in.

Well, at least until World War I. That's because Republicans agreed on fiscal and financial policy, but not on regulation. That split let Woodrow Wilson win a three-way race in 1912, and, despite getting reelected on the slogan that "he kept us out of war," he didn't in 1917. Now, gold had already been pouring into the U.S., fueling inflation, as people moved it out of Europe, but once we joined the Allies, we also partially suspended the gold standard by banning gold exports.

[More from source of above and picture]

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