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We need a dose of inflation
William Jennings Bryan was a crank, but he understood in the 1890s that deflation is more dangerous than cheap money. It still is
 
David Frum
David Frum

Epitaph for the Obama administration: too much Franklin Roosevelt, not enough William Jennings Bryan.  

The president’s economic recovery plan has emphasized New Deal style stimulus spending, especially on big infrastructure projects. Just this week the president returned to this favorite subject, proposing $50 billion in new spending on roads, railways and runways. 

The results are … well you (and two-score soon to be retired Democratic Congress members) know the results. 

Back in the 1890s, William Jennings Bryan had another idea. After the crash of 1893, money had become scarce. Debts had become more burdensome, incomes to pay the debts had shriveled. Bryan’s idea: why not create more money? 

History has tended to dismiss Bryan as a reactionary crank, which to some degree he was. But he also had hold of an important truth, developed into a powerful theory by monetary economists led by Milton Friedman: When you’re in a deflation, the only way to escape is by deliberate inflation.  In Bryan’s day, inflation was created by coining silver ingots into silver dollars. In our day, it’s created via the operations of the Federal Reserve. 

In 2008 and 2009, the Federal Reserve operated on an epic scale. The Fed bought a trillion dollars’ worth of mortgage-backed securities. To pay for those securities, the Fed created a trillion dollars worth of cash money – money injected into banks and then (supposedly) through the banks into the general economy.  

That supposedly is the tricky part. The Fed has to rely on the privately owned banks to circulate money through the economy – and the banks can only circulate if individuals and companies want to borrow. Right now, nobody with any credit-worthiness is in the mood to borrow. Newly created money sits (metaphorically) in the vaults of the banks, awaiting customers who never come. 

But it is also true that in 2010, the Fed reduced its operations. At the beginning of 2010, it owned a little over $2 trillion worth of securities, and it owns a little over $2 trillion worth of securities today. 

Rather than fighting deflation, the Fed has called quits, apparently haunted by anxiety that it has stoked inflation. Yet there is no inflation to be found anywhere except the ad copy of cable television advertisements for gold coins. House prices continue to tumble, wage increases seem the product of a bygone era, as out-dated as legwarmers. 

Yet – as Bryan argued in 1896 – inflation is what we need. In an inflation, debts gradually melt, and depressed assets like houses begin to recover their value relative to cash. 

Defenders of the administration argue that there is nothing more that the Federal Reserve can do -- that it has already cut interest rates to zero, that monetary policy is exhausted. But there’s always more that monetary policy can do! As Milton Friedman famously proposed back in 1968, when all else fails, the monetary authorities can print money, load it into helicopters, and drop cash over the landscape. That’s stimulating! 

But instead we get presidential exhortations for yet another six-year program of government cement-mixing.  

We’re not going to pave our way out of this crisis. The greatest debt crisis since World War II can be resolved only by resolving the debt problem. There’s a hard way to do it: stand by until enough credits have defaulted to lower the overall debt level. And there’s an easier way: act so that all credits shrink a little. Why not do it the easier way? Bryan may have been a Prohibitionist, a Creationist, and more than a little of a mountebank – but he got this one right.

 

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