Pub. 9 2021 Issue 2

Issue 2. 2021 13 The gold standard ended in 1971 when the French government began demanding the U.S. redeem dollars for gold. President Nixon responded by revoking the gold standard and closing the gold window. By then, the dollar no longer needed gold backing, leaving the French with the option of exchanging their dollars for other currencies instead. In effect, this showed that the dollar had become so well established, relative to other currencies at least, that its value was presumed and given no thought by anyone except economists at the Federal Reserve and U.S. Treasury. Dollars are now just a utility in the most successful economy in history. The value of a dollar is directly measured by the value of all the goods and services it can buy. In terms of federal fiscal policy, this evolution of priorities from balancing the budget to managing the money supply was the beginning of modern economics. The key questions today are whether enough money is f lowing through the economy to sustain it at full capacity and full employment and, conversely, whether there is too much money, which could cause inf lation. Underlying all of this is the one economic principle that has never changed. Basic economics says the healthiest economy is equally balanced between supply and demand. A drop in demand causes a recession or depression. Too much demand increases prices and causes inf lation, and inf lation can wreck an economy. A successful economic policy maintains the right balance. This transition of priorities began in the Great Depression when a few economists and businesspeople questioned the need to balance the federal budget. Utah native and First Security Bank Chairman Marriner Eccles, who became the first chairman and the “father” of the modern Federal Reserve, made his reputation in Washington initially by encouraging Congress to run a deficit to reverse the effects of the Depression. He said the main problem causing the Depression was “the velocity of money,” meaning how much and how fast money was moving through the economy. British economist John Maynard Keynes came to the same conclusion around the same time. But their model still retained the notion of a balanced budget by repaying the debt resulting from deficits with surpluses collected after the economy recovered. MET takes that a step further by considering budget balance irrelevant. The deficits in the early 1930s worked but were too small to restore the economy fully. There was a constant concern over the debts. By 1937, the federal government went back to a balanced budget and the depression quickly returned. When WWII began, the government ran considerable deficits to bring the economy up to full capacity to supply the war. By 1945, the true measure of the nation’s economic capacity was that the U.S. was producing half of all of the goods in the world. A good measure of the nation’s industrial capacity was that the U.S. Navy, seriously outnumbered in the first months of the Second World War, was bigger than the combined navies of every other nation when the war ended. The key to avoiding an economic collapse when military spending was cut after the war was enacting the GI Bill to provide returning soldiers with money to buy houses and go to college. That helped maintain overall spending by directing it to nonmilitary goods and services. Another crucial economic principle is that avoiding inf lation is essential because a healthy economy requires stable asset values. Inf lation devalues the relative buying power of currency by increasing the cost of goods and services. That benefits debtors by enabling them to pay their debts with money worth less than when they became indebted. It works fine for building equity in a house over 30 years but makes extending credit difficult or impossible when inf lation rates are volatile. That matters because credit drives most of the economy today. In the past, cash was used for all but the largest purchases, such as houses and cars. Today payment in cash is rare and credit is used for most purchases, even the most mundane. Credit has significantly expanded demand and added to the overall prosperity we have enjoyed during the postwar period. Modern economics focuses on maintaining supply chains. That is especially important because supplying goods and services The key questions today are whether enough money is flowing through the economy to sustain it at full capacity and full employment and, conversely, whether there is too much money, which could cause inflation. →

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