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However, Ramaswamy is correct to associate the 1920s boom with his proposal for a stable price level. In 1927, Benjamin Strong, governor of the Federal Reserve Bank of New York, confirmed that the Federal Reserve System had been directed toward the use of open market operations and other devices to stabilize the price level as much as possible since 1921. Rothbard summarizes: “We may conclude that the Federal Reserve authorities, in promulgating their inflationary policies, . . . were also guided—or rather misguided—by the fashionable economic theory of a stable price level as the goal of monetary manipulation.”
It may be useful to contrast the 1920s with the 1880s, when the US economy had the highest rate of growth of any decade. Reflecting economic expectations, prices fell, with the US economy growing at its fastest rate in history. Also congruent with the natural course of the market, capital investment led to a corresponding increase in real wages. At the time, the US had just adopted the classical gold standard following the resumption of specie payments in 1879 and had been without a central bank since 1836.
At this point, we may consider the implications of the semantic change of inflation from an increase in the quantity of money to rising prices. The continued failure to identify the 1920s as an inflationary boom is one such consequence of this semantic change. Rothbard explains:
The designation of the 1920s as an inflationary boom may trouble those who think of inflation as a rise in prices. Prices generally remained stable and even fell slightly over the period. But we must realize that two great forces were at work on prices during the 1920s—the monetary inflation which propelled prices upward and the increase in productivity which lowered costs and prices. In a purely free-market society, increasing productivity will increase the supply of goods and lower costs and prices, spreading the fruits of a higher standard of living to all consumers. But this tendency was offset by the monetary inflation which served to stabilize prices.
Just as stabilizationists conclude that there is no inflation based on a stable price level, the Fed can determine that there’s no inflationary threat as long as price inflation remains around their 2 percent target. In this way, the semantic change has helped facilitate monetary policy.
Elsewhere, Ramaswamy refers to the Federal Open Market Committee as a dozen central planners. Notably, Ron DeSantis, who has also since ended his campaign, echoed Ramaswamy by endorsing a stable price level with a similar conflicting message: “The Fed should focus on stable prices. They are not an economic central planner for the American people.” However, the manipulation of the price level and the management of the currency by the central bank is a particularly destructive form of central planning. It is thus not surprising that the stable money movement led by economist Irving Fisher in the early part of the twentieth century was supported by progressives and socialists.
By 1921, Fisher had established the Stable Money League, and supporters would eventually include Norman Thomas, perennial presidential candidate of the Socialist Party, and Samuel Gompers, president of the American Federation of Labor. John Maynard Keynes was another influential economist to propose a stabilized price level in his book A Tract on Monetary Reform, published in 1923.
Ramaswamy concludes by saying the Fed “should refocus to avoid repeating its past mistakes.” However, as the original sin of the Great Depression, the Fed’s policy of a stable price level in the 1920s must rank among its greatest mistakes.
The unprecedented expansion and measures by the Fed in the wake of the coronavirus panic ensures that monetary policy will once again assume greater urgency in the public mind. Better answers will be required than the stable price level, which differs from the current Fed policy only in degree. Both policies are inherently inflationary with a target price level set by the Fed. It might be an objection that a stable price level would be less inflationary than the Fed’s target of 2 percent price inflation. However, the emphasis on a stable price level can be more insidious because it can further mask an inflationary threat, especially to its exponents. J. M. Keynes hailed “the successful management of the dollar by the Federal Reserve Board from 1923 to 1928” as a “triumph” for currency management and continued his praise several years into the depression. Likewise, Fisher infamously stated that stock prices looked to have reached a permanently high plateau nine days before the crash.
What’s needed is a paradigm change away from the notion of monetary policy, which accepts a monetary system dictated by the central bank and politicians. Only the Austrian School framework and a return to the historic definition of inflation can offer a causal explanation of business cycles and solutions to our monetary issues.
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