The Federal Reserve celebrates its 100th anniversary this year. One person who is
not celebrating is Paul Moreno, professor at Hillsdale College, who provides a brief
history of the Fed and its economic impact in a recent article in the Wall Street Journal.
He reports that the central bank has increased the money supply by 25 percent
since the financial crash of 2008. And the federal government has borrowed more than $5
trillion in the last four years. Can inflation be far off? That is his concern.
He reminds us that “inflation has often been popular, especially in democracies,
since it benefits debtors, who are always more numerous than creditors. Inflation allows
debtors to repay in money that is less valuable than the money they borrowed.”
Starting with the Revolutionary War and continuing through the Civil War into
the 20th century, America has had a history of using various monetary vehicles to create
inflation, which was a benefit to the debtors rather than the creditors. Starting 100 years
ago, the Federal Reserve intervened to increase the money supply during World War I.
The central bank continued to facilitate low-interest Treasury borrowing in World War II
and the Korean War.
By the 1960s, inflationary pressures built up because of the Fed’s accommodation
of deficit spending on Lyndon Johnson’s Great Society programs and the Vietnam War.
Then came the abandonment of the gold standard and the collapse of the Bretton Woods
system of fixed exchange rates.
Fast forward to today, and inflation is certainly on the horizon. Paul Morena
observes that: “the inflationary potential of deficit financing has grown enormously over
the first Obama term. The lesson of American history is that it is difficult enough for
government to resist popular demands for inflation to relieve private debts. When the
government itself is the country’s chief debtor, resistance is all but impossible.”
If history and human nature are any predictors of the future, then we are headed
for significant inflation. I’m Kerby Anderson, and that’s my point of view.