> It's impossible for a micro group of human beings to know just
> how much currency a legal jurisdiction needs. 'The Road to Serfdom'
> explains this quite well. Because a treasury and a central bank
> are political institutions, they always err on the side of too much
> in the favor of the government that they work for, untill the
> currency is worthless or the government is embarressed into changing
> to a new currency.

Though this sort of 'error' hasn't happened yet with US currency in the
recent past, the US has had periods of serious inflation, (in the 1970's),
and serious deflation, (in the 1930's), precisely because of the decisions
of the central bank. During the 1910's and 1920's, the central bank was not
able to keep the currency stable with the supply of gold which backed it,
(and they were required to do this). The cause was an inflated money supply
which found its way into the stock market and into production. When stocks
collapsed, it became apparent that a currency devaluation was needed; and
people started hoarding gold, in exchange for dollar bills. This led
President Roosevelt to issue an executive order making it illegal for
citizens to own gold, and requiring them to turn in their gold to the US
Government. Even though the Federal Reserve raised interest rates, cut-off
new credit, and started reeling in the money supply, the net result was that
about 70% more money existed than the available supply of gold and the US
dollar was devalued for the first time since the country's inception, (I
believe), from around $20 an ounce to $35 an ounce. This was all the result
of 20 years of easy credit, promoted by the Federal Reserve.

Then, in the 1970's with the dollar floating in the world market, the
Federal Reserve, again, failed to keep interest rates high enough to control
inflation, which resulted in periods of extreme inflation, including
double-digit inflation, from 1973 - 1979. Things didn't calm down until Paul
Volker was appointed Chairman of the Federal Reserve, (by Jimmy Carter). He
understood the relationship between inflation and interest rates; he raised
interest rates to near 20%, until inflation dropped, and the problem has not
appeared since. However, the decision to increase interest rates, (to
control inflation), or to lower interest rates, (to encourage economic
growth), ALWAYS has a political element, and the time will come again when
it becomes politically difficult to raise interest rates to control
inflation, and this could easily cause the problems in the 1970's to return

Politics and Money have never mixed for long.


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