Baltimore's Plight Reveals the Comical Absurdity of 'Market Monetarism'

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While central planning has historically been associated with the American left, and with failed socialist experiments outside the U.S., it's most recently revealed itself on the American right. The movement isn't large or growing, but there's a sliver of the right that's fallen in love with its own version of central economic control. The members of this nascent group call themselves ‘market monetarists.'

‘Market monetarists' believe that economic growth can be managed by the Federal Reserve. Convinced that the U.S. central bank can control the supply of dollars in the U.S., they're of the view that a consistent monetary rule related to the Fed's management of dollar supply will gift the economy with predictable levels of GDP growth. Who cares that economic advancement would be stunted assuming the Fed actually could put the U.S. economy on the monetarist version of Prozac, and who cares that GDP is an unreliable creation of Keynesian planners normally associated with the left? 'Market monetarists' believe the Fed can achieve the alleged nirvana that is planned GDP growth and national income through money supply targets set for the central bank by members of the right who've caught the central planning bug.

At this point mildly sentient readers probably think this discussion of ‘market monetarism' is a joke, or some kind of April Fool's hoax. Sadly it isn't. April 1 is in the rear-view mirror. The ‘market monetarists' are real, and to prove that they believe what they say, it's best now to reveal the thinking behind this neo-religion through the opining of some of its actual members. Names of the planners are unimportant, particularly since the revival of a theory that failed impressively once before (1979-82) will soon enough collapse of its numerous contradictions.

Most recently, a prominent member of the group placed an op-ed in a national newspaper. Here's a portion of what was written about how the Fed should operate:

Instead of trying to target either inflation or employment, the Fed ought to target the economy's overall level of spending or its statistical counterpart, NGDP, which stands for the dollar value of nominal gross domestic product.

A single NGDP mandate would serve just as well as a single inflation mandate in making monetary policy less arbitrary and more predictable.

Why should the Fed target spending rather than inflation? Because the Fed can better avoid, or at least dampen, the business cycle by stabilizing spending than by stabilizing inflation.

Excessively rapid spending sponsors booms by swelling business revenues and profits - or does so until costs catch up, driving up interest rates and turning boom into bust. Spending downturns, in contrast, bring immediate misery by causing overall business revenues to fall short of expenditures.

It's as though the 20th century never happened during which central planning proved not only a failure, but a tragically bloody one. William F. Buckley once joked he'd rather be ruled by the first 200 names in the Boston phone book than by the faculties of Harvard and MIT. ‘Market monetarists' don't hail from either Cambridge institution of higher learning, but they're generally from academia, and like their more prestigious peers, they too are convinced economic growth, business revenues and private spending can be managed with an auto-pilot they've designed. Just to confirm for the incredulous that these otherwise smart people believe what they write, here's another passage written by another ‘market monetarist' for a major online media company:

In targeting the level of nominal spending, the Fed would aim to ensure that total dollars spent throughout the economy grow at (say) 5 percent a year. In a year where the economy grew by 3 percent in real terms and the target was hit, inflation would run at 2 percent. The Fed would also commit to making up for undershooting that 5 percent target in one year by overshooting it the next, and vice-versa.

The problem for these doubtless well-intentioned theorists is that even if readers were to take the leap of faith and assume that the 20th century failed not because of central planning, but because the wrong planners were in charge, ‘market monetarism' would still fail impressively even if overseen by the best and brightest promoters of the monetarist central plan. To see why, we need only overlay ‘market monetarism' on the desperate economic situation in much of Baltimore.

In fairness to the neo-monetarists, they would all agree that Baltimore has problems that extend well beyond money supply. Still, if money supply planning is the alleged fix for the broad U.S. economy, presumably it would have a positive impact locally. Importantly, monetarists like the idea of local monetary policy. That's one reason they don't like the euro. As a conservative publication known to be sympathetic to ‘market monetarism' put it not long ago:

"A common currency for the European Union was always a bad idea, because it required a common monetary policy for very different economies."

Missed by the publication is that a common dollar has worked out pretty well for the U.S. despite state economies that don't much resemble one another, but that's a digression. Monetarists like the idea of monetary policy tailored to more local needs despite the very notion turning the genius of Adam Smith ("the sole purpose of money is to circulate consumable goods") on its head. In that case, it's worth once again applying the ‘market monetarist' theory to Baltimore. If reasonable, it could at least improve the outlook there.

Specifically, ‘market monetarists' seek consistent money supply growth, and then when the economy is weak, a bigger increase in the supply of money to boost GDP. Since it all sounds so strange and unreal, it's worthwhile to unearth yet another passage by a prominent monetarist academic to confirm the "economy is weak, just add money" characterization laid out in this piece. Writing about presumed Fed errors of a more recent vintage, those mistakes allegedly the result of the Fed failing to use the monetarist model, the academic wrote:

The Fed could have avoided these mistakes, and done better by savers, had it targeted the growth of nominal spending. It would have announced that it intended to keep nominal spending - that is, the total amount of dollars being spent each year on consumption and investment - growing at a rate of 4.5 percent or so, that it would conduct sales and purchases to stick to that target, and that overshooting the goal in one year would be corrected by undershooting it the next (and vice versa).

Of course, the problem is that money supply increases cannot be forced or planned. Monetarists put the cart before the horse. This may explain their confusion.

Contrary to the models they've created whereby the amount of dollars in an economy can be planned, money supply in a city, state, or even a country is demand determined. More specifically, production is money demand. When the computer manufacturer sells computers, he is demanding money. In reality, this manufacturer is demanding food, wine, clothing, cars and shelter in return for his computers, but since money is the accepted medium of exchange that can command consumer goods, the computer manufacturer takes in money in exchange for his production.

The above well in mind, readers can no doubt see why attempts to control, or expand the supply of money would fail in a place like Baltimore. It would similarly fail in Detroit, Stockton and Lima, Peru.  As evidenced by Baltimore's weak economy, there's very little production that would attract money in return. Money supply is once again demand determined. Money supply is high in Silicon Valley precisely because production is, just as there's no shortage of the facilitator of the exchange of real wealth (money) in places like New York, Hong Kong and Shanghai. Where there's valuable economic activity, there's lots of money. It's kind of simple. Money supply once again can't be forced.

To the above, ‘market monetarists' might respond that the Fed could literally drop money out of helicopters to increase the supply of dollars in Baltimore, thus increasing consumption-driven GDP. Yes, in a sense. But even then, one's demand is a function of one's supply. It's impossible to get around Say's Law. So while the Fed could increase demand in the poorest parts of Baltimore by virtue of showering the city with dollars, in many parts of town there would still be very little to buy. In order to consume, many in Baltimore would leave the city altogether. The supply of money would leave with them. Producers tend to congregate near other producers.

But what if Baltimore's citizens were to deposite every dollar dropped from the sky in local banks? Even then, Baltimore's "money supply" would very quickly fall back to the levels that prevailed before the drop. It would because with production low in the city, not to mention that the riots have made investment in future production there somewhat perilous, money banked in Baltimore would quickly be lent well outside the city, out of the state of Maryland, and perhaps even outside the U.S.

It can't be repeated enough that production is money demand, and is thus the driver of money supply. Money supply shrank in the 1930s not because the Fed decreased it (if it had, alternative sources of money would have quickly revealed themselves), but because the federal government erected massive tax, regulatory, and trade barriers to production. All that, plus FDR's devaluation of the dollar from 1/20th of an ounce of gold to 1/35th of an ounce in 1933 further put a damper on the very investment that powers new production. It's forgotten by economists today, but when investors invest they're tautologically buying future dollar income streams.

Back to Baltimore, profitable production and attractive investment opportunities that foretell future profitable production are the only realistic forms of money demand that could boost "money supply." But with production low in Baltimore alongside not very appealing investment opportunities there, no amount of central bank string pushing could increase Baltimore's money supply.

The obvious problem for ‘market monetarists' is that their planning of income, business revenues and spending is rooted in the Fed being able to do what it quite simply cannot. The same goes for the national economy. Dollars that flood banks thanks to Fed purchases of bonds don't necessarily stay in the U.S. Figure 2/3rds of all dollars have a foreign address at least in the banking sense, but often in the global sense too.

Money that is exchangeable for real resources (credit) ultimately migrates to where vibrant production is, or it goes to where the potential for production is greatest.

‘Market monetarism' presumes that the location of profitable production can be chosen and planned by central bankers, who will also plan income, revenues and total growth. One can only hope that what so plainly fails in theory is never allowed to fail in practice. How insanely cruel if future generations have to relive the central-planning horrors of the 20th century.


John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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