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ByJeffrey Frankel

The Weekly Standard is promoting a letter to Fed Chairman Ben Bernanke that urges a reversal of its policy of QE2, its new round of monetary easing. The letter is signed by a list of conservatives, most of whom are well-known Republican economists, some associated with political candidates. Apparently the driving force is David Malpass, who was an official in the Reagan Treasury, and he is taking out newspaper ads later this week. This follows similar attacks on the Fed by politicians Sarah Palin, Mike Pence, and Paul Ryan

If the National Journal and Wall Street Journal are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on very shaky ground. I will leave it to others to make the important point of substance: the risk of excessive inflation is low now compared to the risk of an alarming Japan-style deflation, with the economy having only begun to recover from its nadir of early 2009. Or to acknowledge that Quantitative Easing is only a second best policy response to high unemployment. (Fiscal policy would be much more likely to succeed at this task, if it were not for the constraints in Congress.)

I will, rather, respond to the political component of the National Journal’s question by pointing out some insufficiently understood history:

  1. Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to address with wage-price controls. Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system.
  2. Republican Presidents Ronald Reagan and George H.W. Bush tried aggressively to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy, especially in election years.  This is documented in Bob Woodward’s 2000 book Maestro. The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually declined to be reappointed, prompting James Baker to exult “We got the son of a bitch!” (p.24).
  3. Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents in the last four decades who have refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into inflationary monetary policy.  
  4. Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash.

Thus if the other party were to accuse Democrats of pursuing excessively inflationary monetary policy, it would be akin to them accusing Democrats of pursuing excessively expansionary fiscal policy. Perhaps such accusations will strike some who don’t pay close attention as superficially plausible, even after all these years. But they nonetheless fly in the face of history.  Another case of the pot calling the kettle “red.” Yes, I know, the usual saying is about the color black.  But red is the color of deficits, overheating, … and Republicans.

I document the history in “Responding to Crises,”Cato Journal 27, 2007.