We Can Take Monetary Policy Out of the Hands of Technocrats

Defenders of the Federal Reserve often argue that we should just let the bank “do its job.” But a recent book shows that democratic forces have challenged this sharp separation between politics and economics throughout America’s history.

The Populist Convention at Columbus, Nebraska, July 15, 1890. (Solomon D. Butcher / Library of Congress via Wikimedia Commons)

The US economic elite is worried about populism — again. After an initial wave of hand-wringing followed the ascent of Bernie Sanders and Donald Trump in national politics, recent inflation has rekindled fears of the uninformed masses intruding into economists’ rarefied technocratic domain.

Especially troubling to economists has been the idea that addressing inflation requires the federal government — and not just the Federal Reserve — to act. As inflation reached a crescendo in late 2021 and early 2022, progressive politicians began to focus on corporate profiteering as a significant driver of price hikes, proposing taxes on windfall profits for oil companies and suggesting that antitrust enforcement might be necessary to break the monopolistic pricing power of large corporations.

Economists responded in force. Larry Summers grumbled that this kind of “hipster antitrust” push was driven more by “a general feeling of hostility and outrage toward business” than by “facts and economic science.” Nobel Laureate Robert Shiller likewise warned against a populist vision of inflation as “an indicator of a cycle of greed and inhumanity, as a conspiracy to rob [the public] of their buying power.” The US public, Shiller counseled, should calm down and “let the Fed do its job.”

A year later, it has become increasingly clear that populist anger toward corporate profiteers has been justified. Officials at major investment banks, the European Central Bank, and even the Fed itself have conceded that large firms opportunistically expanding profit margins is a major driver of ongoing inflation. (Some have dubbed this “excuseflation,” highlighting how inflation narratives are exploited as cover for squeezing consumers.) Real wages are actually falling as a result.

And yet, much of the economic mainstream is still fixated on nominal wage growth and a tight labor market as the primary economic problems. Both Larry Summers and his Harvard colleague Jason Furman persist in calling for monetary tightening, arguing that higher unemployment rates and worse conditions for workers are the only possible medicine for rising prices — even as ongoing rate hikes start to destabilize the banking system. The business press, meanwhile, ridicules the “evil capitalism theory of inflation” — that is, profit-led inflation — as a populist delusion.

Coolheaded economists see the objective picture, the science. Workers and consumers are angry and irrational, moralizing about processes they don’t comprehend.

Best to leave things to the experts.

There is a grain of truth here. While the New Keynesian macroeconomics favored by the likes of Summers and Furman hardly has a monopoly on “objective science,” it is undeniable that the American public has a tenuous grasp of how our monetary institutions work. The single best-selling book on the history of the Federal Reserve in the United States is a work of antisemitic conspiracy theory, written by an author who promotes the idea that cancer is caused by a deficiency of “vitamin B17.” Even those who don’t indulge in conspiracies are largely unaware of what the Fed does.

From this angle, it would be easy to take the necessity of deferring to economic experts as a given. Money is complicated. People are busy. Of course they don’t understand how it works.

But this misses a crucial point: lack of understanding about the monetary system is as much a pedagogical effect of the system’s institutional arrangement as it is a justification for it. It is not, in other words, that ignorance and disengagement justifies excluding the masses from monetary politics; it is their exclusion from monetary politics that promotes ignorance and disengagement.

Money to Burn

Moral Economies of Money: Politics and the Monetary Constitution of Society, the outstanding new book by the sociologist Jakob Feinig, shows that it doesn’t have to be this way: we need not settle for a monetary system that breeds apathy or withdrawal into conspiracy theory. To the contrary — for much of this country’s history, the conspicuous entanglement of fiscal and monetary policy encouraged money users to participate in the design, implementation, and governance of systems for issuing and retiring currency.

Feinig shows how from the late seventeenth through the eighteenth century, colonial governments across British North America directly spent paper money (“bills of credit”) into circulation. Legislatures would meet, agree to a quantity of bills to issue, contract with a printer, and then deliver the new money to the treasury. The freshly printed bills would then be given to various municipal authorities for distribution.

At the local level, enfranchised smallholders had a front-row seat to the fiscal-monetary circuit. Town assemblies would vote on whether to accept “their Part” of the new block of money and come up with a variety of mechanisms for distributing it. The money might be advanced to individuals against an immediate down payment, used to pay for public improvements, or entrusted to town officers who would have immediate access to the currency for other municipal spending. After the money was spent, the bills would be gradually taxed out of circulation, at which point they would be returned to the treasury to be publicly burned.

However they voted to allocate the bills, participants in these local assemblies were taught that money was a creature of politics. It was something that could be created and directed according to a process of conscious collective decision-making, rather than a resource that circulated according to impersonal economic laws. Intuitively understanding this fact empowered them to make effective moral and political claims on the monetary system.

In a time when currency scarcity and deflation were existential threats to the vast majority of small farmers, this often meant agitating against creditor interests for more bills to be emitted through fiscal spending. One 1720 proposal from Massachusetts, for example, suggested using newly issued bills to finance “some great & Expensive Work,” such as the construction of a bridge over the Charles River.

Financiers and international merchants, for their part, wanted to preserve the discipline of scarce hard currency against the threat of abundant, popularly controlled paper. Wealthy creditors, like the pamphleteer William Douglass, argued that bills of credit “Debauched the minds of the People” — making them believe that “common Consent, or the Humour of the Multitude, ought to be the Ratio Ultima in every thing and particularly in Currencies.”

For Douglass and his ilk, the idea of democratic money was a pernicious fantasy. It could only undermine labor discipline and enable the extravagance of idle debtors. Scarce, undemocratic, silver currency was useful for both its material effects and its implicit pedagogy: it taught the masses their place by keeping them subject to abusively rigid wage and payment discipline.

Still, even colonial elites recognized that some form of circulating credit was necessary to supplement the entirely insufficient supply of coin. For the wealthiest financiers, merchant capitalists, and large landowners, the preferred mode of supplying credit elasticity was the private silver bank, which issued convertible banknotes against specie. Offering credit only to those with access to silver, these banks promised to remedy the problem of monetary scarcity while excluding the morally “debauched” smallholders from accessing credit. This empowered financiers to lend at high rates to distressed small farmers, and large landowners to scoop up foreclosed farms at fire-sale prices.

Fed Up

Feinig traces a similar cycle playing out several times in the subsequent centuries. The state issues an inconvertible paper currency to meet some fiscal emergency, usually war, which leads to widespread popular engagement with the money question. Conservative reaction — the drive to enclose public currency for private gain and remove the money question from the sphere of popular politics — quickly follows.

During the American Revolution, the Patriot war effort was financed both by state-level bills of credit and paper “Continentals” — named after the Continental Congress that issued them. After the war, demobilized farmers-turned-soldiers pushed back against public creditors, who wanted the war debt paid back in specie rather than depreciated paper. In the most extreme cases — such as Shays’s Rebellion (1786–1787) — farmers took up arms, demanding relief in the form of new bills of credit, and forcibly occupying courts to prevent foreclosures on farms that owed back taxes in specie.

Reaction set in as members of the Federalist Party successfully inserted a ban on state-level public currencies into the newly ratified Constitution. State governments, the Federalists thought, were too vulnerable to democratic demands, too beholden to the interest of debtors who, after all, were in the numerical majority. It therefore made good republican sense to prevent them from controlling their own money. As James Madison explained, “A rage for paper money, for an abolition of debts, for an equal division of property or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it.”

If the Constitution nominally restricted the right to “coin Money” and “regulate the Value thereof” to the US Congress, however, this right would, in practice, be delegated to private banks, chartered at both the state and federal level. Currency issue was, in effect, privatized — placed in the hands of rent-seeking bankers.

At least until the Civil War.

Once the Confederacy rebelled, the cycle played out all over again. The Union issued an unbacked public paper currency (greenbacks) to finance the war, a wave of mass monetary politics ensued (first the Greenback Party and then the Populist Party), and monetary reaction set in (Republicans instituted and successfully defended the gold standard from the populist threat).

With the foundation of the Federal Reserve in 1913, however, this cycle starts to recede. The complex institutional structure of the Fed, which blurred the boundaries between state fiat currency, private bank credit, and, at least in its early years, precious metal, made it far more difficult to understand — let alone mobilize around — the politics of money.

Where earlier public currencies were visibly issued by elected governments, Federal Reserve Notes entered circulation through the private banking system. And even though the Federal Reserve coordinated with the US Treasury to support its issuance of debt — frequently turning the federal government’s net spending into new currency in a way that functionally replicated direct monetary financing — the mechanisms through which this occurred were opaque and inaccessible to all but the most financially literate.

Consequently, a new pedagogy of money started to arise: one based on the idea that fiscal spending and money issuance should be rigidly separated. Modulation of the supply of credit gradually came to be seen as a technical question, categorically distinguished from the political question of credit allocation.

World War I, Feinig astutely points out, became the first major armed conflict in which the US government did not issue some new kind of currency to fund the war effort. Instead, Treasury Secretary William McAdoo launched a publicity campaign to educate the public about war bonds and the necessity of saving. Wars, McAdoo told the public, were financed by individuals, who paid taxes and saved in the form of bonds. No mention was made of banks or monetary institutions.

Likewise, President Franklin Roosevelt was determined to prevent the return of greenback politics. During the Great Depression, some seventeen thousand World War I veterans marched on Washington to demand an early payment of a deferred bonus they had been granted for their military service. When sympathetic representatives in Congress passed legislation that would allow the Treasury to pay the soldiers in new currency that it issued directly — that is, in greenbacks — Roosevelt swiftly vetoed the bill.

Echoing Madison, he argued that meeting the claims of the so-called Bonus Army would only “raise similar demands for the payment of claims of other groups.” In the end, “Every candidate for election [would] be called upon in the name of patriotism to support general pension legislation for all veterans.” What the United States needed was a firm hand to maintain monetary discipline, not an enabler of populist demands on the currency.

This is the legacy we are left with today. The twentieth century has been marked by a profound demobilization around the money question. There have been moments to be sure — the farmers who drove their tractors to Washington to demand an easing of credit conditions in the late 1970s, or the contractors who mailed two-by-fours to Paul Volcker to protest the Fed-induced slowdown in construction — but these have been the exception rather than the rule.

Feinig’s book gives us an invaluable historical account of how we got here. Still, we cannot simply transplant the monetary populism of the eighteenth or nineteenth centuries to the twenty-first. As Feinig takes pains to point out, to the extent that these movements embodied “democratic” values, it was usually the democracy of white male smallholders, shot through with the politics of settler colonialism and white grievance.

Whether a liberatory form of monetary populism can gain traction today — one that claims money for the people without defining “the people” against a conspiracy of Jewish bankers or racialized freeloaders — is anyone’s guess. There is no shortage of serious left-liberal proposals for overhauling the monetary system. But these have yet to translate into a popular movement that could compete with the sheer institutional inertia of a system that teaches people to think of monetary policy as a technical problem, divorced from the political world of taxation, spending, and redistribution.

When Larry Summers applauds the Fed’s push to induce higher unemployment while sitting beachfront on some tropical island, he tacitly understands this. Once he has to think twice before speaking, we’ll know we’re getting somewhere.