A current question in economic circles is why the massive expansion of the money supply as aresult of the Federal Reserve’s strenuous efforts to deal with the financial crisis and ensuing general recession has led to utterly no discernible inflationary pressures, at least in the short term. After all, it’s a generally accepted fundamental precept of modern macroeconomic theory that, ceterus paribus (ah, such as old fashion phrase, a whiff of napalm in the morning), an expansion of the monetary supply will generate inflationary pressures, and we have witnessed over the last year a veritable explosion in the money supply.
The succinct and apparently indisputable answer is that the expansion of the money supply has occurred in tandem with a slowing in its velocity, dressed up with the occasional pontification about appreciating the difference between statistics that are expressions of first derivatives and those which express second order derivatives. Without honoring the mathematical window dressing, let’s accept that observation as simple, gospel truth.
What is stunning to me is that the idea resonates with the long-discarded ideas of an English engineer-civil servant-social theorist named Clifford Douglas who in the early 20s developed an idea of Social Capital. I am currently reading a magisterial exegesis of the poetry of Ezra Pound, and, before falling in with Mussolini’s fascism, Pound was temporarily captivated by the ideas of Douglas.
Douglas was not talking about the money supply. Douglas was not a Marxist (he felt the attribution of all value ultimately to labor and toil of the contemporary working classes and peasantry was fallacious). He was not an economist (not even by the more flexible standards of his day). He may have been a crackpot. But his diatribes on cost accounting and contempt for the reliance on markets to both price and value goods and services are seductive.
In a nutshell, he argued, with respect to capital, not the money supply, that the velocity of capital, not the quantity of it, explained the vicious grip of banks and the financial interest on the general economy. His argument echoed that of the American populists and progressives of a generation earlier that Wall Street held the country in its talons, crucifying Man on a Cross of Gold as surely as our Savior suffered on a Roman cross of timber. In a wonderful analogy, he made the argument that to ignore velocity would lead one, in the context of demographics, to claim that, because everyone who is born eventually dies, the birth rates and the death rates must be identical, and so the population must be stable, which it patently is not. These statistics are matters of rates, not absolute quantities (and it hardly required the invocation of Calculus to understand it).
I’m not sure if Douglas is worth exploring, or not. He was a whacko, and, like Pound, more than a whiff of anti-semeticism pervades his writing. But clearly, all of the post World War II macro orthodoxies are being found wanting. Hence, you have Paul Krugman reading Hyman Minsky. Thus, the endless invocations of the same few phrases of John Mayard Keynes (efforts to restore ‘animal spirits’ by fiat seem to me about as likely to succeed as efforts to repulse the Mongols by sending the patriarch and his bishops beyond the city walls to parade the icons before the approaching horsemen).
It’s enough to make me wonder if these issues are, at bottom, really issues of the economy, at all.