One question

Matt O’Brien The Washington Post January 13, 2015 The arc of the political universe is long, but it bends towards monetary policy. That’s the boring truth that nobody wants to hear. Forget about the gaffes, the horserace, and even the personalities. Elections are about the economy, stupid, and the economy is mostly controlled by monetary policy. That’s why every big ideological turning point—1896, 1920, 1932, 1980, and maybe 2008—has come after a big monetary shock. Think about it this way: Bad monetary policy means a bad economy, which gives power back to the party that didn’t have it before. And so long as the monetary problem gets fixed, the economy will too, and the new government's policies will, whatever their merits, get the credit. That’s how ideology changes. In 1896, for example, Republicans completed their transformation from being the anti-slavery party to the anti-inflation one. Back then, the U.S. was on the gold standard, but there wasn’t enough gold. Miners had found so little of it that overall prices were falling, which was particularly bad news for anyone who’d borrowed money. That’s because wages fall if prices do, so debts that don’t become harder to pay back. The result was two decades of slower-than-it-should-have-been growth where the economy was in recession more often than not…. Well, at least until World War I. That’s because Republicans agreed on fiscal and financial policy, but not on regulation. That split let Woodrow Wilson win a three-way race in 1912, and, despite getting reelected on the slogan that “he kept us out of war,” he didn’t in 1917. Now, gold had already been pouring into the U.S., fueling inflation, as people moved it out of Europe, but once we joined the Allies, we also partially suspended the gold standard by banning gold exports. That left us with higher prices and a big pile of shiny rocks after the war ended. So, in 1920, the Fed raised rates so much that prices not only stopped rising, but actually started falling. A deep recession followed, right before the presidential election. That, together with general war weariness, was enough for an extreme mediocrity like Warren G. Harding to win the biggest popular vote victory, by percentage points, on record just on the strength of three word[s]: return to normalcy. A year later, the Fed lowered rates, the Roaring Twenties were born, and the conservative orthodoxy of low taxes and low spending once again seemed to be vindicated. It wouldn’t [last] for long. Households, you see, went on a borrowing binge in the 1920s. They borrowed money to buy cars. They borrowed money to buy homes. And, yes, they borrowed money to buy stocks. So once the market crashed, this pyramid of debt did too. Even zero interest rates weren’t enough to stop the economy’s free fall. This only got worse when people panicked, sometimes justifiably so, that all these bad debts would make their banks go bust. That became a self-fulfilling prophecy as people rushed to pull their money out before everyone else, and the Fed, which was more concerned about propping up the gold standard than propping up the financial system, let everything collapse. Q 2: This article argues that monetary policy helps determine election outcomes because of its impact on the economy. Yet it begins by talking about 1896, well before the Federal Reserve was established, and the United States had a monetary policy. However, the main point is changes in the financial market, especially money markets and foreign exchange markets, can have a significant impact on the economy and on elections. What role did money and financial markets play in 1896 and the “roaring” 1920s?