by Steve H. Hanke
This article appeared in the July 2012 issue of Globe Asia.
During the 1992 presidential campaign, former President Clinton’s rallying cry was “It’s the Economy, Stupid.” He sang it to perfection and won the election. Today, the smart politicians (and economists) should realize that “It’s the Money Supply, Stupid.” One doesn’t have to delve deeply into the mysteries of money to realize that money matters. But, you wouldn’t know it from reading the deluge of polemics on whether a fiscal stimulus is, or is not, the proper prescription for most of the world’s economies. Most of the doctors are misdiagnosing the real cause of the world’s economic ills because they often fail to take the patients’ monetary pulse. It’s as if the diagnosticians were unaware of the connection between money growth rates and economic health.
This wasn’t always the case. In the late summer of 1979, when Paul Volcker took the reins of the Federal Reserve System, the state of the U.S. economy’s health was “bad.” Indeed, 1979 ended with a double-digit inflation rate of 13.3%.
Chairman Volcker realized that money matters, and it didn’t take him long to make his move. On Saturday, 6 October 1979, he stunned the world with an unanticipated announcement. He proclaimed that he was going to put measures of the money supply on the Fed’s dashboard. For him, it was obvious that, to restore the U.S. economy to good health, inflation would have to be wrung out of the economy. And to kill inflation, the money supply would have to be controlled…