John Mauldin touches on the monetary system

Just as I celebrate a new internet connection that is working efficiently (provided the ISP doesn’t drop the ball… which it does… often), I am pleasantly surprised to see Mr. Mauldin bring up the issue of the monetary system. Few in the main stream media have done that. I suspect that of two things one must be right; either the monetary system appears too arcane a subject for most, or most do not understand the logical implications of choosing one system over another. Of course, both options may also be true.

Little old me has in previous months mailed Mr. Mauldin asking whether he would bring up the matter for, at the very least, public discussion. I’d like to think that my missives have struck a chord with Mr. Mauldin though I know better. Still! The fact that a well known and well connected luminary of economics and finance should find it worthwhile to raise the issue even if indirectly (Mr. Mauldin offers the views of Milton Freedman rather than his own) is an important step forward.

Below and with permission, I’ll copy the part of Mr. Mauldin’s text that is relevant to the monetary system and will intersperse my comments prefixed by “GR“:

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

” […] Let me be clear. There are a lot of things not to like about the Federal Reserve System. I think it was Milton Friedman who said we would be better off with a computer determining monetary policy. A quote from an interview with him is instructive. When asked “Do you still think it would be a good idea to have a computer run monetary policy?” he answered:

jm040910image002 “Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.

“GR” The reason a computer program would do better than a human counterpart is because the software could be programmed to manage monetary policy towards expansion or contraction purely on technical data without emotional interference thus making full use of the beauty of fiat money. The human counterpart on the other hand, is by necessity beholden by political considerations particularly in a political context characterized by personal freedoms. Thus, a fiat monetary system managed by politicians not only will always and everywhere be expanded at rates far in excess of economic growth but will also guarantee that the largest and most connected entities will be saved from bankruptcy (several times if needed) thus guaranteeing a finale characterized by a bloated, inefficient and corrupt economy and state.  – end GR comment

“In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge. We have seen that in the history of our own Federal Reserve System. Surely a computer would have produced far better results during the 1930s and during both world wars.

“That raises a question about the desirability of our present monetary system. It is one in which a group of unelected people have enormous power, power which can lead to a great depression or which can lead to a great inflation. Is it wise to have that power in those hands?

“An alternative would be to eliminate the Federal Reserve System; to reduce the monetary activities of the federal government to the provision of high-powered money, that is, currency and bank reserves, and to constitutionalize, as it were, what is to be done with high-powered money. My preference is simply to hold it constant and let financial developments produce the growth in the quantity of money in the form of bank deposits, a process that has been going on for many decades. But that is, of course, politically impossible.”


As much as I acknowledge how intriguing an idea the above is, in the end Friedman is right; it is politically impossible. We are stuck with this system. But what would be far, far worse is a system that was directly controlled by Congress or the President, whether Republican or Democrat. Politicians think in very short election cycles.”

“GR” Here Mauldin is tentative in that he finds the idea of fixed money or of the abolition of the Fed “intriguing” without giving too much away as to his reasons for being intrigued for or intrigued against the idea.

You can read the rest of the article here at the link you will find in the acknowledgment blurb:

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

There you have it. The monetary system is upstream of all our social and economic decisions but even in the ostensibly democratic West, society has no say in what system should be chosen nor how it should be managed. Worse still, since the choice of monetary system is intimately related to the concept of raison d’etat, the state has a vested interest in encouraging and providing a type of education that steers away from understanding what is effectively the central issue of economic and social development and political logic.


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