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THE JETHRO PROJECT
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- Monetary Growth is Essential for Employment
- By Byron A. Ellis – December 04, 2009
According to Milton Friedman, money does matter. In The Quantitative Theory of Money – A Restatement, he noted “that any interpretation in the short term movements in economic activity is likely to be seriously at fault if it neglects monetary changes…” Likewise, John Hicks argued that changes in the level of output, employment, or inflation are product of monetary factors. Giuseppe Fontana in Why Money Matters: Wicksell, Keynes, and the New Consensus View on Monetary Policy stated “In the short run, changes in the quantity of monetary aggregates affect the level of output and employment.
Thus, monetary theory indicates that the economic slowdown is everywhere a monetary occurrence. The Federal Reserve executes monetary policy.
The graph below, from the St. Louis Federal Reserve, depicts the growth of M1 (currency in circulation) from 1975 through the 2008. The shaded areas indicate US recessions. Note that recessions are preceded by flat monetary (M1) growth periods, red ellipses. The graph can be downloaded at: http://research.stlouisfed.org/fred2/series/M1.
It is the Federal Reserve policy that engineered the periods of flat growth. The period of flat growth is akin to household income remaining flat for consecutive years while the household family size and the price of goods are increasing. Clearly, under these conditions, household income per person would diminish.
If household income per person diminishes due to the Federal Reserve restriction in the growth of M1, the sequential economic process would be disrupted. That is, merchants who rely on consumers to purchase commodities would experience inventory accumulation because household income per person has diminished. Therefore, merchants would find their inventories accumulating and would not purchase commodities from entrepreneurs due to high inventories. Furthermore, merchants and entrepreneurs would have to furlough or layoff wage earners due to low demand. Finally, entrepreneurs and employees would find it difficult to repay bank loans.
The sequential process of job creation is as follows: (1) loans for entrepreneurial investments and to pay workers’ wages, (2) workers using wages to buy commodities from merchants, (3) merchants using monies received from workers (consumers) to buy commodities from producers. However, the sequential process of job creation will always result in a disequilibrium condition if the real money supply is not growing at the appropriate rate.
When the Federal Reserve keeps the nominal money supply flat, the real money supply is inadequate to maintain a high demand. Thus, it is difficult to understand why an economic historian, such as Bernanke put the brakes on the economy.
Conspiracy buffs might argue that slowing down the economy was deliberate. A means to enhance military recruitment, but such an argument would be cynical.
Nonetheless, the Washington Post noted that the deep recession has made the military a more appealing option for job seekers, all the armed services have consistently met or exceeded their recruiting and retention goals in recent months. Furthermore, the Obama administration proposed cutting the Defense Department's budget for recruiting by nearly $800 million, or 11 percent, for 2010 as a result of successful recruitment.
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