Good Thing We Have No ‘Steel Policy’

by Don Boudreaux on September 22, 2008

in Financial Markets, Monetary Policy

Regarding the current financial turmoil….

Suppose Uncle Sam were the monopoly supplier of steel in the same way that he is the monopoly supplier of money.  A (largely) independent board of Very Smart People meets monthly to determine the nation’s steel supply.  If this board gets matters correct, the resulting price of steel prompts producers and consumers to use steel wisely.  But if the board guesses wrongly and, say, increases the steel supply too much, the market will overuse steel.  Products that would have been better made with aluminum or plastic, or not made at all, will instead be made with steel.  And production plans made in anticipation of a continuing ‘easy steel’ policy will be disrupted if the board changes course.

Unless this steel board gets things right with superhuman regularity, the structure of the economy will be become grossly distorted over time.  In addition, producers and investors will be forever anxious about upcoming decisions of the steel board.

We avoid this fate because steel is supplied by markets, with competitive producers and consumers adjusting daily to new information about changing opportunities and costs of using and manufacturing steel.  No one worries about getting the steel supply right, for markets do that job remarkably well.

Unfortunately, the same isn’t true for money.  Its supply is determined consciously by a board.  Unable to know and adjust to changes in people’s demand for money – and subject always to political pressures to grease the economy with the snake oil of easy money – the Federal Reserve distorts the economy with its inevitably mistaken decisions on the supply of money.  Asset bubbles are part of the price we pay for this primitive way of supplying money.

Markets should supply money just as they supply steel – and experience (for example, Scotland and Canada in the 19th century) shows that they do so when given the opportunity.

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{ 15 comments }

Russ Wood September 22, 2008 at 4:46 pm

Don,

You are a rare bird. Too many free-market proponents simply ignore the fact that we have a command and control system when it comes to the money supply. So much time and effort is wasted debating the Fed's next move when we should be debating the very nature of the Fed.

Kudos.

Tom Kelly September 22, 2008 at 4:46 pm

Finally- the one writer who puts this whole mess into the proper perspective!

CRC September 22, 2008 at 7:00 pm

Or "Shoe Policy"…"TV Policy"…"House Policy"…"Food Policy".

Of course the cynic in me (perhaps not all that cynical given evens of the past several days) says it's only a matter of time.

John Smith September 22, 2008 at 7:05 pm

THE HAIR CUT

One day a florist goes to a barber for a haircut. After the cut he asks about his bill and the barber replies, 'I cannot accept money from you. I'm doing community service this week.'

The florist is pleased and leaves the shop.

When the barber goes to open his shop the next morning a 'thank you' card and a dozen roses waiting for him at his door.

Later, a pastry chief comes in for a haircut, and when he tries to pay his bill, the barber again replies, 'I cannot accept money from you. I'm doing community service this week.'

The pastry chief is happy and leaves the shop.

The next morning when the barber goes to open up a 'thank you' card and a dozen donuts waiting for him at his door.

Later that day, a CEO comes in for a haircut, and when he tries to pay his bill, the barber again replies, 'I cannot accept money from you. I'm doing community service this week.'

The CEO is very happy and leaves the shop.

The next morning when the barber opens his shop, there is a 'thank you' card and a dozen different books, such as 'How to Improve Your Business and 'Becoming More Successful.'

Then, a Congressman comes in for a haircut, and when he goes to pay his bill the barber again replies, 'I cannot accept money from you. I'm doing community service this week.'

The Congressman is very happy and leaves the shop.

The next morning when the barber goes to open up, there are a dozen congressmen lined up waiting for a free haircut.

And that, my friends, illustrates the fundamental difference between the citizens of our country and the members of our Congress.

Lee Kelly September 22, 2008 at 7:52 pm

I hope the barber was Sweeny Todd.

Methinks September 22, 2008 at 10:38 pm

That was brilliantly put, professor. Now, the Fed and Treasury will take it one step further and engage in true, Soviet style central planning. They will decide not only money supply but mortgages, insurance and sundry lending directly.

Worse still, the Federal Reserve and Treasury promise equivalent outcomes for both good and bad lending practices and good and bad borrowing practices. Failures (banks and delinquent borrowers)are painted as victims of success (shorts, for example, who sniffed out the weakest and less prudent in the herd long before anyone else and took the risk to act on their analysis). So, those who engaged in behaviours that led to success will now pay for the consequences of the bad behaviour of strangers.

Every day I become more disheartened.

Sam Grove September 23, 2008 at 12:53 am

Ah, the political world is the world of inversion.

vidyohs September 23, 2008 at 6:22 am

"Every day I become more disheartened.
Posted by: Methinks | Sep 22, 2008 10:38:29 PM"

Get two guns. A good handgun, nothing lower than a 45 caliber, and a good semiauto rifle such as an AR15. Learn to use them and care for them.

The Gulag was full of people who had no weapons.

Hammer September 23, 2008 at 8:42 am

I would suggest an AK-47 for the rifle, as they are cheaper and easier to maintain for similar performance, as well as adding a good shotgun. In case you want to eat a rabbit or something at some point.

Otherwise, Vidyohs point is a solid one for everyone, even those who don't necesarily think this whole mess will lead to deportations to remote parts of the world.

vidyohs September 23, 2008 at 9:20 am

Hammer,

I can't argue the selection of an AK over the AR, and they are both available. Just something that will punch through kevlar.

I wasn't thinking so much of putting food on the table as I was keeping people from stealing the table and the food as well as your life.

Hammer September 23, 2008 at 9:55 am

Vidyohs: Oh, yea, I figured you mainly meant bringing down people rather than animals, though in this case the difference might be more biological than anything. I just figured that while we are on the subject, advocating the trinity of pistol, rifle and shotgun was worth while. Particularly if, after declining to be forcibly removed to a rather unpleasant place, one is obliged to spend a little time away from their primary mailing address. Or at least not going to the store in town.

Garrett Schmitt September 23, 2008 at 10:28 am

I apologize in advance if I am taking your example too seriously. Certainly, it is easier for most people to see the absurdity of a centrally planned steel supply than of the monetary equivalent.

Unfortunately, we do have a "Steel Policy". It just happens to be the reverse of our monetary policy: whereas the Fed trys to push down the price of money (interest), the International Trade Administration's Import Administration trys to protect Americans from cheap steel arriving through "unfair foreign pricing".

We have a hair trigger setup for an independent (though naturally receptive of any complaints you may have to offer!) board of Very Concerned People to restrict the incoming supply of steel, should a "crisis" of cheap steel impend. The ITA and everyone producing or consuming steel do worry about getting the steel supply right, because steel is only now supplied by a free market at the pleasure of those appointed to oversee it (PDF).

vidyohs September 23, 2008 at 11:20 am

Hammer, to be sure the shotgun is a necessary piece of gear. I have two, a Savage side-by-side upland game gun and a Mossberg 500A for home defense, it has an eight round capacity with one up the spout. Short of getting a Street Sweeper it was the best I could do for home defense.

John Smith September 23, 2008 at 2:29 pm

Garrett Schmitt,
I too understand that Mr. Boudreaux was using this example to explain a point; and did a very good job.

Yes Garrett Schmitt, the strong arm of the government touches everything.

(as a note: I buy steel) The governments role in steel is amazing and cofounding. Why? US companies who USE steel, there revenue, size and people employed, is much larger than the US companies who PRODUCE steel, there revenue, size and people employed.

A couple of years ago the Auto makers meet with president Bush requesting the steel tariffs be removed because the cost of steel was hampering Auto sales, AND they said those employed and taxes collected in the Auto industry dwarfs the steel industry.

It astonishes me the HUGE power the Steel producing Special Interest Groups maintain.

Morgan September 23, 2008 at 3:15 pm

I don't get it. What is the equivalent of the British Pound as the "reserve currency" for which privately-issues money would be redeemable in the US?

If the backing is issued by the central government (like the Pound), aren't we right back to the feds controlling the money supply?

Is the plan to go back to the gold standard?

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