Balance of Power
We all know the “traditional” balances of power from our “Schoolhouse Rock” days in 8th grade history. There’s the Legislature that “writes the laws”, the Executive that “executes those laws”, and the Courts that determines whether “the laws” are allowed under the Constitution or not. But there are less obvious areas of “balance” that Congress, the President and the Courts have agreed to, usually about issues they think are “too important” to politicize.
Money is the obvious example. America doesn’t want the value of its money to become a political football. And since the “value” of our money (measured in how much that money can purchase) is no longer linked to a precious metal, like gold or silver (since 1933), the main factor that “controls” the value of the dollar is the amount of dollars in supply.
Gold Standard
How much money is worth (can purchase) has been a major issue since the founding of the Nation. One of the great debates of the 1880’s and 90’s was that the money, tied directly to gold in the US Treasury, was is in too short a supply. This forced prices down (a good thing) but it also made it difficult to actually have money. It didn’t matter how low prices were; poor Americans couldn’t get any. The average worker wage in 1885 was $589…a year. That’s less than $50 a month, $12 a week, or $.20 an hour. Even if goods were cheap, the average American just didn’t have much money to use.
The debate at the time was about silver. If silver was added to the gold standard regulating American cash supply, then the money supply could be greater. Sure, prices would go up, but average Americans would have access to more cash, to increase their purchasing power. William Jennings Bryan, the Democratic candidate for President in 1896, gave his most famous speech on this subject, advocating for adding silver. It was called the “Cross of Gold” Speech.
So why bring up Bryan, other than to quote his stirring final paragraph:
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
It seems that most of President Trump’s economic strategy comes right out of the high tariff and no business regulation days of the 1880’s. So it might give us insight into his thinking to look back. But there is no “gold standard” no “cross of gold”, these days. The value of US money isn’t actually regulated by precious metals, it’s “controlled”. The Federal Reserve Board, a part of the government but supposedly independent of the President (or the Congress) tries to control our money supply by determining how much it costs banks to borrow money from the Federal Reserve Bank (kind of bank for banks).
Reserve Rates
If the “Fed” raises interest rates (the cost for banks to borrow money), it limits the amount of money in supply, and keeps prices down. If it lowers interest rates, it puts more money in supply (reduces the value) and prices will trend up. For example, during the Covid crisis, the stock market went down by more than a third and millions of Americans were out of work. The supply of money went way down, and the “value” of the dollar was up. Sure, prices for some things, like gas, went down. But there were shortages of products (like toilet paper) and those prices went up.
The Fed responded by lowering their interest rates virtually to zero. If you had money, the summer of 2021 was a great time to buy a house, with a 30 year mortgage of 2.8%. But the problem was, like in the 1880’s, many Americans didn’t have the opportunity, because unemployment was up. Americans were worried about paying monthly bills, not buying houses.
The Biden Administration poured money in to “jump-start” the post-Covid economy. That increased the supply, and reduced the value. the country got going again. But prices and wages went up, and Americans experienced major inflation for the first time since the 1980’s. The Fed moved to slow inflation. In October of 2023, a 30 year mortgage was 7.7%.
Stag-Flation
Trump’s 1880’s style tariff policy jolted the US economy once again. Since tariffs are taxes on imported goods, and since the vast majority of consumer goods in the US are imported, prices are likely to go up. And combined with the Trump draconian immigration program raising the costs of labor as well, America may well be looking at a near future of less development, less expansion, and higher prices, called “stagflation”. It’s the economic recipe that afflicted the 1970’s Carter Administration, and helped elect Ronald Reagan.
So Trump wants the “Fed” to lower interest rates, even though it would cause prices to go up, something his tariff policy is already going to do. And, not surprisingly, the Fed, led by Chairman Jerome Powell, is saying “no”. It’s an “open” legal question whether the President can fire the Federal Reserve. It’s one of those “other” checks and balances on the government, outside of the “Schoolhouse Rock” version. But if Trump did fire Powell, the stock market would plummet, wiping out large “supplies” of US money. That’s something, at the moment, the President seems unwilling to do.
Donald Trump wants all of the economic “levers of power” in his own hands, from tariffs to employment to Federal Reserve rates. Jay Powell is holding firm, no change in Federal rates yesterday. He’s giving his subtle version of Bryan’s speech: “You shall not crucify the United States on a cross of tariffs”. We’ll see how long he lasts. And, by the way, that “cross of tariffs” better not be made of Canadian lumber. The tariff on that is scheduled to more than double from 14% to 34%.
It might as well be made of gold.
