Caveat on fiscal policy

Then there is the economy: Economic activity is subject to fluctuations. Most economists believe that the federal government has a legitimate role in countering recessions. The rationale for countercyclical compensatory fiscal policy is that the government will engage in deficit spending (financed by monetization of public debt) to stimulate sagging activity, and then repay the debt when prosperity returns. For this to work properly, both the spending and the repayment must occur. Unhappily, our government has shown disdain for the second element of the protocol.

During World War II (fall semester 1942, if I recall correctly), Professor Edwin Kemmerer — well known in his day as “The Money Doctor” for his work in stabilizing the finances of several governments, in part by converting their currencies to the gold or gold-exchange standard — returned to the campus to replace faculty departed for national service.

In a “Money and Banking” precept, a student asked Professor Kemmerer what he thought about fiat money systems (those not linked to gold or silver). The answer amazed us: A fiat currency could be the basis for a satisfactory monetary system! He added that this would require responsible behavior on the part of government. The wisdom of that caveat is demonstrated by the recent level of federal deficits and a public debt of $14 ­trillion.