Should easy money or government spending jumpstart the economy? Many commentators have asked this question in the post-2008 era. With rare exceptions, the distinction between monetary and fiscal policy appears obvious to politically interested Americans on the left and the right. The division of labor between “technical” decisions about the money supply—made by Federal Reserve officials—and “political” decisions regarding public spending—made by Congress—only reinforces this obviousness.
But the distinction between monetary and fiscal policy did not always structure public debate. During the Great Depression, many Americans advocated governmentally created and spent money to stimulate economic life. For them, easy money for banks would do little to address the crisis, as bankers were accused of hoarding money. Issuing bonds to finance more public spending, conversely, would only reinforce creditors’ profits and taxpayers’ collective debt bondage. In this context, the distinction between fiscal and monetary policy did not make sense: If the Treasury spends money it has just created, is this “fiscal” or “monetary” policy?
For the Great Depression’s politicizers of money, the country needed public spending financed by public money. For instance, the tens of thousands of WWI veterans who camped on the doorsteps of Congress demanded Treasury money to settle their claims. Large farm organizations like the National Farmers’ Union demanded public spending “without bonds.” Many members of Congress who were opposed to such monetary heresies faced such pressure from their constituents that they were willing to go along with it in early 1933.
Americans of different classes tied their economic fortunes to the money question, as the livelihoods of debtors and the unemployed were coming apart due to catastrophic price declines. Creditors, on the other hand, were haunted by the specter of Weimar hyperinflation. Soon after Roosevelt took office, Agriculture Secretary Wallace described a clash of interests in a note to the President. He contrasted a “smaller, but wealthier, group … thoroughly scared for fear there will be uncontrolled inflation” with “millions of people who are worried sick for fear that there will be no inflation.”
FDR attempted to avert money creation by the inflationist congressional majority. In the context of the emergency agricultural legislation (the Agricultural Adjustment Act), he accepted discretionary powers over silver and greenbacks to thwart mandatory legislation. The inflationists expected the chief executive—who had just suspended the gold standard—to take radical action, but he never did. A few months later, a disappointed Farmers’ Union official wrote: “Why in the hell doesn’t the government issue a billion in currency instead of buying in the money and paying interest in it? In all fairness, is this the New Deal?”
But such maneuvering did not prevent Congress from passing a greenback-financed Bonus Bill in 1935. Now, FDR used his veto power to stop it. Roosevelt’s veto message—which he delivered in person to a joint session of Congress—can be read as a dismissal of popular participation in money creation. He argued that participation would lead to hyperinflation and social disintegration, as group after group would pressure its congressional allies.
But which mode of money creation did FDR defend? A gold standard? He had suspended it. Expert-led monetary policy by an “independent” central bank? Economists were discredited, and he himself had voiced his skepticism of this profession in a previous address.
The money he defended but did not name—largely supplied by banking corporations—did not appear as a creature of the law and hence of politics. It appeared to pre-exist politics, class interests, and state institutions. He described only government money—which he dubbed “printing press money”—as political. His silence about the money he considered legitimate but did not name creates the appearance that “real” money is timeless, rather than a historically created institution that puts some actors in positions of power and insider knowledge while disempowering others.
In this sense, Roosevelt’s discourse departs from 19th century American monetary conservatism, which centered on a fixation on gold. While Hoover had defended the gold standard as “enshrined in human instincts for over 10 000 years,” FDR was silent about money creation. Revealing only that which he opposed without defending a specific mode of money creation, he inaugurated the 20th century discourse of monetary silence that assumes money as a background.
Budget deficits were tolerable, FDR pointed out, but only if they were financed without public money. He did not spell out that this meant bond issues to private actors. A politicized budget process was legitimate, but only if citizens did not also participate in the money creation process. Citizens’ proper attitude relative to monetary system was accepting the existing institutions. Hence, he attempted to separate public spending from money creation, widely considered a single domain of political practice.
Roosevelt nearly failed. During the congressional debate that followed the veto message, Congressman Patman made an argument that was difficult to counter in the context of the Depression. He suggested that the bonus was a way of getting money into impoverished men’s pockets “without the payment of a dole.” To make his case more striking, he listed the counties the money would go to, and the dollar amounts in question.
The House overrode the veto (322 to 80), but the Senate did not (54 to 40). After these events, commentators have noted, the focus shifted from “monetary” to “fiscal” policy. But this was more than a shift because FDR helped draw a boundary between fiscal and monetary policy. Historically, when money creation and state spending were connected, popular forces had defended public money, from colonial-era bills of credit to Civil War-era greenbacks.
Today, Americans largely accept the Rooseveltian separation, even though they do not credit FDR with it. While taxation is a common topic of debate, money creation is not. This can be understood as a condition for austerity, as limits to government spending are typically justified by the need to raise money through bond issue or taxation.
Is the separation of monetary from fiscal policy an instance of ruling class knowledge entering the minds of the ruled? By ruling class, I mean something quite specific in this context: the group Ingham defines as “the producers and controllers of money.” The separation of monetary and fiscal policy stabilizes the power of this class because it delinks public spending from money creation, a site in which the government’s money creation power can become visible.
Jakob Feinig is Visiting Assistant Professor in the Department of Human Development at Binghamton University. He is a member of the editorial team of Policy Trajectories and can be reached at firstname.lastname@example.org.