The Blind Alley of Monetary Populism

SWARTHMORE – In the United States and elsewhere nowadays, populist politicians often claim that easy monetary policy is hurting ordinary workers, thereby exacerbating income inequality. But while inequality is a problem, raising interest rates is no way to address it.

To say otherwise is a strange claim for anyone to make, especially populists. After all, low interest rates benefit debtors and hurt creditors, as does the inflation that can be spurred by monetary easing. Throughout most of US history, for example, populists have supported easy monetary policy as a way to help the little guy against distant bankers with hard hearts devoted to hard money.

That was why the Andrew Jacksons of the nineteenth century fought the efforts of the Alexander Hamiltons to establish a national bank. It was also the argument William Jennings Bryan made during his 1896 presidential campaign, when he promised easier money to his core constituency: Midwestern farmers who had been hit hard by high interest rates and declining commodity prices. And it was the argument made by supply-siders who opposed US Federal Reserve Chair Paul Volcker’s high-interest-rate policy in the early 1980s – an argument that spurred President Ronald Reagan to appoint two Fed governors to challenge Volcker in 1985.

Today, however, the script has switched – and not only fringe populists are working from it. British Prime Minister Theresa May, for example, declared earlier this month that low interest rates were hurting ordinary working-class people, while benefiting the rich. Falling interest rates help push up the prices of securities – both stocks and bonds – which are disproportionately held by the wealthy. “People with assets have gotten richer,” said May. “People without them have suffered.”