Federal Reserve Bank of Cleveland
Press Release

For Release: November 21, 1997
Contact: John Martin, 216/579-2847 or June Gates, 216/579-2048

Monetary Policy Should Seek to Promote National Prosperity by Facilitating Wealth Creation

The Federal Reserve, or the central bank of any country, contributes to national prosperity by providing a payments mechanism that allows productive people to trade more efficiently. If, however, monetary policy is used to divert resources to the state, the central bank can undermine a nation's accumulation of wealth. Federal Reserve Bank of Cleveland President Jerry Jordan says a nation prospers when the central bank is a component of a national economic infrastructure that fosters private wealth creation.

Writing in a recent issue of the Bank's Economic Commentary (titled Wealth, Economic Infrastructure, and Monetary Policy), Jordan defines an economy's infrastructure, broadly speaking, as the climate created by the private and - more importantly - the public institutions that serve as conduits of commerce. Huge differences in economic prosperity currently observed across nations, he says, can be largely explained by whether institutions of the state encourage or discourage private production. An environment that encourages production, and hence wealth creation, is one that protects as private property the product of individual labor. Conversely, a confiscatory environment discourages accumulation of wealth.

Jordan uses post-depression-era Federal Reserve monetary policies to show how monetary regimes can promote prosperity or divert resources. During the late 1960s and 1970s, the U.S. money supply was used to usurp the authority of the market to adjust the level and distribution of national production, and with disastrous effects. The resultant breakdown in the U.S. monetary standard, Jordan says, reduced national investment, discouraged productivity growth, and diminished the nation's position in the marketplace of international trade.

More recently, says Jordan, the Fed has committed itself to the proper role of a monetary authority in a free society: providing a stable currency. By doing so the Fed has become a strong and stable component of a U.S. infrastructure that is the foundation for the strongest economy in the history of the world. However, Jordan believes that the Fed=s commitment to national prosperity could be strengthened if the state (Congress) were to mandate specific and verifiable objectives for maintaining the value of the U.S. money supply. He advocates bringing the power of the state to bear on the Fed's responsibility to protect money holders' property rights.

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