Over the course of the twentieth and twenty-first centuries, monetary and fiscal policy in the United States has become increasingly entangled with one another. In 2012, the late Federal Reserve Bank of Philadelphia President and CEO Charles Plosser lamented a “substantial breakdown in the institutional framework and accepted barriers between monetary and fiscal policy” in the aftermath of the Federal Reserve’s and Europe’s responses to the 2008 financial crisis.
Unfortunately, his call to restore these boundaries fell on deaf ears, as the Fed further blurred the boundaries between fiscal and monetary policy in response to the COVID-19 economic downturn. Many self-described pragmatists in the policy world stated that these emergency measures made in response to the COVID-19 economic downturn were necessary and temporary responses to extraordinary situations, ignoring the long-term consequences of these interventions. Currently, President Trump is taking up a long-standing, bipartisan tradition of presidents pressuring fed officials to follow their preferences. President Trump, however, is the first President to invoke the Federal Reserve Act’s Section 10.2 and remove a member of the Board, which his team argues is “for cause.”
To communicate the importance of keeping fiscal and monetary policies separate, we must look outside the discipline of economics. Robert Frost’s poem “Mending Wall”, a poem commonly taught in high school English classes, can offer an new approach to teaching this important lesson to the general public.
Frost’s Ambiguity and Broader Applications
Frost’s poem features two characters: the narrator and his neighbor who work on an annually recurring task (“spring mending-time”) of repairing a stone wall that marks a property boundary. The narrator questions why the two should repair a boundary that seems unnecessary, while his neighbor insists, without explanation that “Good fences make good neighbors.” The tension between the two characters mirrors our current policy dilemma: some question the value of strict boundaries between fiscal and monetary policy while others recognize that these boundaries serve a purpose, even if their value isn’t immediately visible.
The narrator, while questioning the purpose of the wall, is the one who informs the neighbor that the wall needs mending (“I let my neighbor know beyond the hill;/And on a day we meet to walk the line/And set the wall between us once again”). Despite respecting these boundaries, his questioning stems from an annoyance with this annually recurring task because his apple orchard won’t intrude on the neighbor’s pine trees (“If I could put a notion in his head:/ ‘Why do they make good neighbors? Isn’t it…Before I built a wall I’d ask to know/What I was walling in or walling out,”).
The neighbor, conversely, sticks to the phrase “Good fences make good neighbors” without giving much thought to why such a saying exists or its usefulness (“He will not go behind his father’s saying,”). At the end of the poem, Frost gives the neighbor, and his aphorism, the last word.
Frost is ambiguous about who has the correct perspective in the poem, leading to much ink being spilled over how this poem applies to social barriers and human nature. While some see it as a straightforward allegory arguing against boundaries, Frost’s own ambiguity invites nuance and interpretation.
Frost’s poem complements G.K. Chesterton’s fence analogy. Chesterton takes a slightly more straightforward approach than Frost, arguing that one should understand a fence’s purpose before taking it down. Chesterton emphasizes careful consideration before changing institutions because those institutions may be serving a purpose that is not immediately obvious.
Analogously, a gold standard provides a check on fiscal policy by limiting the amount of paper money that can be issued by the central bank to its supply of gold reserves, so printing money and financing government spending through the stealth tax of inflation isn’t an option. In other words, it creates a wall between fiscal policy and monetary policy. “Good fences make good neighbors.”
This does, however, limit policymaker flexibility during times of crisis and forces policymakers to make choices that are politically unpopular, such as financing budget deficits by tax increases, spending cuts, and/or issuing debt (future tax increases).
Critics also saw the lack of coordination between fiscal and monetary policy weakened the United States during the Cold War. During the 1960’s, U.S. policymakers wanted to contain communism, go to the moon, and create an expansive welfare state. Achieving these goals meant taking on additional debt. Policymakers desired monetary policy that could accommodate this expansive fiscal policy. Much like the narrator of Frost’s poem, these policymakers questioned why the dollar was “the only major world currency still meaningfully linked to gold” entering the 1960s.
They also ignored Chesterton’s lesson of understanding the purpose of a gold standard and engaged in inflationary finance to cover an expansive federal government. As other governments became aware that number of dollars far surpassed the U.S. monetary gold stock, and, in 1967, France became the first country to start converting dollars from gold. By 1968, there was a “massive run on the dollar.” The U.S. triaged the run on gold by requiring requests for gold at par value be made “obvious and conspicuous” through official U.S. monetary authorities. This triage, however, did not last. By the end of 1970, foreign governments were still eager to convert dollars for gold.
When President Nixon “temporarily” closed the Gold Window in August 1971 (severing the last connection between the dollar and gold), he did so out of an immediate concern about a “run on the bank” by foreign governments hoping to dump their dollars for gold, resulting in the dollar being dethroned as the world reserve currency. This immediate concern catalyzed what had been an ongoing breakdown of the wall between fiscal and monetary policy. The post-war Bretton Woods system of international gold exchange, economist Bryan Cutsinger notes, was “destined to fail. Its loose constraints permitted the US to issue much more money than it could redeem [in gold].”
In their arrogance, American policymakers ignored the wall between fiscal and monetary policy in hopes of achieving a myriad of ambitious policy goals at home and abroad. They ignored Chesterton’s warning of removing the “fence” between fiscal and monetary policy in the delusion that removing the fence could mean getting both “guns and butter” and never pay the piper. Fifty-four years later, we are stuck paying for unsustainable government debt with a currency that is increasingly shrinking in value.
These delusions were quickly shattered as painful stagflation, rising unemployment and rising inflation, resulted from congress and the president pressuring the Fed to accommodate an expansive fiscal agenda.
The Consequences of Mixing Monetary and Fiscal Policy
Congress is granted the “power of the purse” under Article I of the constitution, include the power to tax (§ 7, 8, and 9 cl 7), spend and take on debt (§ 8). Congress also has the power “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures” under Art. I, § 8, cl. 5 of the constitution. Many scholars view the Fed as a creation of Congress that carries out the functions of its money creation duties. While the Federal Reserve’s website states that it “reports to and is directly accountable to Congress,” Economist Alex Salter shows that, while not totally independent, the Fed has a reasonable amount latitude which leads “Fed watchers…[to] largely assume the Fed both is and should be independent.” Salter notes that Fed officials have discretion in choosing what constitutes success in achieving the objectives set by Congress (“maximum employment, stable prices, and moderate long-term interest rates”) as well as the methods by which it achieves those objectives. The Fed also has financial independence (funding itself through monetary policy instead of via the federal budget process), and its personnel are protected from being fired without cause.
Being a creation of congress, however, means the Fed often falls prey to politics both from congress and the president. As James Dorn notes, the relationship between the Fed and the White House has long been a strained one, that, unless more clear rules are applied to monetary policy “both the White House and the Fed will be more focused on the short run than the long run, and politics will play an oversized role.” This is especially true after 2008, when the Fed adopted a new operating framework, which increased the influence of both the Executive and Legislative branches. This change also allowed the Fed to increase, in the words of Andrew T. Levin and Christina Parajon Skinner, “the scope and complexity of monetary policy [which] has outpaced Congress’s ability to monitor these policies through existing mechanisms of oversight.”
This increase in “scope and complexity” was cheered on by some commentators. For example, in May 2010, Vice Chairman of the Federal Reserve Donald Kohn commented that the central bank had to abandon its traditional approach of providing “backup liquidity to sound depository institutions” and expand to provide that same liquidity to “nonbank financial institutions as well.” These extraordinary times, Kohn argued, called for extraordinary measures. Despite the closure of the emergency lending facilities, many of the Fed’s expanded activities remained, breaking down the separation between fiscal and monetary policy as well as setting the stage for future mission creep,
In response to the COVID-19 economic downturn, Peter Conti-Brown commented “Congress created something that we’ve never seen before in the United States, in the history of the relationship between the Fed and Treasury and the Fed and Congress.” Federal Reserve Board Chair Jerome Powell noted, “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.” Economist Paul McCulley excitedly exclaimed, “It’s an epic moment in terms of breaking down the orthodoxy of church-and-state separation of the fiscal and monetary authority.” Grace Enda, William G. Gale, and Claire Haldeman of Brookings argued, “with interest rates staying low, we have an enormous amount of fiscal space to focus on the economy rather than the budget…Deficits will have to take a back seat to preventing a Depression and supporting public health.”
Much like the narrator in Frost’s poem these individuals (and many others) questioned the value of keeping monetary and fiscal policy separate: “Oh, just another kind of out-door game,/One on a side. It comes to little more:/There where it is we do not need the wall…Something there is that doesn’t love a wall,/That wants it down.’”
Such statements were made too hastily. An initial appraisal of these lending programs from scholars at the AIER Sound Money Project found, “Although some facilities likely helped to promote general liquidity, others were primarily intended to allocate credit, which blurs the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.” The result was above-average inflation while Americans were already struggling to rebuild their lives after 2020 due to the failure to maintain the wall between the Treasury and the Fed.
In the aftermath of 2020, the White House continues to press their preferences onto the Fed. In May 2021, the Biden-Harris Administration eagerly issued Executive Order 14030, which directed the Fed and other financial regulatory agencies to assess climate-related financial risk. The second Trump Administration has taken to openly criticizing the Fed and Chairman Jerome Powell. Additionally, President Trump recently invoked Federal Reserve Act 10.2 and fired board member Lisa Cook “for cause.”
Federal Reserve Act states that Federal Reserve Board members are set to fixed terms “unless sooner removed for cause by the President” but does not provide further details, necessary and sufficient criteria for proving “for cause” removal, or procedures for removal. The onus is now on the judicial branch to interpret the law and determine both if Cook has committed a crime and if such allegations are sufficient for a “for cause” removal. While an appeals court recently ruled that Cook can remain on the Federal Reserve Board, the President’s desired nominee, Stephen Miran, was also recently confirmed. Many fear that Miran, like many Fed appointees that came before him, was put on the board to advocate for the President’s preferred policies. As William Luther notes, “Both parties have shown themselves willing to play politics with the Fed when it suits their interests. Neither likes it when the other does.” This recent episode is yet another area where clarity would improve the Fed-White House relationship.
“Good Fences Make Good Neighbors”
If fiscal and monetary policy are to function properly, there must be a wall between the two as well as constraints on both sides to prevent the wall from breaking down. On the monetary side, it could mean applying a strict mandate on the Federal Reserve that reins in the “scope and complexity” that has plagued monetary policy since the Great Recession, returning to the gold standard, or, ideally, replacing the Fed with a free banking system and taking monetary policy out of the hands of government altogether. On the fiscal side, keeping strict rules limiting how much the government can tax, spend, and regulate will help keep policymakers on that side of the fence in check.
The value of Frost’s poem, however, is the perspective of the neighbor. While the narrator derides his neighbor as someone who will not think beyond an aphorism repeated ad nauseum, the neighbor appreciates that there is value to the mending wall—value that neither he nor the narrator readily sees and may only come to appreciate after the wall is gone and the damage from the wall’s absence is done.
Much in the same way as the neighbor, the average American does not need to become an expert in the nuances of the Fed-Treasury relationship, the “Gold vs. Fiat” debate, or the “Rules vs. Discretion” debate in monetary policy. The average American only needs to know that when the government pays for spending by printing money, the value of their dollar shrivels up—and that is why “good fences make good neighbors.”
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