The Dangers of Modern Monetary Theory

by Ben Zhao ’22

Created by: Joyce Wang ’22

Published Mar. 22nd, 2021

Modern Monetary Theory is an economic theory which argues that government policymakers should control central banks and inflation; basically, that the government should take over the traditional role of the Federal Reserve.

An evaluation of MMT requires a brief understanding of the role of monetary policy and the function of the Federal Reserve in the 20th century.

Research on the role of inflation and monetary policy followed the Great Depression. During this period, famous thinkers and economists wanted to understand why the United States economy experienced a tremendous collapse for such a prolonged period of time.

Ludwig Von Mises and Frederich Hayek studied business cycles and credit theory in the 1920s, portraying recessions and expansionary periods in the economy as occurring due to artificial inflation in the prices of goods and services. 

The Austrian School argued that the Great Depression was caused by the Federal Reserve’s low interest rates in the Roaring 20s, as well as extreme deflation due to America holding on to the gold standard. In essence, that the Federal Reserve was largely responsible for the Great Depression.

The Federal Reserve has been known for its lack of judgement and its role in bursting economic bubbles. Some argue that low interest rates burst the Dot Com bubble and caused the 2008 mortgage crisis.

Today’s economic situation calls on a handful of Federal Reserve board members to make precise judgements about the economy. 

MMT suggests that this duty be replaced by politicians. 

Despite the many flaws of the Federal Reserve, the board consists of well-educated economists, who have made adjustments to their policy decisions following the Great Depression. Politicians, on the other hand, pander to voter demographics from year to year. 

An example of this is Germany’s Weimar Republic following WWI. The German economy was plagued by hyperinflation when Germany tried to print money in order to pay for its reparations while the nation was in a recession. If the U.S. tax and spending budget factors inflation, business cycles would experience fluctuations which come at the expense of the American people.

If the Federal Reserve board makes mistakes from time to time, it is frightening to imagine what politicians with little background in economics would do with the U.S. economy. Economists have a far better sense of how to achieve long-run economic stability than politicians who serve the interest of select groups. 

EDITOR NOTE: To get an alternative perspective on this issue, check out Rohin Mishra’s article: https://themontgomerypawprint.com/free-money-an-introduction-to-modern-monetary-theory/

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