Why Are Talking About Monetary Policy in a Civics Blog?

"All the perplexities, confusions and distresses in America arise not from defects in the constitution or confederation, not from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit and circulation."

— John Adams, 2nd President of the United States

The answer to this question is simply one word – policy. But before we get too far into the civics aspect of our discussion, let’s make sure we are clear on the economic principles of this topic.

What is monetary policy? Monetary policy is the mechanism a country uses to control its money supply. Central banks (non-governmental entities) are typically in charge of monetary policy. For example, in times of inflation (like now) the central bank may want to pull some money out of the system. The idea is that with less money in the economy, it becomes more valuable. So, by decreasing the money supply, a central bank can influence the value of its money and stop inflation. But who makes the decision to increase, or in some instances, decrease the money supply? If the central banks are not governmental agencies, how is this a topic for a civics class? Perhaps the best way to explain this is to examine the role of the Federal Reserve System.

The Federal Reserve System is the central bank of the United States.

It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest.

The Federal Reserve

conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy
promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad
promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole
fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments
promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations

Perhaps the last bullet point best illustrates the need to discuss monetary policy in a civics class. Consumer protection and development can only be achieved through legislation. All levels of government have a vital interest in promoting community development but can only do so effectively with adequate financing. This of course can be done through privatization of financing. However, most often, community development is financed through public funds which involves the Federal Reserve System – the banks. Also listed in the last bullet point is the need for consumer laws and regulations which can only happen through the legislative process.

Additionally, lawmakers have a role in monitoring the activities of the banks. The Federal Reserve is subject to oversight by Congress. Board governors and staff testify before Congress frequently to discuss issues within the Federal Reserve's authority. Board staff also meet with Congressional staff to brief them on topics related to the Federal Reserve's operations and future direction. The Government Accountability Office (GAO) has broad authority to review and audit Federal Reserve activities. The legislative limits on the GAO's access to the Federal Reserve System are very specific and stated in the law. The GAO conducts reviews and audits at the direction of the Congress and also under its own authority. These engagements cover a wide variety of Federal Reserve activities.

"A power has risen up in the government greater than the people themselves, consisting of many and various powerful interests combined in one mass, and held together by the cohesive power of the vast surplus in the banks."

— John C. Calhoun, 7th Vice President of the United States

Since we have dipped our toes in the world of economics, it might be useful to mention Fiscal Policy. The term fiscal policy clearly screams economics but its definition places it in the middle of governmental activities.

Fiscal policy, in simple terms, is an estimate of taxation and government spending that impacts the economy. Some of the key objectives of fiscal policy are economic stability, price stability, full employment, optimum allocation of resources, accelerating the rate of economic development, encouraging investment, and capital formation and growth.

There are two key tools of the fiscal policy:

Taxation: Funds in the form of direct and indirect taxes, capital gains from investment, and so forth, help the government function. Taxes affect the consumer's income and changes in consumption lead to changes in real gross domestic product (GDP).
Government spending: It includes welfare programs, government salaries, subsidies, infrastructure, etc. Government spending has the power to raise or lower real GDP, hence it is included as a fiscal policy tool.

"We must have no carelessness in our dealings with public property or the expenditure of public money. Such a condition is characteristic either of an undeveloped people, or of a decadent civilization. America is neither."

— Calvin Coolidge

What is the difference between monetary policy and fiscal policy?

Monetary policy is concerned with the management of interest rates and the total supply of money in circulation. It is generally carried out by the Federal Reserve.

Fiscal policy, on the other hand, estimates taxation and government spending. It should ideally be in line with the monetary policy, but since it is created by lawmakers, people's interest often takes precedence over growth.

Most state curricula include fiscal policy in their civics standards. However, it is worth noting that a discussion of monetary policy should occur in civics and government classes too. Many students in the U.S. are not required to take an economics class as part of their graduation requirements which could account for the general public’s lack of knowledge and understanding of monetary issues. This is a small yet significant practice that could help to remedy this problem.

Teaching about monetary policy can be challenging for many teachers. The St. Louis Fed provides helpful resources at their website.

Additional resources:

The Story of Monetary Policy High School Lesson Plan

Federal Reserve Bank of Atlanta