5 - Economic Integration and the Politics of Monetary Policy in the United States

Summary

International economic integration has profound effects on monetary policy. In this chapter, I argue that it has equally important effects on the politics of monetary policy. It makes monetary policy more prominent politically, by heightening its impact on relative prices. Because high levels of capital mobility mean that national monetary policy implicates the exchange rate, it gives rise to clear-cut distributional effects that in turn lead to political divisions. At the same time, high levels of world trade make the exchange rate a critical price for much of the population. When the general effects of economic openness are compounded by international price shocks, there are strong incentives for affected groups to seek redress in the monetary arena. Economic internationalization leads to an increased politicization of monetary policy and a change in the sorts of socioeconomic and political divisions it implies.

The United States has in fact experienced the impact of economic integration on monetary politics. Both the country's integration into the world economy, and its monetary politics, have varied substantially over time. Indeed, monetary policy was once at the center of American politics. From the 1860s until the 1930s, “The Money Question” was, along with the tariff, the great constant of political debates in the United States. It brought forth messianic populist fervor, terrified defenses, two of the more successful third parties in the nation's history, and impassioned speechifying from the floor of Congress to the wheat fields of Kansas.