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Cash Is the Problem, Not ‘Confidence’

Another poor excuse for the stagnant economy.

Oct 17, 2011, Vol. 17, No. 05 • By LAWRENCE B. LINDSEY
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History suggests that it was a revival of cash flow, not FDR’s eloquent talk about fear and confidence, that caused the economy to turn upward back in 1933. One of his very first acts was to confiscate gold from the public, paying just $20.67 per ounce. Once it was in the government’s hands, FDR revalued it by decree to $35 an ounce, leading to a huge increase in the money supply. With more cash flowing around, prices rose, confidence grew, and the economy began to expand. Even then, confidence followed cash flow.

Today things aren’t that easy. There is no gold standard to revalue. Instead, the government will have to make more with less, creating value in the process. This means using rigorous cost-benefit analysis for spending programs and regulations and passing sensible tax policies. The president is not temperamentally, intellectually, or ideologically suited to this unglamorous work. Instead he will continue to use his rhetorical gifts to talk about how the Republicans or the Europeans or someone else destroyed confidence, taking down an otherwise promising economy. But cash flow, not rhetoric, is and always has been the precursor to economic confidence.

Lawrence B. Lindsey served in the Reagan, George H. W. Bush, and George W. Bush White Houses and at the Federal Reserve during the Clinton administration. His most recent book is What a President Should Know .  .  . but Most Learn Too Late.

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