Page 36 - Ultimate Guide to Currency Trading

A Brief History of Fiscal and Monetary Policy

In recent history there has been the coordination of fiscal policy and monetary policy. The determiners
of fiscal policy lowered tax rates and this action left more money in the taxpayers' wallets. Since the
average taxpayer was paying less in taxes, there was more money in her household budget to spend
on goods and services. Money spent on goods and services put money in the pockets of the
businesses and business owners. The business owners and business then had to pay less tax on the
income, which in turn left more money in their checkbooks. The process was repeated when the
businesses and business owners spent the money on goods and services. A larger pro-portion of this
money was then left in those business owners' pockets when they, in turn, paid less tax. The overall
effect was a growing economy.

While this was being done, the Federal Reserve offered a coordinate policy of increasing the
overall money supply by keeping interest rates low. This easy money policy, coupled with the lower
taxes, had the net effect of growing the U.S. economy quickly and strongly. One of the most effective
uses of this low tax—easy money policy was in the 1960s.

The 1960s and 1970s

The growth created by the combination of monetary and fiscal policies was very strong and carried
much momentum. The slower economy of the late 1950s was turned into a raging economy of the
1960s. The economy was so strong that it overheated in the 1970s, leading to an inflationary era. The
price of commodities such as gold and oil went up seemingly overnight, while the producers were just
beginning to corral their sources. The best known case of this was the formation of the OPEC oil
embargo, when the world's producers of crude oil worked together to raise the price of oil by limiting
supply. The lower supply of oil to the world caused even greater inflationary pressure. The result was
very high inflation across the spectrum of goods and services.

Inflation can creep up suddenly and unexpectedly. You can measure the effects of
inflation by looking at a good that has both material and labor inputs. For example, a
ALERT fully loaded 1974 Ford Crown Victoria station wagon cost $4,300 when it was

released. The same Ford station wagon cost $7,300 in 1977!

The 1980s Recession and the 2008-2009 Crisis

Other experimentation with fiscal and monetary policy was done in the early 1980s with the election
of the new U.S. President, Ronald Reagan, and the idea of future tax cuts. The chairman of the Federal
Reserve took a different approach and used the discount rate as his mechanism to control the
economy. Interest rates were hiked up. The overall effect was a severe recession and huge amounts of
new government debt by the United States.