History tends to repeat itself
The United States was once on the verge of civil war because of monetary policy. During the Revolutionary War, the United States used IOUs to finance battle supplies. After independence, many people claimed that the IOUs should be dishonored. But Treasury Secretary Alexander Hamilton argued that U.S. confidence should be enhanced by paying off debts and began imposing taxes on whiskey and other goods. Whiskey makers claimed that Hamilton was giving benefits to the bond holders with citizens’ money.
The protest led to the Whiskey Rebellion. American historian John Steele Gordon wrote that the Whiskey Rebellion was the origin of discord between Main Street and Wall Street. The Whiskey Rebellion was subjugated with Wall Street’s victory.
The confrontation came back right after the Civil War. The Union printed paper currency called the “greenback,” which was not backed by gold. After the war, creditors claimed that the greenbacks should be collected, as inflation would result in the declining value of the bonds.
However, retrenchment was painful for the veterans and farmers, and they resisted intensely. While attempts to collect greenbacks were made sporadically, it did not happen in the end. A similar thing happened again in the 1870s. Both gold and silver were used as official currency, but the silver standard was abolished. As the money supply shrank drastically, debtors, including farmers and businessmen, resisted.
Columbia University professor and former member of the Federal Reserve System in the Bush Administration Frederic Mishkin said that it is a consensus within the Fed not to cause or aggravate crises like the Whiskey Rebellion or the silver coin discord with retrenchment. Lately, the death of Freddie Gray has resulted in protests in Baltimore. As the investigation developed, U.S. media began to pay attention to the inequality of wealth on the other side of the racial discord.
At this juncture, retrenchment is an option that Fed Chair Janet Yellen cannot choose easily. Retrenchment could worsen the inequality of wealth. As the interest rate is raised, investment contracts, resulting in less jobs and more burden on low-income earners.
The U.S. economic growth rate in the first quarter did not meet expectations, so the interest rate hike in June is not likely to happen. Morgan Stanley forecasted that the interest rate would be raised after the end of the year. The Bank of Korea has earned some time to focus on the domestic economy rather than preparing for retrenchment by the United States.
Next year, the presidential election campaign will begin in earnest in the United States. Former Secretary of State and presidential hopeful Hillary Clinton is including reducing the gap between the rich and the poor as one of her key election promises. U.S. society is likely to be swept up in the controversy of wealth distribution and inequality. This will also be another factor that makes Yellen’s interest rate increase harder.
The author is the deputy international business news editor of the JoongAng Ilbo.
JoongAng Ilbo, May 4, Page 26
by KANG NAM-KYU