Current monetary policies and arrangements are immoral as well as ineffective
The current debate about monetary policies reminds me of the 1970s.
Keynesian policies as then understood involved adjusting the fiscal “stance” of policy to ensure sufficient, but not excessive, effective demand. But these policies no longer had “traction”. The world was changing in ways that economists at the time struggled to understand. Money was becoming more fluid. Cross-border flows were rising rapidly. The move to flexible exchange rates and vast increase in the scope of international money markets had created a new world. Bankers rushed to exploit new lending opportunities from Africa to Latin America to Asia. Real interest rates turned negative.. Expected inflation rose.
Then as now, people were not responding to policy stimuli as policy-makers expected. Businesses and consumers started to “see through” policies; there was a loss of “money illusion”. In short, people refused to be treated as guinea pigs. In the search for growth, monetary policies became uniformly stimulative. Thus money, which itself should be the chief regulator of the economy, became a pawn in the hands of policy makers.
Hayek got it right
What had gone wrong? Hayek put his finger on it:
“Money is not a tool of policy that can achieve particular foreseeable results by control of its quantity. But it should be part of the self-steering mechanism by which individuals are constantly induced to adjust such activities to circumstances on which they have information only through the abstract signals of prices”. (Denationalisation of Money, IEA, 1976)
Of course there are big differences between the two periods. Then, policies searched for growth but produced inflation; now, policies aiming at growth produce stagnation.
But they have much in common. Just as in the 1970s, today also, monetary policies are undermining money itself – as a crucial social institution. Current policies help governments by providing zero borrowing cost. They facilitate the growth of the State. They do nothing to help individuals, SMEs, or any other businesses plan their futures. Don’t be fooled by talk of reform; current arrangements suit governments well. As we have seen in the past nine years, they have no intention of changing them in a serious way.
Up to the financial crisis, these policies also helped senior bankers. They turned once great institutions into machines for skimming the cream off successive asset price booms and busts and currency fluctuations from which they – the senior executives – could extract profit. But since 2010 not even the bankers are happy.
Now the rest of us will live in fear of officially sponsored theft – “oh, of course we are taking your money from you in your interests, you do understand that, don’t you?”.
“We just have to threaten to take money from you in order to make you spend it now. On the other hand, we might also give you a huge amount of money – on condition you spend it now. We shall also suggest things you might spend it on and things we don’t approve of. No, we cannot say whether we shall take it back later. Just do as you are told and be good, children.”
Monetary mandarins try to manipulate people
The underlying issue with most of the bankers and economists Martin Wolf interviewed is that, just like their Keynesian predecessors in the 1970s, they are trying to manipulate people through policy levers to do what they, the monetary mandarins, want. They think they know what is in the people’s interests. But people are not like that. They rebel, as they did in the Brexit vote. The monetary mechanism seizes up. This is because they, the mandarins, are using a bad concept of money.
Nobody in the BBC programme (reported in the following note, the Wolf of the City) argued for an alternative concept of money. Nobody expressed the idea of money that was taken for granted by all the great classical economists and by all central bankers up to the 1970s. Some doubtless could have done, but were not asked.
As in the 1970s, current moneary policies and arrangements strike people as immoral as well as ineffective.
As in the 1970s, we need a monetary counter-revolution.
There will doubtless be further crises before we re-learn the old truth. Money fulfils its crucial social functions only when it is held to an inflexible standard – one that is expected to endure for generations. Yes, money is a social convention but it only works well when that convention becomes part of nature. That is the thesis of The Money Trap.
Oh for a central banker to stand up and protest against this madness!
They all miss the international dimension
It is also tragic that the current debate is posed almost entirely from the point of view of individual central banks struggling to cope with deflation and stagnation in their economies or economic areas. Yes, they take a sideways look at what others, notably the Fed, are doing. But only so they can factor that into their individual central bank’s decision making. They have lost the sense that we need an international monetary order to counter the international monetary breakdown that caused the crisis in the first place. Without such an order, there is no hope. Countries and regions cannot crawl out of the holes they have dug for themselves by their own efforts.
In sum, the new monetary standard needs not only to be inflexible, but also international.