How money keeps its magic
Funny thing about money. It is supposed to be a bedrock of stability but it feeds on illusions. So much monetary policy relies on trickery. The elite know things that the unwashed masses do not. Such as money illusion. The success of devaluation rests on tricking the masses. But tell a central banker he or she is in the business of peddling illusions and risk a smack in the eye.
Another weird but essential feature of money is this. Every monetary regime has to be regarded as right not just now but for all time. It has to be right in some absolute sense. It does not work otherwise. It has to be “credible”. The archetype was the much-maligned gold standard –universally regarded as right for all time in the 19th century, rubbished since. The idea that anybody would want to return to it was seen (and still is by the conventional-minded) as barring a person from respectable economics circles, if not evidence of lunacy. Thus the central bankers of the 1920s and 1930s who wanted to return to gold, and tried to stick to it after the return, are objects of ridicule, contempt. Modern, grown up central bankers, said Ben Bernanke, will never make that mistake. Or so he assured Milton Friedman; we have at a technology called the printing press. We will use it to engineer inflation when necessary.
In the 1950s to suggest in public that floating exchange rates might in some circumstances be a good thing was a treasonable offence. That was what I was told by my first editor, the great Wilfred King, when I started in financial journalism in the mid 1960s. Within a couple of years, Britain had devalued.
Ten years later, flexible rates were regarded by all and sundry as the right regime for all time. The entire economics professions did an ideological about-turn, following the lead of the IMF, with hardly a sign of embarrassment. They started marching in the opposite direction. History got to be rewritten to fit the new ideology. It is not only present policies that change, it is the past and the future as well.
This is not because everybody who deals with money professionally is hypocritical, or that they love manipulating the public, bamboozling us all with promises they have no intention of keeping. It might look like that to an outsider, but the odd thing is, these people are all sincere. They speak with gravitas. They cultivate the slow walk, the heavy demeanour, the formidable eyebrows.
They are pillars of society. Pillars of an unusual kind. Pillars that also have to bend themselves into contortions, like hairpins, to accommodate necessary changes. For instance, where does money get value from?
Central banks were the keystone in the arch of the metallic theory of money – the theory, several hundred years old, that the essence of money is intrinsic in it as an object; money derives value from it being an object universally admired and desired. This goes back at least to John Locke. Then, all of a sudden, they all simultaneously did a somersault. Immediately, money had become a creature of the state; it was from the state that money derived value; the state that decided what counted for money; the state from which central banks derived their very raison d’etre. Trust me.
But wait a second, can the state be trusted? Every state or just the one I happen to be serving? Until proven guilty, all states had to be assumed innocent. Hence central bankers’ laborious petting and praising of each other – one of their more irksome customs. But, but.. was it the state itself from which money derived value, or was it rather those institutions properly protected by the state – the rule of law, free speech, property rights….? Oh dear.
We have seen why money has to be for ever. But it is equally true that money has to change every now and then, or else it could never adjust to basic changes in society.
The upshot is this: a central bank obeys two imperatives. The first is that whatever is now must be for all time. Second, it must be ready at any time completely to change its practices, its model, its ideology, its communications and its soul. Moreover, this must be done with an illusionists’ skill, all the time pretending that nothing has changed.
Look at a coin. It has two sides, heads and tails. Heads represents sovereignty; tails represents the market. Money is a joint venture. However, you cannot see both at the same time. So central bankers get everybody to focus on one side, while smartly changing their clothes ready to appear dressed for action when the coin is flipped. And nobody will be rude enough to point out the change! These changes must be immediate, radical, and give the illusion of continuity. Otherwise money will lose its magic.
We should never forget money’s magic, part of its mystery as a marvellous invention, a crucial stage – along with coinage, its much later manifestation – in the progress of civilisation. To work its magic, the arrangement governing money has to be seen as fixed and reliable, the bedrock of social and economic life, as hard as granite, part of nature past, present and future. What is in fact fluid, changing, manmade, malleable, fragile and contrived must be presented as solid, fixed, unchanging, resilient, sturdy and natural.
All of history must be rewritten to point to one end, which is the present; not even last year, but now. Last year we were still learning, now we have learnt. The present perfection is the result of centuries of careful preparation, experiment, testing, and learning; we are the epitome of everything that is tried and tested, reliable and trustworthy.
The future of money is always open but must always be regarded as closed.
Central bankers are the necessary illusionists.