[Originally posted on Martindurkin.com]
Giant Meryl Streeps, with hair-dos and pearls, are riding round on London buses, reminding us of the achievements of the Iron Lady. Mrs Thatcher, as we all know, saved Britain by privatising State monopolies. It seems so obvious now what was needed, but at the time Mrs Thatcher was â€˜thinking the unthinkableâ€™.
Well itâ€™s time to think the unthinkable again, and to privatise the biggest State monopoly of all â€¦ the monopoly which is so ubiquitous it usually goes unnoticed, but which has impoverished us more than any other and is the cause of the current world banking and financial crisis. It is time to privatise money.
Of course we canâ€™t possibly privatise money (we are told). We need State monopoly control of dollars and sterling and the rest, because the State acts as guarantor. If it werenâ€™t for the vigilance and honesty of our governments, some unscrupulous neâ€™er-do-wells would come along and debase the currency. We would not have money we can rely on.
This is the sickest joke in economic history. Governments have always robbed their subjects by debasing the currency, but this abuse, in recent years, has burst all bounds of decency and sanity. In the old days, the gold-standard imposed some restraint on politicians, but since the US left the gold standard in the early 1970s, an orgy of money printing has devalued currencies to a degree almost unprecedented in human history (only events like the German hyperinflation can beat it). In Britain, since the early 1970s, sterling has lost more than 90 percent of its value.
As the economist Professor Kevin Dowd points out, â€˜The argument that the state should protect the private sector from monetary disruption ignores the historical evidence. Private monetary systems in the past have been stable and highly successful. By contrast, the history of government money is an appalling record; governments have regularly debased their currencies, driven their banking systems into insolvency, and plundered their subjectsâ€™ wealth by various means of legalised fraud â€¦ If the historical record on monetary regulation is anything to go by, it surely suggests that the public need protecting from the state, not by it.â€™
The effect of this money printing by governments has been to rob people of their savings. But more than this, it is the cause of the phony economic booms which always end, inevitably, in horrible busts, in which millions of honest hard-working people lose their jobs, homes and businesses.
Governments, of course, would rather not be blamed for this. They disguise printing money as best they can, by doing it in devious ways and calling it different things. They do not call it â€˜printing moneyâ€™. They use technical terms like â€˜increased liquidityâ€™ or â€˜quantitative easingâ€™ or they simply talk of taking measures to lower interest rates (which can only be done by printing money). And they talk of booms and busts as if they were natural phenomena, like the tide coming in and out.
Journalists, for their part, are bad at holding government to account. They are confused by the technical details and the jargon. Journalists know that printing money doesnâ€™t sound right, but very few journalists could tell you precisely why printing money is a bad thing. So, for the sake of journalists and everyone else with better things to do than read books on economics, let us remind ourselves of the basics (informed readers can skip a few paragraphs).
Does printing money make us richer? Obviously not. Printing money does not create more value (real wealth). If it did, we could end poverty in Africa by sending over a few photocopiers. As the great economist Ludwig von Mises observes, â€˜An increase in the quantity of money results in no increase in the stock of consumption goods at peopleâ€™s disposal.â€™ And indeed, this isnâ€™t just true of paper money. David Hume explained two centuries ago, suppose the amount of gold in the world magically and suddenly doubled. Would we be twice as rich? Clearly not. What makes us rich is the abundance of goods.
Why do governments do it? There are a few reasons. First, printing money redistributes wealth (to governments and their agents). Imagine a little old lady with savings of Â£100. Now picture the government printing more money. Remember, the more money there is swilling about, the less valuable it is (thatâ€™s why prices go up). As a result of the new money, the real value of the little old ladyâ€™s savings has been reduced. The value that has disappeared from her savings account (the wealth that has been stolen from her) has been redistributed, in effect, to the agent printing the new money (the government). In other words, printing money is the ultimate stealth tax. As the economist Murray Rothbard puts it, the government, by printing money, â€˜can appropriate resources slyly and almost unnoticed, without rousing the hostility touched off by taxation.â€™
Printing money is also way of defrauding people who have lent the government money. Letâ€™s say the government borrows Â£100 (by selling bonds to people who want to save for their pension). If the government prints more money, then the Â£100+interest which it pays back, will, in real terms, be worth less than the Â£100 it borrowed. As Thomas Gale More, a member of President Reaganâ€™s Council of Economic Advisors, reassured him in the mid-80s, not to worry, â€˜We can pay off anybody by running a press.â€™
Governments also like printing money because it creates an artificial and temporary boom which makes politicians look good. In the words of Rothbard, â€˜counterfeiting [government printing of money] can create in its very victims the blissful illusion of unparalleled prosperity.â€™ It temporarily creates, he says, â€˜a tinsel atmosphere of â€œprosperityâ€â€™.
In short, governments have every incentive to print money. But apart from stealing from people, does printing money do any harm? Yes it does. It is the cause of â€˜boom and bustâ€™, of recessions and depressions. Letâ€™s see how. Imagine a game of Monopoly, in which the total amount of money magically doubles. You suddenly get Â£400 for passing Go and you get twice as much for winning a beauty contest. But at the same time the cost of the Gas Works and Fleet Street and the price of houses and so on are also doubled. Obviously the effect will be zero. The vital point to remember about printing money is that it is only because the new money makes its way gradually into the economic system that it has any impact at all.
And it is this that does the damage. In the end, all prices will rise, but there is a lag between price rises in different sectors of the economy, and this confuses business. At first the appearance of new money looks like good news. As von Mises says, â€˜An increase in the quantity of money leads to the appearance in the market of new desire to purchase, which had previously not existed: â€œnew purchasing power,â€ it is usual to say, has been created.â€™
For many businesses, they see the price of the goods theyâ€™re selling pushed up. But the price of wages and raw materials has not yet risen (the new money hasnâ€™t reached that far yet). They are deluded into imagining that there is a genuine rise in demand and that their businesses are more profitable than they really are. These businesses then expand.
The trouble is (Iâ€™m sure you can see whatâ€™s coming), when the new money has made its way through the system, the businesses which have expanded (during the â€˜boomâ€™) suddenly find themselves in difficulty. The â€˜new demandâ€™ has evaporated and, as the price of raw materials and labour catch up, so their profits return to where they were before. But, having expanded in the â€˜boomâ€™ (often by borrowing money), their overheads are now much higher and they have debt to repay. The investment in boom-time turns out to have been what economists call â€˜malinvestmentâ€™. The phony â€˜boomâ€™ has turned companies which may once have been healthy and profitable into loss-making, indebted concerns in danger of going bust.
But thatâ€™s not all printing money does. An interest rate, in a true market, is the price borrowers pay to savers for the temporary use of their money (plus a commission to the banks). Printing money artificially suppresses this price (producing more of anything tends to lower the price). But lowering interest rates, of course, discourages saving and encourages borrowing. Since the value of money is falling, youâ€™d be a mug to keep it in a bank, watching it grow ever less valuable. Borrowing, by contrast, is a great idea. The interest payments are low, and the money you pay back in the end will be worth less, in real terms, than the money you borrow. Since the government allows banks to lend money they havenâ€™t actually got (this is one of the ways they produce more money), we end up with the kind of financial and banking crisis which is currently spreading havoc throughout the world economy.
Bill Bonner, who owns Money Week and wrote the wonderful Empire of Debt, describes money printing and the debt-fuelled boom it encourages in the following way: â€˜Real booms need real money. Typically people save money when they are wary and spend when they are flush. The spending is real. The money is real. The boost in sales is real. The profits are real. But a boom that people build on phony money is itself phony. Every step of the way takes them in the wrong direction. The demand is an illusion. The spending is a mistake. The money is suspect. And the resulting business profits are not merely temporary, they are next yearâ€™s sales disguised as this yearâ€™s earnings. A man who borrows money to begin his spending spree contributes nothing to the economy. Every dollar he spends must somehow be withdrawn. It must be paid back.â€™
Frederick Hayek rightly describes â€˜the government monopoly of the issue and control of moneyâ€™ as â€˜the source and root of all monetary evilâ€™. Allowing governments to control currency is like putting a drunk in charge of a brewery. With grim inevitability, our money will be debased. And in the process, the very thing that makes capitalism work, the very mechanism which has delivered prosperity to so many people, will be handicapped and put at risk. As von Mises argues, â€˜In a social order that is entirely founded on the use of money and in which all accounting is done in terms of money, the destruction of the monetary system means nothing less than the destruction of the basis for all exchange.â€™
Enough is enough. Hayek says of this State monopoly of issuing money, â€˜governments have become wholly inadequate to the task and, it can be said without qualifications, have incessantly and everywhere abused their trust to defraud the people â€¦ When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over two thousand years that was regularly used to exploit and defraud them.â€™
He says, â€˜I have no doubt whatever that private enterprise, if it had not been prevented by government, could and would long ago have provided the public with a choice of currencies, and those that prevailed in competition would have been essentially stable in value and would have prevented both excessive stimulation of investment and the consequent periods of contraction.â€™
There is nothing magical about money. As Hayek points out, the only legislation needed for the creation of private money is the basic law of contract itself, â€˜The ordinary law of contract does all that is necessary without any law giving special function to particular forms of currency â€¦ If I promised to pay 100 sovereigns, it needs no special currency law of legal tender to say that I am bound to pay the 100 sovereigns, and that, if required to pay the 100 sovereigns, I cannot discharge the obligation by anything else.â€
In fact, the prohibition of private money is itself an offence against our most basic freedom to contract with one another, as the lawyer and statistician Lord Farrer pointed out in 1895, â€˜any Law of Legal Tender is in its own nature â€œsuspect.â€â€™
Would private money be more reliable? When stability is the quality most valued in a currency, it is quite clear that in a world of competing moneys, the most stable would be chosen by us. Private money would be more reliable in the same way that a privately made Toyota is more reliable than a State-produced Trabant. Hayek argues forcefully against â€˜the suggestion that government, which only profits from excessive issues [of money], can be trusted more than a private issuer whose whole business depends on his not abusing that trust. Does anyone really believe that in the industrial countries in the West, after the experience of the last half century, anybody trusts the value of government sponsored money more than he would trust the money issued by a private agency whose business was understood to depend wholly on its issuing good money?â€™
Professor Dowd rams home the point, â€˜There is no reason to suppose that competition among the issuers of â€˜moneyâ€™ would lead to the elimination of superior monies any more that there is to suppose that competition among the producers of automobiles would lead to the disappearance of high-quality cars.â€™
It is time to lift the prohibition on private money. It is time to allow VISA or Google or Virgin or whoever else, to issue currency, based on gold or some other form of value measure, which we can chose to use if we so wish. Given the incontinence of our dishonest politicians when it comes to printing money, given their shameful willingness to rob their own citizens, how long do we imagine State currencies would last? They pass laws forcing us to use dollars and pounds because they know that if we had the choice we would not.
It is time to lift the prohibition on private money. As Hayek says, â€˜the reform proposed is not a minor technicality of finance but a crucial issue which may decide the fate of free civilisation.â€™