A Guide to Good Money: Beyond the Illusions of Asset Inflation

284 Pages·2022·3.326 MB·English

by  Brendan Brown, Robert Pringle

Beyond the Illusions of Asset Inflation
Brendan Brown
Robert Pringle
A Guide to Good Money
·
Brendan Brown Robert Pringle
A Guide to Good
Money
Beyond the Illusions of Asset Inflation
Brendan Brown Robert Pringle
Hudson Institute Central Banking Publications
Washington, USA London, UK
ISBN 978-3-031-06040-3 ISBN 978-3-031-06041-0 (eBook)
https://doi.org/10.1007/978-3-031-06041-0
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To my late mother, Irene Brown
—Brendan Brown
To my wife
—Robert Pringle
Preface
This book has been written primarily for people who are interested in
knowing about the world’s monetary problems but who may not have enough
basic knowledge to follow the comments on TV, online or in the newspapers.
It is a guide to how the money system works today and how it might work
in the future. Our guide should also appeal, as a quest for truth amidst so
much contemporary obfuscation, to specialist readers usually more at home
with journal articles.
It focuses on the big issues—why the money system matters to all of
us, how inflation spreads round the world, how financial crises occur and
why governments’ efforts to patch things up end in failure—causing far-
reaching economic, social and geopolitical damage. We, the authors, present
a point of view. We take sides. There is good money and there is bad money;
good regimes treat everyone equally, bad regimes are easily manipulated by
a minority. We devote one part to “the essence of good money” and another
part to analysing bad money and the grip it seems to have on us.
Bad money has huge costs for people everywhere. Over four chapters,
we show that it is based on a faulty and quite recent concept—the state
theory of money, that it generates episodes of sustained asset inflation and has
other dire consequences. These include a shortening of investment horizons,
skewing the allocation of capital to get-rich-quick projects which hot spec-
ulative markets overrate and detaching money prices from the real value of
goods or services. It levies several forms of taxation without the normal checks
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viii Preface
and balances of a legislative process. It causes widening inequality alongside
reduced general prosperity. So we should avoid it like the plague.
Yet, most monetary regimes in the world now are, we judge, “moderately
bad”. If true (and we present the evidence), what keeps such inferior and
dangerous systems in power? We have a chapter on that. What difference has
the pandemic made? Many governments have been claiming that with their
help, we “won” the battle with the virus. We argue on the contrary that official
policies were far from optimal—that the so-called “victory” over Covid was
indeed Pyrrhic.
The final part—“Reform, Idealism and Prosperity” is all about imple-
mentation, i.e. the reforms needed to instal good money regimes and the
obstacles reformers will face. Good money needs a solid anchor. We discuss
what features it should have and review candidates for this key function.
Central banks have tried to put one in place—“inflation targeting”. We take
a different path. Money should be tied to the real world.
We also discuss the politics of reform. Which states or currency areas will
lead the world on to good money? The status quo is defended by a “moat of
consensus”. Reformers need to cross it before seizing the castle, which, like
Kafka’s, looms ominously over us.
The authors would like to thank William White for having so meticulously
and constructively read our whole volume in manuscript form. His stimulus
and encouragement meant so much to us both at the inevitable moment of
doubt and re-casting which marks the end-phase of book-writing. We also
acknowledge the critical nurturing of the project from its start by our editor,
Tula Weis.
Washington, USA Brendan Brown
London, UK Robert Pringle
March 2022
Introduction
All of us would like to live in a good society. Yes, people have differing ideas of
what exactly that means. Yet most of us would agree that it would have certain
basic features. These would include—in no particular order—the rule of law,
an independent judiciary, freedom from arbitrary arrest and imprisonment,
respect for human rights and the rights of minorities, secure property rights,
absence of ethnic or gender discrimination, plus freedom of speech and of
religious belief. The key questions that we pose in this book are the following:
what kind of money and financial system would foster/nourish and protect
such a society best and how would it differ from our present system? Money
may not appear as fundamental a matter as some of the other features of a
good society already mentioned, but we believe it is pretty basic. We argue
that our money system is deeply flawed, and that, it imperils our enjoyment
of the other properties of a good society. So what is wrong and how can we
fix it?
To address these questions, we need to answer a prior question: what is
money and the money system for? The answer might seem obvious enough:
we need money to buy and sell things with. If you want to sell, unless the
person buying your service has exactly what you want and you are both ready
to do a barter deal, you would both do better doing the deal at an agreed
price in money. We need it to compare prices offered by different vendors
and to compare the profits of a company or the accounts of a charity over
time. It is also helpful in many other ways—for instance if we decide to
wait before we buy something, we can keep the sum in money. So money
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x Introduction
is not only whatever is accepted in payment in a society but is also potential
purchasing power. But money is even more than that—it is an essential ingre-
dient that lets markets operate. Only through functioning markets can we
have any confidence in being able to buy or sell what we want when we want
to. Only with money or access to it can we plan our lives with confidence. A
supply of money is thus crucial to the attainment of personal liberty.
We should, however, pay attention not just to the supply of money but also
to its quality. A high-quality money is a good from which we all derive bene-
fits, both as individuals and as a society. It is critical to the proper operation
of the modern market economy, which has been called the most complicated
piece of machinery in history. There, it is a foundation of a social structure
that supports high ethical standards, while a poor-quality money undermines
those standards. There is no discrimination in the provision of good-quality
money. Those without power or connections do not have to put up with
an inferior good. It does not favour the monopolist or would-be monopo-
list. Good-quality money is a foundation of a liberal political order as well as
prosperity. It goes along with better economic and social outcomes. What we
mean by good-quality money will become clearer in the course of this book.
Suffice to mention now that it should be reliable, easy to use, widely accept-
able and be expected to maintain its value in the very long run. It should also
go along with a responsive and a diverse array of competitive banking and
other financial services.
Nowhere in the world can we observe such a money in operation. Official
spokespersons insist that the public trust the current monetary system which,
they say, safely looks after people’s money and supports business activity.
In our contemporary world (though we must now make exception for the
pandemic inflation shock of 2021 followed by the European war shock of
2022), many people, at least in the major industrial economies, in their
everyday financial decision-making act as if the value of money were broadly
stable. Interest rates are low by modern historical comparison and people
deemed creditworthy can obtain loans—for example, for house purchase,
albeit at highly inflated property prices.
However, we shall argue that official reassurances are empty. Just to point
to some obvious problems; the money system is laden with debt; financial
crises recur; and nobody in the corridors of power knows how to prevent
them short of at least partially nationalising the entire system while amassing
armies of regulators and compliance officers. Further, we shall argue that
social ills seemingly unconnected to the monetary system are to a large
extent its unintended consequences. Capital investment has been weak in
many countries for many years, as has productivity growth. Linked to this,
Introduction xi
middle-class incomes have stagnated or advanced so slightly as to be imper-
ceptible in many nations for a generation of more. Looking ahead, millions
are likely to lose their jobs in the next severe downturn with little prospect
of finding new employment except at very low pay, as occurred in the last
economic expansion. The financial system discriminates against small and
medium-sized firms in the sense that they face higher costs in large part due
to their more restricted access to competing suppliers of services (especially
loans)—with regulatory and compliance hurdles an important factor here.
(Yes, there is private equity, but that is a story for later in this volume!). At the
same time, asset inflation has increased financial and wider economic fragility
from a long-run perspective, while increasing inequality of wealth and in
many countries inequality of incomes as well (See Glossary for a definition of
asset inflation). We argue that asset inflation has critically strengthened the
destructive forces of monopoly capitalism which both Adam Smith and Karl
Marx warned in their own ways would imperil the liberal capitalist order.
While low-quality money has worsened many social ills, it is by no means
their sole cause. Nor do we claim that high-quality money would be a panacea
for them. Indeed, it is wrong to expect money, however “good”, to solve
political and economic problems, though it should make some of these less
difficult in so far as it can raise the general level of prosperity compared to
where this would be under inferior money regimes. Rather, we should view
good money as a critical foundation block of the good society. We reject the
notion that there is a trade-off whereby chipping at that foundation block or
weakening it in any way can produce a better society. The erroneous belief
that you can address so many social and economic problems by throwing
money at them is itself one of the sources of the deterioration of the quality
of money. Indeed, we take issue with the whole idea that an ideal condition
described as “full employment” can be reached by use of active monetary
policies. Such ideas can easily end up producing what we call “bad money”.
Indeed, that is what has happened. It is easy to understand why governments
make such claims—it helps to get them elected—but we will show that these
claims rest on continuous state propaganda and historical myth-making. It is
often asserted, for example, that a plentiful supply of money ensured recovery
from the Great Recession of 2007–2009 and lessened the economic pain of
the corona virus pandemic. We argue that these assertions are false.
Although a good monetary regime would not guarantee progress towards
a good society, it could and would contribute mightily to its possibility.
Good money is a necessary but not a sufficient condition on its own of a
good society. Without good money, there will not be a good society. But
this requires more than good money. Beyond that statement of principle,