Keith Hudson:
> The latest fashionable theory of central banks is that the money supply, > inflation and, hopefully, employment, can be regulated by the interest > rate. Now that governments/central banks are concentrating their minds on > this alone I cannot help thinking that there are sufficient signs already > that it's not working. > > Perhaps this will stimulate some economists to enquire more deeply about > the real nature of what has been the subject of so many Keynesian and > monetary theories in recent decades -- that is, money itself. Perhaps they > will come to the conclusion that money should be restored to having real > value -- instead of being, what is in effect, a paper token whose validity > is sustained only by governmental say-so and the unthinking compliance of > those who use it, or who can speculate against one currency or another for > profit. Goodness, but this does keep coming around. I would suggest that any monetary system, whether fiat or fixed to some real asset such as gold, can only be as stable as the world in which it operates. The gold standard and even the gold exchange standard worked reasonably well in the 19th and early part of the 20th century because of the relative stability of the part of the world, Europe and North America, that mattered. Beginning in 1914, the world of the 20th century came apart violently several times, and it would have been virtually impossible for any international system, no matter how well designed, to hold together and continue to function. Wars, the large-scale displacement of people, industrial destruction and reconstruction and all of the other things that stem from violent upheavals result in winners and losers and therefore large scale transfers of wealth - typically much larger than systems designed for "normal" times can effectively handle. We mustn't forget that, despite being pegged to gold, the value of the US$ was inflated during the1930s because the government felt this was a necessary antidote to the depression. In 1990, before the collapse of the Soviet Union, the rouble was officially valued as equivalent to the US$, though it probably was not really worth that much. By 1995, it was worth 0.002 US$s. Enormous inflation had occurred because the government had been forced to print money to pay bills. Because its ability to tax was extremely curtailed, it would have had to have done so whether it was using money pegged to a commodity or fiat money. My general point is that, under conditions of instability, governments will do what they believe they have to do whether a currency is pegged to a commodity or not. Potentially, everything is in flux. Nothing ever stands for all time. > Until recently the restoration of real-value currencies rather than > national currencies was considered ridiculous. But I've noticed a few > straws in the wind that suggest that this might start to be discussed much > more seriously in the years to come. Hayek's book, "Denationalisation of > Money", published in 1976 is being mentioned more than ever in various > articles and books I've read recently. > > When could sensible value-currencies be restored? Much depends on whether > the earliest interest rate reductions of a year ago have any effect. They > should have have done by now, but if it becomes increasingly apparent in > the coming few months that they're not working then I think that many > economists will question the continuation of the present headlong run of > reductions. Quite rightly, they will start to say: "What if the interest > rate becomes zero and still nothing happens, like Japan? Where do we go > from here?" > > And, of course, there's nowhere to go. There are no other wonder theories > doing the rounds. There'll only be one thing to do: to restore money to its > rightful historical place as the meaningful basis on which all economic > transactions depend. As one possibility,it has been suggested that we are currently moving into a "liquidity trap" and that Japan has been in such a state for some years now. This is the kind of "pushing the string" situation which you describe. There is plenty of liquidity (money) in the economy, but people prefer to hold (or "hoard") it rather than invest or spend it. I'm not quite sure of why they behave this way, but it may be because, under conditions of considerable uncertainty, they see the potential return on their investment or expenditure as being negative - i.e., under the circumstances, they are being "rational maximizers" by holding onto their money. Someone, Paul Krugman I believe, has suggested that the way out of this trap is to inflate the money supply to a point at which the rate of inflation exceeds the rate of interest - i.e. people would lose more by hoarding their money than by investing it. Rather cruel medicine, don't you think? Ed Weick
