by Samuel Gregg
If a society regards governmental manipulation of money as the antidote to economic challenges, a type of poison will work its way through the body politic, undermining justice and the common good.
Money: it’s on everyone’s mind sometimes. In recent years, however, many have suggested there are some fundamental problems with the way money presently functions in our economies.
No one is seriously denying money’s unique ability to serve simultaneously as a medium of exchange, a measure and store of value, and a means of calculation. Yet deep reservations about the current workings of the world’s monetary systems, both foreign and domestic, have been expressed by people ranging from Senator Rand Paul (who is fiercely critical of the Federal Reserve), to Pope Francis (who has denounced what he calls “the cult of money”) and France’s François Hollande (who once described “big finance” as his “greatest adversary”).
Some censures focus on the observable economic effects of particular monetary policy choices. There is, for example, no shortage of commentators who believe that the Greenspan Federal Reserve’s decision to keep lowering the federal funds target rate for five years after the bursting of the dot-com bubble and September 11 contributed to the excess money that fueled the housing-market bubble. Other concerns seem to have more to do with worries about greed per se than with the finer points of central banking.
Often missing from these discussions, however, is reflection on the more subtle ways in which the treatment of money and monetary policy by governments and central banks can undermine justice. An obvious example is those instances in which central banks appear to stray outside the limits of their defined charters. In February, for instance, Germany’s Federal Constitutional Courtruled that the European Central Bank’s program for purchasing sovereign bonds on secondary markets was most likely an attempt to circumvent EU law’s general prohibition against direct financing of governments by the ECB.
It is always problematic, to say the least, for any state institution to behave in an extra-legal manner. Sometimes, however, even the perfectly legal conduct of monetary policy, whether by independent central banks or by central banks operating under tight political leashes, raises many questions that have as much to do with justice as with their impact on economic life. Take, for instance, the seemingly benign choice of governments and central banks to pursue a stable low inflation policy, one that’s often expressed in terms of annual inflation targets of, say, 2 percent.
One argument for such policies is that they help provide a small, permanent stimulus for short to medium-term employment without letting the full-blown inflation genie out of the bottle. This idea is traceable to John Maynard Keynes’s General Theory, but even further back to the eighteenth-century Scottish-French financier John Law. The latter insisted that “addition to the money will employ the people who are now idle.” It’s worth noting that Law’s money-creation schemes contributed to the famous Mississippi Bubble that helped bring France to its financial knees in 1720.
The short-term benefits—but also the long-term problems—associated with these approaches to money have been known for several centuries. In his 1597Treatise on the Alteration of Money, the sixteenth-century Jesuit theologian Juan de Mariana stated that the equivalent of inflationary policies of his time—currency-debasement—was “like the drink given the sick person unduly, which first refreshes him, but later causes more serious accidents and makes the illness worse.”
Certainly, Mariana observed, depreciation may temporarily stimulate production and lighten the burden of debt. Nevertheless, Mariana also maintained, it would certainly result in inflationary price rises and undermine commercial productivity as more people turned their attention away from innovation in the real economy and toward the wrong types of financial speculation. In his own lifetime, Mariana witnessed no fewer than five official state bankruptcies (1557, 1560, 1575, 1596, and 1607) of his native Spain—not one of which was averted by the successive currency debasements undertaken by Philip II and his successor Philip III.
Looking at the present, even small levels of inflation help governments—and other debtors—to reduce the real value of their debts. If, for instance, a government takes on debt in the form of bond issues, but also insists on maintaining low interest rates and big spending programs, the inflationary effect will be to reduce the bonds’ real value.
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