COMMUNITY EDITORIAL BOARD: Monetary pollution
Some climate scientists, concerned with the warming impact of rising levels of carbon dioxide and other greenhouse gases in the atmosphere, have proposed that to keep temperatures cool what is needed is more pollution. More specifically, they suggest that more particulate pollution in the upper reaches of the atmosphere would reflect the sun’s radiation back into space and thereby have a cooling effect, as has been demonstrated in the past when large volcanic eruptions have led to years without summers.
In a similar way, policymakers across much of the developed world, concerned about rising inequality, are recommending the introduction of a guaranteed minimum income. However, just as it appears senseless to send soot into the air to correct the atmospheric damage wrought by over a hundred years of fossil fuel burning, so too is it senseless to expect easy money for the poor to correct the damage caused by over 30 years of easy money for the banking system and the rich.
The creation of money by central banks and the banking system has predictable consequences. As the economic thinker Henry Hazlitt wrote in his 1965 book, “What You Should Know about Inflation” (keeping in mind that for Hazlitt, inflation refers not to an increase in prices but rather to an increase in the quantity of money): “Inflation makes it possible for some people to get rich by speculation and windfall instead of by hard work. It rewards gambling and penalizes thrift. It conceals and encourages waste and inefficiency in production. It finally tends to demoralize the whole community. It promotes speculation, gambling, squandering, luxury, envy, resentment, discontent, corruption, crime, and increasing drift toward more intervention which may end in dictatorship.”
From the early 1970s onwards, the ability of central banks and the banking system to create money from nothing has distorted the incentives upon which healthy market economies depend. While the reasons for expanding the quantity of money in circulation always seem benign, be they ‘to avoid a financial crisis’ or ‘to reduce unemployment’ the truth is that every dollar so created increases inequality while simultaneously sapping productivity.
The tendency of money printing to exacerbate inequality was first noted by a French merchant by the name of Richard Cantillon who gave his name to the observation that the initial recipients of new money enjoy a higher standard of living at the expense of later recipients.
Cantillon made this observation during the Mississippi Bubble of the early 1700s. A Scottish professional gambler, John Law, convinced the bankrupt French government to consolidate its debts, form a national bank to issue banknotes backed by the debt, and to consolidate various state monopoly trading companies to generate the income to service the debt. Crucially, he made himself head of both the currency-issuing bank and the trading company.
As Law controlled both the Bank of France and the Mississippi Company, he had every incentive to print more banknotes in order to give speculators the means with which to drive the share price higher. Shares that were offered to the public at 500 livres in January 1719 were trading for 10,000 livres a year later!
Clearly, those who received banknotes and bought their shares early did very well, while those who got their banknotes only in time to buy shares near the peak were ruined when the share price returned to 500 livres in 1721. In the end, the new banknotes themselves became worthless and the middle class saw their savings evaporate. However, a lucky few (Cantillon being one of them) who bought early and sold before the crash and who then exchanged their paper livres for other currencies or gold made immense fortunes.
The same pattern can be observed today. As the United Kingdom’s ex-finance minister George Osborne stated a couple of weeks ago, “loose monetary policy…makes the rich richer and makes life more difficult for ordinary savers.” As the prime real estate and other financial assets (such as stocks and bonds) which appreciate in value the most in response to money printing are owned by the already wealthy, they are the prime beneficiaries of easy money policies such as quantitative easing and interest rate suppression.
On the other hand, poorer people who do not own such assets are left to struggle with rising rents (reflecting higher real estate prices) even as their wages remain unchanged. Pensioners, meanwhile, face hardship as the interest earned on their savings approaches zero.
To address this rising wealth and income gap between the financial haves and have-nots, some thinkers are suggesting that governments introduce guaranteed minimum income schemes. On the face of it, such schemes seem to be an elegant way of addressing poverty. Rather than spend money administering different social welfare programs, why not just give everyone enough money to live on? The amounts being suggested are not trivial – this past June the Swiss considered a proposal that would have seen every adult receive 2,500 CHF (over $3,300 CAD) per month, and every child an additional 625 CHF.
To their great credit, Swiss voters rejected the proposal. Looking past the administrative efficiencies of such programs we can see that they would, for many, eliminate the incentive to work. Why would anyone learn a skill and spend their days performing necessary and perhaps unpleasant tasks for the benefit of others if they can get by on a state-provided income doing only those things which they enjoy?
If we ask this question of the poor, though, we should also ask it of the rich. What incentive have the rich had to work hard and create value for others over the past few decades when such easy gains could be enjoyed by simply buying assets and watching their prices rise as a result of central bank money printing? Is it any wonder that productivity growth has fallen in an environment where earning profits from asset-price inflation is so much easier than earning them from developing and producing innovative goods and services?
Having distorted incentives to such a degree already, it is almost tempting to go that last step, grant everyone their free money, and wait for it all to end in tears in a hyper-inflationary currency collapse such as Venezuela is currently suffering. Assuredly, if we do experience the same fate, it will be minimum income schemes for the poor which will take the blame. Conveniently for the rich, the damage done over the past few decades by easy money-fuelled asset price inflation will be ignored.
Clearly, though, it would be better to avoid such a grim outcome altogether. In order to do so, we need to remove monetary pollution from our economy for both the rich and the poor. No one should have the power to create money from nothing and no one should be allowed to become dependent on it.
In the short term, a return to sound money will cause asset prices to fall. Insolvent and inefficient businesses and households who have come to rely on financial speculation as opposed to productive activity to generate income will go bankrupt. However, over the longer term, clearing the monetary pollution from our economic atmosphere is necessary if we are to once again breathe the fresh air of opportunity and enterprise and avoid Hazlitt’s feared drift towards ever-more noxious government intervention ending in dictatorship.
Next week: Betty Ryan