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The free-marketeers who favour monetary socialism

I hate to disagree with the Institute of Economic Affairs, an important institution, which for decades has promoted good thinking on economics.

But on monetary policy, the institute is promoting socialism.

Since 1997, it has hosted a Shadow Monetary Policy Committee (SMPC). This committee evidentially believes that the problem with our economy is not the existence of central planners who intervene. It seems to be their position that the economy would do well if only wiser people, like them, were in charge.

No one much mentions this, but Milton Friedman, the father of monetarism, opposed the existence of central banks. While speaking favourably of one US Federal Reserve chairman, Prof. Friedman said that the well-being of our economy shouldn’t rely on one individual being good. He favoured the money supply being decided by computer. Meanwhile, F A Hayek – in a little-promoted IEA publication – favoured privatising the currency and allowing competition.

The Shadow Monetary Policy Committee predates the current Director General of the IEA, Mark Littlewood, who is talented and has called on the Prime Minister to read Hayek. As a Hayekian, does he really believe that the SMPC is doing any good?

Mark, this statist committee is hated by supporters of the IEA. It is surely time to scrap it – and start promoting the ideas of Milton Friedman and F A Hayek. After all, what is the chance of getting the Bank of England to stop promoting monetary socialism, when the IEA is promoting the same?

25 comments to The free-marketeers who favour monetary socialism

  • [...] Samizdata: The free-marketeers who favour monetary [...]

  • Alsadius

    What about folks(like me) who think private money is both morally permissable and really stupid? Sure, remove any laws that may be on the books preventing people from using private currency. But do it for moral reasons, not because anything would change.

  • PeterT

    In the private money era in the UK users benefited from a common base currency, being gold, or gold backed notes. Being a real asset that is easily defined (i.e. measured) it already benefits from public recognition and acceptance. Even if we did have a handful of currencies (i.e. say one issued by each commercial bank), even if not backed by the same asset, or any asset, these would be subject to competitive pressures, like any other good. So I disagree that there are intrinsic reasons for why things would not change.

    I’m not sure there are, in the UK, any laws against private currencies, but the practical obstacles to implementation are non-trivial, not least tax implications. There are also steep regulatory hurdles to engaging in banking activities, which prevents change. Unfortunately any change will either have to be encouraged from the top or brought about by severe crisis.

  • bloke in spain

    Very off topic, but maybe a problem for the Samizdata guys. Visited the site today (nice revamp, glad you kept the cplour of the wallpaper) & logging out of my internet supplier I seem to have eaten 95Mb of data in half an hour. Maybe not a problem for most people but this mobile internet device has a data allowance. 95Mb is close to 1/10 my monthly allocation & about 2€’s worth. Equivalent to a couple hours’ MP3 audio.
    Problem being, the other sites visited that session would normally use around 3 – 4 Mb max & this machine is blocked from downloading pretty well everything without asking first. Unlikely to be a virus. Viruses down generally try to capture media & 95Mb would be about 10 times the text files I have.
    So a question; Are you now set up so any video is downloaded if one opens the page? Lot of newspapers do this, Both for content & ads. But that usually starts the media playback. I think it’s possible to set up so the file just loads the temporary cache, though. Firefox usually blocks downloads for me but it might not if it’s coming from a source I allow.
    Any ideas?.Coz it’s damned annoying.

  • JohnB

    I guess every organisation gets corrupted over time. Especially when its influence is not liked by some.

  • Rich Rostrom

    Friedman said that the well-being of our economy shouldn’t rely on one individual being good. He favoured the money supply being decided by computer.

    The computer just executes the rules determined by some individual or committee. In theory, automating the process would remove personal discretion, which corrupts the result eventually.

    But the rules can always be changed. Circumstances may change, new knowledge may develop. The body in charge of the rules may say that the rules must change – and there’s that damnable discretion again.

  • Antoine Clarke

    There is little to prevent privately-issued money in the UK.

    The only restrictions are:
    1) you can’t refuse to take Bank of England currency as payment for goods and services,
    2) you can’t pretend it’s Bank of England currency (i.e. copies), and
    3) if you’re a bank issuing currency, your HQ must be outside London (50 miles away IIRC).

    Of course, there is no requirement of anyone to accept your private currency.

    Essentially, a chequebook could be used as a currency emitter backed by a combination of the bank holding the account and the person signing the cheque. The cheque book owner could simply write something like “redeemable for the equivalent sum in gold/Big Macs/coffee beans” on the back. Be careful with the choice of goods: some are taxable at 20% in the UK.

  • Laird

    I agree with PeterT; with private currencies* things would change. People might indeed do stupid things, but that’s a given in any system, and with private currencies the market would quickly correct.

    As to Antoine Clarke’s comment, it’s #1 that’s the problem. Legal tender laws make it essentially impossible for private currencies to succeed; Gresham’s Law would drive them out. Simply repealing the legal tender laws, without any other statutory change, would go far toward restoring private currencies.

    * I prefer to use the term “currency” rather than “money”. “Money” is the source of value; “currency” is merely a marker redeemable in money. Unless you’re talking about going back to precious metal coinage it’s best to refer to “currency” to avoid confusion (of which there is already more than enough on this subject!).

    P.S.: I tried out the HTML links and the newly-restored Preview pane. All worked fine. Thanks!

  • Antoine Clarke

    There’s no need to repeal legal tender laws, and to do so would seem like telling everyone that their Bank of England money is now utterly valueless.

    Private currencies emerged when paper ones collapse. In Revolutionary France the death penalty was imposed to people refusing to accept assignats. It didn’t stop people from refusing to take them. The UK’s legal tender laws aren’t that bad.

  • Laird

    That depends upon whether you want to wait for the pound to actually collapse and destroy the economy, or take action now to ameliorate the damage. We’re agreed that the pound (and the dollar) are doomed; repealing the legal tender laws would permit people to legally begin moving to protect themselves. Otherwise harsh penalties (death, even?) are a real possibility in the final days of the collapse as the government pulls out all the stops to protect its currency. Why do you think that’s preferable to a more orderly transition via repeal of the legal tender laws?

  • MakajazMakako

    I remember my grandad showed me a fake pound note from WWII. Apparently the Nazi’s dropped huge quantities of fake money to devalue the currency and f@ck the economy. Sort of like the bank of England eh?

  • Plamus

    Legal tender laws make it essentially impossible for private currencies to succeed; Gresham’s Law would drive them out.

    Laird, I must disagree. Gresham’s Law should be invoked very, very carefully outside of commodity money, and it specifically applies to two (or more) currencies that are all required by legal-tender laws to be accepted as having the same face value (even though they have different intrinsic value). In the case of a private currency, there is no legal-tender requirement. In the absence of legal-tender laws, the reverse Gresham Law applies (aka Thier’s Law) – good money drives out bad. I witnessed it firsthand in Eastern Europe in the early 90′s – it took only a couple of years for an economy to almost completely dollarize (well, and deutsche-markize). Converting the useless official currency into hard currency was the only practical way to preserve value, as inflation marched on, and thus the exchange rate soared.

    To channel Mundell, bad money drives out good money only if they exchange for the same price. As any semi-competently managed private currency is likely to be appreciating against a state-sponsored fiat currency, Mundell’s condition is not met.

    I see the biggest obstacle to private currency not in the laws of economics, but in those of politics. Governments do not like competition, and as long as they have a monopoly on force, they can (and will) destroy a private entity that can credibly threaten a gig as sweet as money creation, which, as we know, is implicit taxation.

  • Antoine Clarke

    Plamus has it right about Gresham’s Law.

    To come back to my cheques written with a promise to exchange for gold.
    If I were to write a cheque for £1,048.58 (leaving the payee blank) and promise to exchange it for an ounce of gold (with the promise written on the back and signed), my cheque could acquire value if the price of gold relative to Bank of England money went up.

    PROVIDED I was trusted to keep that promise. My cheque would gain or lose value as my financial probity, relative to the government’s improved or worsened.

    Which is where the real drawback of private currencies comes: the process of discovering the “good money” isn’t something people care to spend time and risk mistakes with. I wrote about this in a Libertarian Alliance pamphlet in the early 1990s on this problem. So long as inflation doesn’t outstrip wage increases too visibly, it is rational NOT to switch to a private currency. The billionth adopter has a huge advantage over the hundredth. Rather like Windows OS software.

  • Julie near Chicago

    Congrats again, this time to Alex S. and Samizdata, on making the Autonomous Mind 5-Best list.

  • I am afraid this is not a case of the IEA being corrupted – a point I have to make over and over again. The IEA has always promoted an understanding of a free economy by hosting several schools of thought – institutional economics, Austrian economics, public choice economics, monetarism, neo-classical economics, and so on – without ever allowing itself to be taken over by one faction. Since the financial crash we have done an awful lot to bring back into wide circulation (in various ways) Hayek’s works on denationalisation of money as well as Larry White’s work and Jesus Huerta de Soto’s Austrian primer (whose position is supported by many readers of this blog, I should imagine, and by many members of the Libertarian Alliance, but who actually believes in passing laws to make fractional reserve banking illegal!). And just to demonstrate that this promotion of a wide range of liberal (in the proper sense of the word) thinking is not new, it is worth noting that Arthur Seldon published a monograph by James Meade on how to have a more market-oriented incomes policy six years after incomes policy was abolished.

  • Laird

    Plamus, you are correct in the situation where two or more currencies are required to be accepted at face value. However, I continue to maintain that if one currency (i.e., the government’s currency) is required to be accepted at face value, people would hoard a competing private currency that was backed by something tangible (gold or whatever). The only solution is the repeal of legal tender laws and let the market sort it out.

  • Richard Thomas

    Time for me to mention Bitcoin again (which, incidentally is up approx 33% since I last mentioned it). It doesn’t really matter if you think it’s got a chance of succeeding long-term or not, I just recommend learning a bit about it. It’s very educational not least in the way it contrasts and compares against fiat currencies and gold.

    Really, a lot of thought went into it. It even manages to answer Antoine’s criticism about the relative advantages of being an early vs a late adopter. Succeed or fail, I’m pretty sure you’ll be hearing more about it.

  • and just to illustrate the point I made above, the IEA will be publishing on bitcoin and other modern private money examples just as soon as we receive the draft of the paper from the author working on it.

  • “I hate to disagree with the Institute of Economic Affairs, an important institution, which for decades has promoted good thinking on economics.”

    Yeah, yeah, yeah. And you come here not to praise Caesar but to bury him.

    Seriously, though, is it not possible that you are missing the point of the SMPC? Whether or not one likes central banks running monetary policy, they exist and they do, and there is a valuable contribution to be made in examining what the MPC might do and what it should do.

    It’s all very well being purist, but one still has to work in the real world. The IEA has published legions of reports that look at using market mechanisms to improve state services, without necessarily agreeing that the services need to be provided by the state at all. It also publishes reports that suggest replacing state with private services, while subsidising low income service-users, without saying that the ultimate end game should not be a world of free and prosperous citizens able to afford to purchase services with their own resources.

    Is your claim that “the institute is promoting socialism” not the equivalent of saying that the Taxpayers’ Alliance/Institute of Directors Tax Commission, which advocated cutting taxes to c.35% of GDP, are supporters of big state socialism (35% of GDP being large by comparison to historical norms and higher than many other countries today) because they’ve not advocated eliminating all taxes entirely?

  • Plamus

    I continue to maintain that if one currency (i.e., the government’s currency) is required to be accepted at face value, people would hoard a competing private currency that was backed by something tangible (gold or whatever).

    Laird, yes, in the situation you describe, you can have a situation the functions of money separate – people begin to use one currency for saving, and TRY TO use the legal-tender one for exchange. It does not last very long, though – the people who sell goods will ignore the legal-tender requirement. Black markets develop. The supposed rank enforcers themselves (police, secret services) are paid in useless money, and begin to exchange it too. It’s not an equilibrium you can maintain for long without total repression, and at that stage, you have bigger problems.

    I grant you that in theory, if a legal-tender requirement were sustainable, your predicted outcome would hold.

  • Julie near Chicago

    Philip, thanks for the reference to Dr. de Soto’s Austrian Economics “primer.” Downloaded from IEA.

  • Paul Marks

    Milton Friedman was all over the place on money (sometimes good – sometimes bad) – so I would not cite him. Broadly his central problem was that he followed Irving Fisher.

    Fisher was no good on money – as Frank Fetter showed in theory, and Irving Fisher being utterly astonished by both the bust of 1921 and the bust of 1929, showed in practice.

    Even Hayek had his flaws (bad ones). He seemed to think that bank credit money was a good idea (it is not).

    As for problems with private money….

    That the government demands its money in tax?

    Private money “really stupid”.

    What is “really stupid” (and that is being polite) is fiat money – money whose only value is based on government threats.

    The government is pushing this fiat money stuff to the outer limits – we really are heading to “Paper Money Collapse” (acccept it is not even paper).

    “So you trust private bankers more?”

    No I do not – please see above.

    Money should be a commodity – not the toy of governments OR the toy of bankers. After all that is what money was – before governments (and government backed bankers) started to abuse it beyond all limits.

    “Which commodity”.

    No prizes for guessing what I value.

    You value it as well.

    Or if you do not……

    Give all of your gold and silver to me.

    By the way – Gresham’s law is indeed based on RIGGED exchange rates.

    If you “fix” the exchange rate of gold and silver then (indeed) one or the other will fall out of circulation.

  • Laird

    Yes, Paul, but legal tender laws are merely a means of rigging the exchange rate. No one would take the crap money if they weren’t forced to do so.

  • Paul Marks

    Laird – yes.

    Legal tender laws – and tax demands.