Money

by Felix Martin

  “So when it comes to the eclipse of the correct view of money, I don’t think it’s fair to call it a murder, or John Locke a murderer, Monsieur Poirot—the verdict has to be one of accidental death. And as for the way in which the conventional view of money took over: you are right that if there had been a murder, that would have made it a perfect crime. But I’m afraid to say it’s really just a case of mistaken identity—albeit one driven by mass delusion.”

  “All right,” said my friend cautiously, “a case of accidental death and mistaken identity it is, then. But in any case, isn’t the whole point of your argument that the rumours of the death of monetary common sense had been greatly exaggerated? There was Law, like you just said—and more to the point, Bagehot, and Keynes, and Kindleberger and those other characters that you went on about. They kept common sense alive—at least on life support. Luckily for you, actually—since you wouldn’t have known about it otherwise. You may have moaned that the conventional understanding of money is behind the failings of macroeconomic and financial sector policy that got us into the current mess. But then you brightened up and argued that the way those neglected geniuses thought about money can show us the way out again. And if I understood you right, what you really meant by that was a lot of inflation and debt restructuring to fleece the capitalist rich and bail out the oppressed masses—coupled with a shake-up of the banking sector to make the Big Bang of the 1980s look like child’s play. So you don’t get off that easily. Even if I buy your argument that there’s something wrong with the conventional view of money and that it has led to some big mistakes, I still think your alternatives sound like a load of irresponsible, revolutionary claptrap.”

  “Ah yes, I’d forgotten—the charge of fomenting revolution. Well, I think you’ve got me quite wrong there. I’ve argued that there are three basic policies that are suggested by the alternative view of money.

  “The first relates to the management of the monetary standard. You’re right that one of the principal differences between the conventional view of money and the alternative view is that the monetary standard can, and indeed should, be deliberately managed. The conventional view implies that economic value is a natural fact. As such, the job of money and finance is to measure it—but not to influence it. The monetary standard is the fulcrum of the scales of political justice, as it were—and just like the fulcrum on a physical pair of scales, it has to be fixed in place in order to be accurate. Any redistribution required in order to even things up between different members of society should be achieved by taxing stuff away from the people on one side of the scales and doling it out to the people on the other—or perhaps by making the process of accumulating stuff itself more equitable, so that redistribution of this sort isn’t needed.

  “The alternative view of money sees economic values not as a natural fact, but as a concept invented for the purpose of organising society in the most just and prosperous way. The job of money and finance is therefore not just the measurement of value—but the achievement of this objective as well. There is therefore nothing intrinsically wrong with moving the fulcrum of the scales of justice, since their purpose is not to achieve accuracy—a notion without meaning in the social world—but fairness and prosperity. On the alternative view of money, keeping the fulcrum fixed while shifting weight from one scale to the other via fiscal redistribution is certainly one way of doing things—and quite rightly the usual way in normal times. But the nature of monetary society is such that unsustainable inequalities that cannot feasibly be corrected in this way will inevitably occur from time to time. When that happens, it is time to move the fulcrum to restore balance.”

  “You and your scales again! I get it. But in practice what you are talking about is higher inflation, right? You think we need to go back to the 1970s.”

  “Well, you’re right that I think many countries are currently at the point where financial inequalities have reached unsustainable dimensions—the point where there’s too much debt. And yes, I think that the current strategy of trying to sweat these debt mountains off over time—of trying to amortise the debt gradually—is not politically feasible or economically desirable. If we take a leaf out of Solon’s book we will deal with the problem up front instead, either by engineering a few years of significantly higher inflation or by restructuring the debt burden directly. Certainly, the crisis proved that treating low and stable inflation as a sufficient condition for economic stability was a big mistake. The ultimate goal of monetary policy isn’t monetary stability, or financial stability, but a just and prosperous society; and no matter how distant that goal might be from the day-to-day business of central banking, it represents the only reliable guide to policy. So yes: I think the time has come to abandon the cult of inflation-targeting and revert to a broader idea of what monetary policy has to achieve—and to allow the central bankers a larger set of tools to attempt these more difficult goals.”

  “Give a bunch of unaccountable bureaucrats an even larger set of tools? Only a socialist could come up with that!”

  “Not so—that brings us to the second policy. Central banks shouldn’t be independent. Or at least, not like they are now.

  “On the alternative view of money, the question of who decides who should issue money and on what standard is, as we discovered, a vital one. And since money is the ultimate technology for the decentralised organisation of society, there is only one answer that works—the one given by Solon. Only democratic politics provides the sensitivity to current conditions and the legitimacy to deflect criticism that is necessary for money to work sustainably. The fulcrum of the scales will occasionally need to be shifted—and only democratic politics can decide when, and by how much.

  “So the alternative view of money doesn’t for a moment suggest that we give a wider set of tools to an unaccountable central banker. Quite the opposite. As a result of our current, dire economic circumstances, we are relearning the fact that monetary policy is intensely political; so in monetary policy, as in all policy, the challenge is to govern well—not to pretend there is no need for governing. And if we have any faith whatsoever in our liberal, democratic systems, the only way of doing that is to re-establish the link between the polity and its policy-makers.

  “There’s another implication too. The alternative view of money shows that the banking sector is really a lot like the civil service. Money is a technology of government—ideally, of self-government—and banks are its bureaucracy. So the bureaucratic virtues of reliability, a public service ethic, and risk aversion are just as important in banking as entrepreneurial energy. And most important of all, the creation and management of money by private banks too should be subject to the ultimate guidance of democratic politics. Of course, I’m not for a moment talking about the sweeping nationalisation of banks—still less a stepping-up of the conventional regulatory arms race we are engaged in at the moment. But the alternative understanding of money most certainly does imply strict regulation of banks’ specifically monetary activities in accordance with political priorities.”

  “Oh yes: how could I forget—your pie-in-the-sky plan for the reform of banking—and money itself!”

  “Exactly. The third policy implication of the alternative view of money is that we should go for a more radical reform of money and finance in order that we only have to rely on active political regulation in the smallest possible area.”

  “And remind me—what’s the point of all this?”

  “The point is to try to reduce the need for active supervision of money and finance by government—surely not a very socialist objective? The monetary system, as currently configured, is flawed: it is intrinsically unstable. The alternative view of money admits this problem, and implies that the best way to deal with it is to take the frightening step of undertaking radical surgery rather than continuing to prescribe piecemeal treatments. And reforming the banking system is also the only practical way of addressing the even older question of what money’s proper place in
organising our lives is.”

  “What? Narrow banking will tell the Skidelskys How Much Is Enough, and Professor Sandel What Money Can’t Buy? That sounds like a bit of a stretch!”

  “I don’t know whether it will do exactly that. But the biggest difference of all between the conventional and the alternative views of money is that the alternative view acknowledges the genuine dilemma in which people find themselves—today as they did two and a half thousand years ago—over the extent to which money should co-ordinate social life. The sceptical tradition is useful because it warns us what are the wrong answers to the question of what should and should not be weighed in money’s scales: the Spartan solution of abolishing money in order to return to traditional society, for example; or the Soviet solution of attempting to impose administrative restrictions on what can and cannot be bought and sold for money. But it is most useful because it also points to the right answer. It is the lesson of the myth of Midas. The root of money’s irrepressible imperialising tendency, it warns, is neither morals, man, nor markets: it is money itself. As currently constituted, money’s promise looks irresistible—but only because, as Midas discovered, it is actually impossible. Confine that promise to sovereign money alone via the structural fix of narrow banking, and the incentive to mediate everything via money would be radically reduced. Shorn of its specious promise, monetary society would perhaps find natural limits—because Midas would grasp that human relations are just as valuable as financial ones from the outset.”

  “So: you’re going to bin fixed inflation targets and license money-printing in order to escape the debt hangover. You’re going to arm the central bankers to the hilt and tell them to keep firing until politicians tell them to stop. You’re going to make banking a branch of the civil service, and tell savers that if they want to earn a half-decent return on their nest eggs, they’d better be ready to take some losses as well. And if anyone complains about this marvellous new policy mix, you’re going to tell them not to worry because as well as preventing financial crises, it’s the only way of avoiding the fate of a deranged despot from story-time. It sounds like a cross between Karl Marx, Ayn Rand, and the Brothers Grimm. I rest my case.”

  “I’m just getting going: that’s only the practical agenda. Given that all these problems originate with the wrong understanding of money, there’s not much point fixing the policies if we don’t fix the ideas behind them too. So there’s an intellectual agenda as well.

  “The key, I’ve argued, is economics. Modern, orthodox economics is a uniquely powerful set of ideas which pervades not only the world’s central banks and finance ministries but popular culture and personal ethics as well—and the conventional view of money is ingrained in its core. More important for the long term than any of the practical policies we just discussed is the reform of economics. As with the practical policies, piecemeal reforms won’t do. We need finally to bring about the Reformation that never happened. We need to reformulate economics so that it starts from a realistic understanding of money. On the alternative view of money, understanding the economy properly also means understanding politics, history, psychology—and ethics. The practical knowledge of finance and commerce taught in today’s business schools and the detailed understanding of institutions and their evolution taught in history departments need to be reintegrated into the teaching of economics, since as Bagehot said, ‘no abstract argument, and no mathematical computation’ can teach what actually determines trust and confidence in the real world. At the same time, the ability to grapple in a grown-up way with moral and political dilemmas developed in departments of philosophy and politics must also find a place, since as Keynes said, ‘economics is a moral and not a natural science,’ and an economist must therefore be ‘mathematician, historian, statesman and philosopher in some degree.’ ”

  “Right. So once we’ve inflated away our debts and euthanised the banking sector, all we have to do is rethink economics from the ground up. Forgive me if I sound a bit unimaginative. But to me this all sounds pointlessly radical and utterly unrealistic. I’m sorry: if you’re asking me to vote for society, regulation, and government, against individualism, free choice, and the market, you can forget it—they are our only hopes. And if you’re asking me to vote to chuck out everything economics teaches at the moment and start again you can count me out of that as well. One thing a career in business has taught me is not to waste time on lost causes—regardless of how worthy they are.”

  “But I agree with all that. The practical and intellectual agenda I’ve just described isn’t meant to start a socialist revolution—it’s meant to stave one off.

  “Today, for the first time in a generation or more, many people—and in particular those without a vested interest in business as usual—are losing faith in the ability of the current economic system to deliver peace, prosperity, freedom, and fairness. You know the facts. The median income of American households has hardly risen for more than two decades. Inequalities of wealth are higher now than at any time since the 1930s. The baby boomers own all the houses, and no one under thirty can get on the property ladder. These are not short-term problems—they have built up over decades. The crisis just exposed them and made them worse. I know you’ll laugh if I mention the Occupy movement or the indignados of Madrid—but these people are asking a question which seems perfectly sensible if you just look at the bare statistics: is capitalism really all it’s cracked up to be?

  “Now, you and I agree that basically it is—or at least, it’s better than anything else. But unless we can explain what’s gone wrong, we will lose the argument. You know my answer: the problem is not capitalism, but money and the way we think about it. You may think the policies implied by this answer are too radical and the intellectual revolution impractical. But the alternatives—whether keeping things as they are or kicking capitalism for something else—are worse. I am going to have to rely on a cleverer and more persuasive thinker again to try to convince you. But this time I’ll stick to one of the neglected geniuses themselves. You don’t like the idea that the monetary standard should be deliberately manipulated and central bankers subject to political control, because you don’t believe government should interfere with business. That’s quite right as an operational principle in normal times. But as Keynes warned in 1923, those who pursue this principle dogmatically become ‘the worst enemies of what they seek to preserve … nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable … The absolutists of contract … are the real parents of revolution.’ Likewise, you think the reform of economics is a lost cause—and I agree that it won’t be easy. But since, as Keynes wrote in 1936, ‘soon or late it is ideas, not vested interests, which are dangerous for good or evil,’ it has to be done if money is to be saved from itself.

  “So you see: it’s not experimenting with the alternative understanding of money that risks a revolution—it’s sticking to the conventional one.”

  “All right, all right,” said my exasperated friend, “I give in! Maybe you’re right. I’ll give you the benefit of the doubt. We definitely are in quite a mess, so I suppose we should be taking some risks with policy. And since I’ve admitted that we should be thinking about money differently, I suppose we should do the logical thing and try to teach our budding economists differently. Yes, I think I’ll write to my old university and tell them they should add a few of those neglected geniuses to the curriculum.”

  “At last! That’s more like it!”

  “I’ll write to my member of Parliament and tell her to submit a bill to bring in narrow banking.”

  “Yes! That’s the spirit!”

  “And what about the head of the International Monetary Fund? Should I email her as well?”

  “Absolutely! I think she might even be in favour already!”

  “But first of all, I’ll write to the new Governor of the Bank of England and tell him he needs to stop fretting abou
t that fixed inflation target and bust us out of this economic hangover with a bout of good, old-fashioned inflation!”

  “Bravo! Only … there is one other thing I ought to have mentioned.”

  “What? Don’t tell me there’s another policy you forgot.”

  “No, no—it’s not that. It’s just that there’s one other important thing about money—in a sense the most important thing about it—that I realise I forgot to explain.”

  “After all that? Well, what is it?”

  “It’s just that, you see, the sovereign doesn’t actually control money—so I suppose some of those letters of yours might be wrongly addressed.”

  “What?”

  “No. You see, money is a social phenomenon—like language—so the whole notion that the sovereign or the central bank controls the standard is in fact a myth. It doesn’t control the monetary standard any more than the editors of the Oxford English Dictionary control the meaning of words.”

  “You must be joking.”

  “I’m afraid not.

  “You see, because money, like language, is intrinsically social, one certainly can’t just invent it on one’s own. A famous economist once said that anyone can issue their own money—the problem is getting it accepted. That’s exactly right: anyone can write IOUs—and depending on how other people rate the creditworthiness and liquidity of those IOUs, they can circulate as money. But the famous economist was making an assumption that these IOUs are denominated in dollars or euros or pounds or whatever. Because what anyone cannot do is issue their own money—regardless of how creditworthy an issuer they are—denominated in their own, private, monetary unit. The IOUs would be quite literally meaningless. It would be as absurd for you or I to decide unilaterally on our own monetary standard as it was for Humpty-Dumpty to claim to Alice that his words mean just what he wants them to mean.