By Frank Taylor
Arguments about debt will always be abstractions until and unless it can be demonstrated that debt and land price inflation hits Joe Soap hard and right in his pocket.
In the April 2007 issue of Prosperity I argued that Monetary Reform should be breaking out of its small circle of the faithful to prove the case as to why debt and land price inflation are so toxic, and thus enable itself to make that case in a much wider public arena.
Like most political sea-changes, Monetary Reform will not happen overnight. It is a journey and during it, we need to progressively revert to the sort of economic management of perhaps 40 years ago, when a higher proportion of government spending was by directly created money (almost 40% in 1960), debt and mortgage levels were far lower, as was bank lending and the ratio of average earnings to house prices.
It seemed, for those who remember it, a pleasanter, slower, quieter, and more convivial world, which although more physically demanding was generally less mentally stressful.
A key economic feature of that era was the use of a wider variety of tools of economic management than interest rates. Both fiscal policy and credit controls were seen as prime tools of economic management.
In a sense, fiscal policy has never gone away. Penal taxes on alcohol and tobacco have been justified as demand control measures, as was the fuel tax escalator. But more recently the debate over green taxation has revived the idea of fiscal policy as a means of demand management — as against being merely a revenue-raising device — albeit with some very timid tinkering with the likes of vehicle excise duty and air passenger charges.
There has not been even this minimal progress on credit controls. Credit controls were once used to dampen localised overheating in the economy, more usually in the consumer and housing markets.
Borrowing could be restricted by placing limits on the duration, deposit levels, and income/borrowing ratios of loans.
Special deposits could be called in, either as a general across-the-board measure by raising the special deposit level for the clearing banks, or as a more localised measure by limiting special deposit increases to consumer and/or mortgage lenders.
The consequences of abandoning credit controls is writ large in the housing market.
House price inflation is so often put down to lack of supply. This is, at best, a half truth. It stands to reason that the process of piling huge amounts of cheap, long term credit – far longer than any manufacturing business could ever hope to obtain – into a fixed non-productive asset whose supply is relatively inelastic, will cause its price to inflate.
The land market is an example of where money can behave like a commodity. In effect there has been a devaluation of money relative to land, caused by an excess supply of money into that market. This process has been masked by relative price stability elsewhere in the economy and by the mendacious fiction of the Retail Price Index (RPI), which views the price of a DVD, a dishwasher or an air ticket as important, but the price of a house as irrelevant.
Credit controls are so sensible that it is a wonder that they have been abandoned.
The process of Monetary Reform cannot even begin until such tools have regained political acceptance and been restored to their rightful place.
Monetary Reformists should be finding out why such sensible measures are viewed with such scorn, and arguing the case.
In doing that, we should be establishing contacts with those who suffer most under the lash of interest rates, such as manufacturers, publicans, farmers and small businesses, who might provide an interested audience for such a discourse.
We might, in doing so, make the point that if such controls are performing good work in China, then why not use them here? Indeed there may be wider questions still as to what is happening in China. There, the world is witnessing infrastructural investment in power stations, trans-continental railways, new cities, public housing, Olympic stadia, hydro-electric schemes, roads, airports and so forth, on an audacious scale. Money seems no object.
Conventional economic wisdom has it that much of this capital formation has been wrung from peasant savings and land holdings either by taxation or sequestration. Whilst it is true that the Chinese peasantry is sorely oppressed it seems unlikely that such huge sums can be squeezed from such a modest pot. Could it be that China is a working example, in part at least, of Monetary Reform?
If so, how many other governments have resorted to such measures? We hear the oft-quoted examples of Canada during WWII, the American Civil War and Guernsey as examples. Guernsey is tiny, and the others were wartime exigencies.
But what of Stalin’s “Great Leap Forward” or the inter-war policies of Germany or Italy? Whatever the ghastly nature of the Hitler regime, Germany burgeoned from a bankrupt failed state to come within an unpleasant eyelash of world conquest within seven years, and at a time when liquidity and investment capital was in seriously short supply internationally.
And what of the extraordinary 19th century progress of Japan which leapt from a feudal backwater to become a world industrial and military power within four decades? Such little economic history as has been written on this phenomenon puts it down to the surplus generated by agricultural reform. Again it seems unlikely that a gallon could be squeezed from such a pint pot. Is that the whole story?
The theoretical model for Monetary Reform would appear to be more or less complete, give or take a few quibbles about terminology and the debate regarding the speed at which such a process can proceed. Such a question is, in any event, a largely practical issue, which cannot be finally decided in an academic vacuum. Now is the time to set aside the pen and take up the sword. This paper proposes that Monetary Reform takes a more open stand by:
1. Commissioning academic research to quantify the real impact of debt and land price inflation and publish those results. This research must be of a high quality and thus entirely credible.
2. Challenging the Treasury and the Bank of England on its refusal to use a wider range of economic management tools, and open channels of communication with those economic sectors which are normally hard hit by the policy of ‘interest rates only’.
3. Finding out what is really happening in China in terms of demand management policy and the possible use of publicly-created money.