A Guide to Good Money - Beyond the Illusions of Asset Inflation
In this thought–provoking work, Brendan Brown and Robert Pringle challenge the monetary policies currently practised by central banks and governments around the world. At the heart of this critique is their contention that one of the central tenets of current central banking policy – the desirability of a degree of inflation which is permitted and indeed stimulated by leading central bankers ( currently 2% for the Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of England) - is misguided, resulting in ‘ Bad Money’ under which prices continually rise. ‘Good Money, in this compelling study, permits prices to return to their proper levels after some relatively short period of unnaturally high prices. Long and sometimes virulent episodes of monetary inflation, they assert, fuel irrational forces in the markets when real estate, commodities and equities are presented as a hedge against inflation. A flight from persistently inflating ‘ bad money’ disguises the true value – or lack of it - of such assets. The authors describe these effects as illusions encouraging poor investment decisions in assets which, they counter, should in fact only rise in value as a result of advances in productivity.
Historic examples of efforts to manipulate monetary standards for short-term political purposes are cited, starting with the US billion-dollar congress in the late 19th century which passed the Sherman Silver act, purchasing silver at a higher than market rate to secure support from western farmers for other policies of the Republican party. The Fed’s low-interest rates in the 1920s and very recently Trump’s attempts to force the Fed to loosen monetary policy are also given as further examples of the way in which ‘ bad money’ is used to fix shocks which might in fact be no more than short term in nature. Better, the authors argue, to allow some short-term turbulence in markets to work its way out naturally, rather than try to fiddle with the underlying value of the currency. Where monetary policies are designed to counter short-term negative effects they will inevitably create a mood of short-term thinking, militating against long-term investments and projects which demand a long-term gestation.
The authors of A Guide to Good Money do not shy away from identifying the culprits. Despite the established orthodoxy of central banking independence, there is inevitably more than a little suspicion surrounding the motives in policy-making by people who owe their appointments or continuing tenure to political masters. Central banks which rescue damaging government policies with bailouts and are commended for doing so inevitably come in for criticism as does ‘ Big Tech’. For Good Money to flourish, there must be limits on the power of the state. The state of Good Money needs to be constitutionally enshrined to protect it against interference by government and political parties.
What do the authors propose as a solution to this set of problems? There are two propositions: one is an entirely novel idea linking currencies to the real performance of stock markets. This idea is explored at length, but remains perhaps, far from fully developed. The second proposal involves the restoration of the gold standard with all its classical conditions: the fixing of the numeraire or unit of account ( the dollar, the euro, the pound sterling for example) to a specific weight of gold; the free convertibility of paper currency to gold and the free export and import of that gold. This, many might think, is a daring suggestion. Neither Britain, the original adopter of the gold standard, nor the US, the last country to lock its currency into gold, were able to sustain that monetary contract. It is now more than fifty years since the US ‘closed the gold window’ bringing to an end the last officially permitted convertibility of paper currency into gold. Surely, the orthodoxy runs, gold has lost its credibility in the present world. Indeed, the IMF specifically forbids its member states from linking their currencies to gold. But haven’t Brown and Pringle got a point? The Bank of England’s own online inflation calculator confirms that over the period of the gold standard’s sway, goods and services costing £10 in 1821 would cost £9:10 Shillings in 1914 when full gold convertibility was suspended on the outbreak of the first World war. Over that period of nearly a century inflation averaged at -0.1% per year, an astonishing record. In contrast to this remarkable period of stability ( and using the same, Bank of England Inflation Calculator ), goods and services costing £10 in 1931, the year in which the sterling came off the gold standard, would at the end of last year cost £540.
A Guide to Good Money throws down the challenge: how far is a government prepared to go in condoning continuing and irreversible inflation before a major re-ordering becomes necessary? And if that re-ordering is accepted, what form other than the traditional gold standard can be a guarantee of stable currency over the long term?
The Oddness of the British
The current Brexit paralysis in British politics has bemused the continentals, but De Gaulle, had he been alive today, would no doubt have reminded all of his 1963 press conference, during which he justified his decision to veto Britain’s application to join what was then called the Common Market.
Considering the founding six continental states of the Common Market, De Gaulle dwelt on their shared continental geography and economies based on agriculture. Britain, in contrast, he described as insular, maritime, industrial, linked to the most remote markets and possessing ‘very marked and very original habits and traditions.’ (Transcript of De Gaulle’s Press conference statement, 14 January 1963, ETH Zurich university website). While no one could argue with his description of Britain as insular (at least in terms of geography) and maritime, his belief that Britain was essentially industrial and linked to the most remote markets has been, ironically , eroded by time and by the country’s increasing dependence on the European markets which are so much easier to access than those of South East Asia or Latin America , where Britain’s trade has significantly declined or Central Asia where it has never really taken off.
It remains to be seen whether, following Brexit, Britain will again achieve the same levels of trade as it once had in the southern hemisphere or Far East. No amount of bilateral trade deals will make this a reality. Only the creativity, drive and hunger of British companies will enable the British economy to adjust to the transformative effect of Brexit. Political leaders are likely to talk a lot about the opportunities, but are hardly in post long enough to make a difference. The best of our Ambassadors and High Commissioners overseas can and often do, however, make a difference. What constitutes the best is something I would like to come back to on another occasion.
Where de Gaulle was absolutely right, though, was in describing Britain as having ‘very marked and very original habits and traditions.’ What precisely he meant by this, he did not elaborate. But it has seemed to me for quite some time that there are some very clear differences between the way Britain has developed in comparison with continental countries, at least in terms of some of the basics of operating a state. For a start, of course, Britain is odd in not having a written constitution. There is nothing inherently wrong in not having a single constitutional document. Better to have no such constitution than to have a bad one. But it is odd when compared to the continental approach. A further difference lies in the fact that while European legal systems rely on codified statues, the British Common Law system gives judges the leeway to interpret the detail of law based on precedent and custom.
And yet, when it comes to observing the rules, the approach of the British government has often been criticised at home for following them slavishly. The European approach to the rules and regulations, on the other hand, seems to demonstrate a special ‘flexibility ‘which to us would seem plain wrong. Thus, when France and Germany breeched the economic requirements of the Maastricht treaty by running up excessive debt to GDP rates and budget deficits in 2004-05, they simply suspended the Stability and Growth pact by which their economic profligacy would have been formally censured. Sweden, which unlike Denmark and Britain had no derogation permitting it to avoid adoption of the Euro, committed on joining the European Union to adopt the Euro. And yet there are no indications that it really intends to do so . Likewise, when the influx of refugees from the Middle East and North Africa threatened to overwhelm Austria and some Eastern members of the EU, they simply suspended free movement guaranteed under the Schengen agreement. On a wider canvas, Germany which is by far the economic giant of the European Union with the strongest economy, fails to fulfil its NATO spending obligations.
Thus, when France and Germany breeched the economic requirements of the Maastricht treaty by running up excessive debt to GDP rates and budget deficits in 2004-05, they simply suspended the Stability and Growth pact by which their economic profligacy would have been formally censured. Sweden, which unlike Denmark and Britain had no derogation permitting it to avoid adoption of the Euro, committed on joining the European Union to adopt the Euro. And yet there are no indications that it really intends to do so . Likewise, when the influx of refugees from the Middle East and North Africa threatened to overwhelm Austria and some Eastern members of the EU, they simply suspended free movement guaranteed under the Schengen agreement. On a wider canvas, Germany which is by far the economic giant of the European Union with the strongest economy, fails to fulfil its NATO spending obligations.
Other British 'pecularities' come to mind. The layout of the House of Commons and the way that business is conducted there – unchanged in its braying and mob – like baiting from the way in which it was conducted two hundred years ago – must seem odd, not to say undignified, not only to the Continentals, but also to most other states around the world. England’s self – proclaimed title as ‘mother of parliaments’ presumably encourages the notion amongst the political class that there is no real need to change, no matter how much the performance in parliament leaves the electorate embarrassed and at times exasperated. No less embarrassing now is the extraordinarily inflated size of the upper chamber, which at approaching 800 members is second only in size to the National People’s Congress of China. Much has been said about introducing a new and better way of doing business or of reforming the upper house (the last attempt fell apart amidst predictable party squabbles over horse – trading), but nothing actually happens.
De Gaulle was right: the country is possessed of some very marked habits which perhaps always meant that we would not sit comfortably within the European political arrangement. The current political mess in Westminster, however, gives little reason for confidence , much less pride , in the British system, not matter how flawed the European model. As representative democracy in its current form in this country is proving past its 'best by' date , what options are available to the electorate to improve the performance of its representatives? I have wondered in the past whether mass abstention in some election or another might serve as a warning shot to them But on reflection it seems to me that that would simply leave the field open to the minority of activists on the right and left to deliver a derisory number of votes to secure election for their candidates from one of the currently discredited parties In other words - no change.
Attempts to field a third party as a serious alternative over the past 40 years or so have not succeeded in changing the face of politics. That is not to say we should give up trying. But is it not likely that the people who will make up such a third party will by and large be the same kind of people who currently make up the conservatives and labour ? Does the party mindset and machinery provide the right sort of representatives for the 21st Century ?
Diplomacy and Trade in a Post-Brexit World
In my last post ‘The oddness of the British’, I wrote that Britain’s ability to weather the Brexit storm will depend to a large extent on how hungry British businesses will prove to be. Will they for instance be able to seek out and win contracts around the world as many of the Brexiteers expect? I also wrote that, while I had doubts about the ability of politicians to make a lasting difference in supporting a Company’s sales drive overseas, ‘The best of our Ambassadors and High Commissioners can and often do make a difference.’ This was based on my personal experience in a number of overseas markets.
While the popular imagination feeds on images of suave diplomats swanning around at cocktail parties in sophisticated European capitals, the majority spend most of their overseas time in postings that can often be tough. Too often, Embassy staff are at risk in the countries in which they serve. In 1970 Geoffrey Jackson, the Ambassador to Uruguay was kidnapped by Tupomaros guerrillas and held for nine months. Britain’s Ambassador to Ireland, Christopher Ewart Biggs and Richard Sykes, the Ambassador to the Netherlands were both assassinated by the IRA in the 1970s. Roger Short, the Consul General in Istanbul was killed in a truck – bombing attack on the Consulate in that city in 2003. Since 1972, British Diplomatic premises have been attacked in Dublin, Istanbul and Tehran. Further attacks have occurred in South Korea (2004) and in Croatia in 2005 (a letter bomb)
In 2010, a convoy escorting the Deputy Ambassador to Yemen, Fiona Gibb was attacked and in the same year a suicide bomber narrowly failed to kill the Ambassador, Tim Torlot. A convoy of British Embassy staff being evacuated from Libya during the 2011 revolution was shot at and in 2012 the Ambassador to Libya had a narrow escape when a rocket propelled grenade, apparently the favoured means of attacking diplomatic vehicles, was fired at his car. More recently a member of the staff of the British Embassy in Beirut was murdered there last year. Embassy staff have been evacuated due to security concerns from Somalia in 1991, Albania in 1997, Tehran in 2011, South Sudan in 2013, Yemen in 2015. And this is to say nothing of the exotic illnesses picked up in some of the tougher postings.
Yes, there are plenty of national day receptions to be attended and entertainment of fellow diplomats from other countries is a part of the job, but representing the country abroad as a member of HM Diplomatic Service is not entirely a bowl of cherries.
From the point of view of Britain’s export drive in a post -Brexit world a lot will be expected of our Diplomatic staff and Department for International Trade officials based at our Embassies and High Commissions overseas. Arguably today’s senior diplomats and officials may be more in tune with business requirements than their predecessors of the 1960s and 1970s who had been brought up at a time when much of the world was still coloured pink on the map. Britain at that time was still , if not a superpower , at least considered a very significant player and Heads of British Diplomatic Missions still found themselves more naturally at home in the traditional functions of diplomacy than in the trade promotion function.
But, over time there has been a clear change in the behaviour of Ambassadors and High Commissioners in promoting UK PLC abroad. De La Rue, the banknote and (still, at that time) passport printer for which I worked was perhaps not a typical British Company, working as it did for Central Banks and Governments around the world. There was no doubt something intriguing about the products involved which was attractive to many senior Diplomats who had started their careers in the 1960s and 1970s. And by the mid -1990s it was evident that some Ambassadors and High Commissioners were proving very active in their support of the Company’s bid for business overseas.
In my own experience from that time High Commissioners in Malaysia and Cameroon made crucial contributions to our efforts to secure contracts in banknotes and passports. An Ambassador to one African state was so effective in recovering a significant debt owed by that government to De La Rue that it would be no exaggeration to say that he played an important part in turning around an otherwise struggling division of the PLC. Senior Diplomats like Judith MacGregor , a former Ambassador to Mexico , were tremendously helpful in resolving logistical problems which in the case of the shipment of banknotes could prove highly embarrassing if not resolved. Of course, not all Embassies are going to perform to a uniformly effective standard. But if Britain’s economy is going to be supported by an improved performance in exports , the current generation of experienced professional diplomats and other officials posted overseas will play an important role in it in addition to all the other things that are expected of them.
Currency for an Independent Scotland ?
News that polls in Scotland are showing a significant increase in support for independence encourages me to revisit the question of what the currency arrangements might be for an independent Scottish Currency.
At the time of the last referendum, the declared preferred position of the SNP on the question of Scotland’s future currency in the event of independence was that of a pound sterling currency union with the rest of the United Kingdom. The SNP insisted that a continuing currency union would minimise disruption for businesses both north and south of the border. Tactically, it would have the advantage of allaying the concerns of so-called ‘swing-voters’ who had doubts about the wisdom of severing Scotland from a currency system which had worked well for it.
However, the Chancellor of the Exchequer in the conservative led Westminster government at that time, George Osborne, ruled out any currency union between Scotland and the United Kingdom, declaring that currency unions were ‘fraught with difficulty.’ In the event, the result of the 2014 referendum was a rejection of the independence proposal by the electorate and much of the analysis of the outcome pointed towards the uncertainty surrounding the currency of an independent Scotland as one of the key reasons for the rejection of independence. One poll indicated that more than half of those who voted against independence cited the currency question as one of the three concerns uppermost in their minds.
As discussion of a second independence referendum gathered pace after the EU/Brexit referendum, so did public consideration of the currency question.
A new plan, put forward in May 2018 by the Sustainable Growth Commission which the SNP had established in 2016, recognised the importance of the currency question in the 2014 referendum. It set out the intention of moving after independence towards a new Scottish currency pegged to the pound sterling after a possibly extended transitional period during which the pound sterling would also be used in parallel( albeit without the benefits of a formal currency union with the rest of the United Kingdom). The plan also envisages the transfer of sterling held by Scottish banks at the Bank of England to back their own issue of Scottish notes to a central bank in Scotland at independence (although the deposits would continue to be the property of the Scottish banks). It accepts that Scottish banks might continue to issue currency for Scotland – in parallel with Sterling - until such time as the central bank would be ready to issue its own currency, implying that , at that point , commercial banknote issue would end.
But , the announcement in the run-up to the 2014 referendum by two of the three Scottish note – issuing banks – the Bank of Scotland ( owned by the British bank Lloyds) , and the Royal Bank of Scotland - that their registered headquarters would be moved to London in the event of a vote for independence must raise the question as to whether they would agree to shift their reserves north following independence.
Commercial banks would of course make their decisions on commercial grounds and that would mean minimising risk. The power of the Bank of England as lender of last resort and the Treasury as a safety net was well demonstrated at the time of the 2008 credit crunch. The cost then of recapitalising the Royal Bank of Scotland amounted to twice the estimated GDP of an independent Scotland. If indeed they refused to move their sterling reserves north, would the Scottish government permit the commercial banks’ currency to circulate without adequate cover held in Scotland? Almost certainly not. The decision by the Royal Bank of Scotland Group in the past 48 hours to rebrand its parent group NATWEST may be an indicator of that bank not only severing its brand from the unfortunate events of 2008 , but also as an early step in repositioning itself for possible Scottish independence.
A plausible scenario to emerge from a transitional period of parallel circulation of sterling and commercial notes could see the former hoarded as a store of value while the latter would be used as a medium of exchange. To counter this possibility, confidence in commercial notes could be underpinned by a clear commitment to convert them for sterling – or indeed for any new Scotpound. But would the population then rush to convert their commercially issued notes for sterling? Provided 100% sterling reserve cover is held in Scotland, such a ‘run ‘on the banks could be managed (even if Scottish commercial banknotes would pretty quickly disappear out of circulation). But the risk would not be manageable in the event that the banks insist on keeping their Sterling south of the border.
In the medium to longer term, the prospects for any future Scotpound backed with sterling will depend on Scotland’s ability to earn enough sterling from its trade with the rest of the United Kingdom. However, the balance of trade between Scotland and the rest of the UK is not in Scotland’s favour. Thus, it would struggle to earn enough sterling to back the Scottish pound in a currency board arrangement for an economy which the SNP must hope will expand post- independence.
There are sound lessons for the SNP to learn from the experiences of Ireland and Estonia following those countries’ independence. But the SNP strategy for a post- independence monetary regime begs as many questions today as it did at the time of the last referendum.
23rd July 2020
This article is a much – edited section from my forthcoming book on National Independence and Monetary Sovereignty.
 The Sustainable Growth Commission – The Monetary Policy and Financial Regulation for an Independent Scotland – C 1.23
WARREN COATS – Countries and Currencies in the Holy Land
In researching my first book – Hostile Money – Currencies in Conflict (Stroud, The History Press, 2019) - I drew on Warren Coats’ One Currency for Bosnia (Ottawa, Jameson Books,2007). Digging a little deeper into on-line information of Warren’s professional career at the International Monetary Fund, I was astonished to learn of the extraordinary geographical range of his work in helping to establish central banks and currency arrangements for newly independent states over 20 plus years until his retirement from the fund in 2003.
From 1992, he either participated in or led IMF technical advisory missions to Bulgaria, Kazakhstan and other countries of the former Soviet Union and former Yugoslavia. Much of his work has been in difficult environments – Iraq after the 2003 invasion; Bosnia after the Dayton accord peace agreement of 1995; Kosovo following the NATO intervention there and Afghanistan in 2002 as well as South Sudan following independence. He has helped to set up the central bank of Bosnia and the Palestine Monetary Authority and advised Kazakhstan, Kyrgyzstan and South Sudan in the introduction of their independent currencies. Thus, Warren’s career straddled an extraordinary time of change, with the creation of some twenty new countries and some major conflicts requiring the re-building of national capacity in countries shattered by civil war. As I noted in Hostile Money (Note 42, Page 259) – ‘The range of Coats’ experience in helping to resolve some of the thorniest currency problems in recent decades is extraordinary. One can only hope that the IMF has bottled his knowledge and experience to be uncorked on the occasion of future crises.’
A couple of years ago I felt it was a great pity that Warren had not published more on his experiences. However, he has more recently been publishing small easy-to- read books combining material on his central banking support activity and his personal views about the countries concerned. I have just finished his Palestine: The Oslo Accords Before and After published this year and could have wished that it had been available when I was writing Shades of Sovereignty – Money and the Making of the State. The book contains illuminating additional detail on the Palestine Monetary Authority. But even more striking are the personal views of this highly civilised and rather self- effacing American on the intractable Israeli- Palestinian situation. Candid, impartial, humane and informed by experiences of dealing ‘on the ground’ with technocrats in Israel and Palestine, Warren’s views are worth more than any number of parti pris opinion columns by pundits who have never been anywhere near the front line or done anything constructive to assist.
Polydromic – the meaning
Some people may be as surprised as I am that it is impossible to find a definition for ‘polydromic’ at any of the on-line dictionaries.
As a noun, Polydrom has existed for at least 5 years and will be recognized by anyone finding this website. Created from the Greek prefix ‘Poly’ – meaning ‘multiple’ or ‘many’ and Dromos – meaning ‘route’ or’ path’.
So, Polydrom = anything or any place with many routes leading to or from it. Polydromic – the ability to attain, enter or exit anything or any place by multiple routes.
The means to great wealth are polydromic.
The opportunities for recreational escapism are polydromic
Polydromic approaches to education and learning must be the aspiration of any flexible and civilized society
Central park is a recreational polydrom.
The internet is now the ultimate polydrom of knowledge
Why this seems to have escaped the attention of the lexicographers is puzzling.