PoliticsHome have published an email exchange between Steve Baker and Austin Mitchell, Labour MP for Great Grimsby:
The controversial strategy of increasing the money supply by ‘quantitative easing’ (QE) is being applied both here and abroad in a bid to stimulate stagnant economies. But aside from the practical question of whether QE works, Steve Baker MP and Austin Mitchell MP disagree about its moral and social consequences
Steve opens as follows:
I have always wondered why anyone on the left would support quantitative easing (QE), which is an obvious wealth transfer from the poor to the rich, and one bound to store up problems for the future. Public debate focuses on aggregates like the total money supply but new money always goes to someone first, giving them a purchasing power advantage. QE is bound to benefit those who receive new money from the Bank of England.
We dream about it, argue about it, worry about it, celebrate it, spend it, save it, we transfer it from one emotion to another. But what exactly is money? And why do we trust it? Frances Stonor Saunders takes a journey through some of the fundamentals of money.
The Cobden Centre’s Gordon Kerr will make a brief but strong case for gold.
Douglas Carswell’s speech introducing his ten minute rule bill, blogged yesterday by Tim and Steve, is now available in Hansard.
We were pleased to see that Paul Goodman has chosen to highlight it this morning in a post for ConservativeHome:
The Osborne/Balls exchanges during yesterday’s Treasury oral questions are well worth reading, but in the wake of Steve Baker’s piece yesterday I’ve decided instead to put up Douglas Carswell’s speech on his Currency Banknotes (Amendment) Bill. The Labour MP John Mann spoke against the bill, but didn’t seek to force a division. It therefore now proceeds for the time being – though it certainly won’t make the statute book.
Personally, I think we need to abolish legal tender laws, rather than expand them, but I am glad to see the subject raised. Carswell’s speech is well worth reading in full.
Motion for leave to introduce a Bill (Standing Order No. 23)
Mr Douglas Carswell (Clacton) (Con): I beg to move,
That leave be given to bring in a Bill to amend the Currency and Banknotes Act 1954 to allow banknotes in addition to those issued by the Bank of England to be legal tender; and for connected purposes.
My Bill would amend the Currency and Banknotes Act 1954 to enable a range of different currencies to be used as legal tender in Britain. The idea comes from a 1989 Treasury paper from when John Major was Chancellor. What the Treasury proposed as theoretically possible 22 years ago, the internet now makes practically achievable.
The internet has given people unprecedented choice. We have access to a greater range of music, financial services, groceries and books than ever before, so why do we have legal tender laws that create a monopoly currency? Thanks to eBay and Amazon, it is possible to buy and sell hundreds of thousands of items at the click of a mouse. It is even possible to do so using whichever currency we please. By making a range of different currencies legal tender in the UK, my Bill would enable people to go a step further. People could buy things, store wealth and pay taxes in a range of different currencies too. Families would be able to plan their financial future without having to do so using a currency that is set to halve in value in the next 14 years. Businesses concerned about rising prices could protect themselves.
We would not need to carry multiple currencies about us in a multi-currency country. Non-cash payments, which since 2004 have exceeded cash payments, mean it would be as easy as using a debit or Oyster card. The 40 years since the collapse of Bretton Woods have been a grand currency experiment. People in Britain might have been using pounds as the unit of currency for centuries, but for the past 40 years the pound has been a fiat—or paper only—currency. Until 1971, the British state could not simply print off as much money as it liked, but since then, a mere 40 years ago, the year that I was born, how many pounds there are in circulation—the money supply—has been directed by Government and by the state. With a fiat pound, there has been no external constraint limiting the amount of money in circulation besides the self-restraint of the British state.
Government turns out not to be very good at restraining Government. UK money supply has grown from £31 billion in 1971 to more than £1,700 billion today—many times faster than the economy. For 40 years, monetarists have argued with those who claim that they follow Keynes about the rate at which the money supply should be increased. There has been much debate about which branch of the state should take the decision. Should it be Ministers, who are accountable to this House, or experts sitting in the Bank of England?
Monetarists or Keynesians, the Monetary Policy Committee or Ministers: so long as it has been left to Government to manage our currency, our currency has been debauched. State officials proved to be no better at managing a nationalised currency than they are at running nationalised airlines or telephone lines.
Just as a broken clock manages to tell the correct time twice a day, our monetary managers have got the settings right on occasion. More often, however, we end up hearing how the state planners lacked the benefit of hindsight. Perhaps we should stop expecting planners to get anything right.
Our paper-only currency system emerged out of the 1960s and 1970s. Like many ideas that grew out of that technocratic age—such as urban tower blocks, child-centred education or DDT pesticide—what seemed terribly modern, forward-looking, progressive and scientific turned out to be a disaster. A small but growing number of academics now see the west’s unfolding financial crisis not simply as a banking problem. It was not simply caused by inadequate capital ratios or too much short selling. Instead, they see it as a fundamental failure of this fiat currency experiment.
A credit balloon was created by reckless management of the money supply. Using inflation, Governments were able to whittle away their debts. Monetary management favoured the debtor over the saver and the consumer over the producer. Monetary policy has encouraged us to over-consume and under-produce, to over-borrow and to save too little. In the space of a generation, fiat money has seen Government grow and the productive sectors of the economy shrink.
Under my proposal, we would no longer be forced to live under such a destructive regime. If the Bank of England keeps printing off more money—more quantitative easing, more loose monetary policy—there may be a fall in the value of its currency, but not necessarily in the value of the currency that the rest of us choose to use. At the click of a mouse, people and businesses would have an alternative. Incidentally, our ability to opt out as individuals and businesses from the MPC’s monetary monopoly might encourage it to stop taking liberties with our currency.
On both sides of the House people recognise that choice and competition safeguard the interests of both the consumer and the citizen. We do not think twice about people being able to tune into different radio and television stations or choose between different hospitals for medical treatment. One day, I hope that Britain will become a multi-currency country.
My proposal for competing currencies is not a new idea. It was the policy of the Conservative Administration in 1989. An excellent Treasury paper presented to this very House suggested competing currencies as an alternative to the European single currency. Perhaps the euro, which we mercifully kept out of, is the ultimate paper-only currency. It is not even backed by the fiat of a single state authority. It is, perhaps, the fiat currency to end all fiat currencies, although perhaps not in quite the way that the architects of economic and monetary union expected. If, as seems possible, the euro breaks up, we should revert to and revisit the ideas in that Treasury paper. By adopting competing currencies, Britain could save herself by her exertions, and save European economies by her example.
Replacing the monopoly of one failed fiat currency with multiple competing currencies would allow euro members the least painful means of extricating themselves from the monetary monster that holds them captive. With choice and competition, all Europeans might be free from the monetary mismanagement that always comes from on high.
John Mann (Bassetlaw) (Lab): I rise to speak because I think it is appropriate that someone from the Labour Benches should oppose this true bastion of Conservatism. History demonstrates to us that, given the opportunity and power, the Conservative party will always attempt to undermine, whittle away and eventually destroy the great institutions of this country. We are seeing it with the police service and the NHS. But Conservative Back Benchers want to go much further. Here we have them proposing a motion, which they wish to become legislation backed by their Front Bench, to take on, challenge and destroy sterling. I think that we on the Labour Benches want to defend the great currency of sterling against such an imposition of Euro-fanaticism—for that is what we have grown to expect from the Conservative party, although it is never up front, never to the public.
One recalls of course that, after Harold Wilson, Denis Healey and others blocked European adventurism, it was the Conservative party, inspired by Sir Keith Joseph, who resolutely took us into the European Union. Who was it who introduced all these new employment laws—maternity leave, paternity leave, a range of rights at work? Indeed, we backed them on that, rightly. It was none other than Margaret Thatcher and the Conservative party, who signed Maastricht. That was the fundamental—
Mr Speaker: Order. I have been listening to the hon. Member for Bassetlaw (John Mann) in a variety of forums for 25 years, and I see no reason to cease doing so now. However, I gently remind him that the matter under discussion is the proposed amendment to the Currency and Banknotes Act 1954.
John Mann: I thank you, Mr Speaker. I was just drawing the parallels with this pernicious motion, which would destroy sterling at the moment of its introduction. We saw the coalition partner, the hon. Member for Colchester (Bob Russell) give an example this very week of how on Eurostar the euro is the currency of use, not sterling. The hon. Member for Clacton (Mr Carswell) wishes to impose the euro on every shop across the country, for every transaction. He would go further: he would allow the Iranian rial and other currencies to be used. When I go to buy my midget gems from the corner shop, I wish to use sterling; I do not wish to use the euro or the Iranian rial.
The idea was inspired by a paper from 1975 by Hayek, which dictated the monetary policy to which the Government are adhering. Hayek first made the proposal, to try to break down boundaries. The concepts of “ever onwards”, free trade, the breakdown of the nation state and the destruction of national currencies are really what Back-Bench Conservative Members are about; they would open the floodgates to euros at every corner shop in Britain.
We should not oppose the motion today; we should give it time, so that the arguments can be developed further, and so that we can hear the supporters’ true perspective—then we should vote it down. I resolutely stand up for sterling and the corner shop, and oppose the euro and the attempt to impose it on us, but I do not seek to divide the House. Let us give the hon. Member for Clacton more time to put forward his case, and let us then destroy him in the vote.
Question put and agreed to.
That Mr Douglas Carswell and Steve Baker present the Bill.
Mr Douglas Carswell accordingly presented the Bill.
Bill read the First time; to be read a Second time on Friday 20 January, and to be printed (Bill 226).
The size of the Fed’s balance sheet is now about $2,843 billion, up from about $800 billion three years ago. The huge increase in the Fed’s balance sheet stems from bailouts, quantitative easing, and other central bank “liquidity” operations.
The Fed’s capital base is $71 billion. That represents about 2.5% of its assets, or a leverage ratio of 40 times its capital. This ratio would have been considered unthinkable prior to the crisis: it is about four times greater than that permitted by the new Basel proposed rules for commercial banks and simply demonstrates that the bailout format and quantitative easing do not make these problems go away. If the patient has been incorrectly diagnosed, taking the wrong medicine will not cure him.
This capital to asset ratio means that a loss on its assets of 2.5% would be enough to make the Fed, by any normal standard, insolvent – unable to pay its debts.
The unexcitingly-named proposal before this obscure-sounding committee would commit an additional £10 billion of British taxpayers’ money to the IMF.
11.39 am – Steve Baker
I begin by welcoming the Minister’s resolve and composure in what are clearly historic and contentious circumstances. We have seen today that there is broad agreement across the Committee that what matters is human prosperity, and we are all deeply worried about our constituents. I am going to make three points. First, I do not believe that we have this money and that we cannot afford the liability. I do not think that my constituents will understand why they should pick up the liability. It seems to me that one way or another, this country will end up borrowing in order to lend to fund present consumption, and funding present consumption through borrowing is simply not a route to prosperity. I wish I felt that it was not necessary to expand on that point, but it seems these days that we forget. If we consume on credit, we are in fact making ourselves poorer.
I find the notion of getting the money back quite worrying. It seems to me that we will borrow some of this money, at least, from commercial banks, inevitably monetising the debt and debasing the currency further after 40 years of continuous debasement. That will involve inflation and further distortions in the structure of the economy. In short, this measure would simply kick the can down the road. We might argue that that is the job of the IMF these days, but the Greek people are already rioting and we have to ask ourselves whether they would be any more sympathetic to such austerity measures simply because they were brought forward by the IMF. I question the action itself.
Secondly, the IMF was created as part of the Bretton Woods system of currencies. We tend to talk as though our current monetary arrangements were a fixed point and had always been the same, but the present monetary orthodoxy has evolved over the years and centuries. Bretton Woods was constructed after the catastrophe of the second world war; the dollar was redeemable in gold, and all other currencies were pegged to the dollar. The job of the IMF was to stabilise exchange rates by bridging temporary gaps in nations’ balance of payments, but the IMF now seems to serve the purpose of ensuring the repayment of reckless financial institutions.
Above all, at all stages of its history the IMF has existed to bring financial stability, which I believe it has singularly failed to do. Turning to the monetary system and stability, I encourage Members to google a chart that I can make available, which shows the price of oil-index factor 1945, the origin of Bretton Woods-brought forward to today. It prices oil in dollars and in gold. I do not like to use the G-word, but I feel that since my hon. Friend the Member for Wellingborough has mentioned it already, I can continue. The price of oil has been high and volatile since 1971, but only when priced in dollars. If we price oil in gold, the price has been low and stable ever since the end of the second world war.
I simply make the point that our monetary arrangements are not fixed, that the IMF has not brought stability and that in fact many of our most important commodities are far more susceptible to the effects of our present, inflationary monetary arrangements than is generally considered. I would like to finish my point about the IMF with Hayek’s words. He said:
“monetary policy all over the world has followed the advice of the stabilisers. It is high time that their influence, which has already done harm enough, should be overthrown.”
He wrote that in 1932 in the preface to “Monetary Theory and the Trade Cycle“, which hon. Members can find by googling “prices and production.”
Thirdly, I want to talk about the contemporary mainstream. With great respect to hon. and right hon. Friends, although my right hon. Friend the Member for Wokingham foresaw many aspects of the crisis, the majority of the mainstream did not see this coming. I have sat at lunch with eminent economists who said that nobody saw this coming, to which I simply replied that they should read Huerta de Soto’s “Money, Bank Credit and Economic Cycles“. That book, which was written in 1998, clearly set out that this would happen and why, following in the footsteps of Hayek, Mises and others. The Queen asked why no one saw this coming. If she had asked me, I would have said that it was because economists pay too little attention to time-the simple matter of the importance of time. Production takes time and, in a market, interest rates should arise from people’s time preferences for consumption. In the jargon, the contemporary mainstream lacks an adequate theory of the inter-temporal structure of capital-that is, capital goods, or the means of production.
We are at the end of an extremely long credit expansion. I depart from my right hon. Friend the Member for Wokingham, but that is because I follow that particular theory of capital. Hayek, it is not often known, was a socialist and confesses as much in the preface to Mises’ book, “Socialism“, but he and Mises together worked out the theory of the trade cycle. Mises wrote:
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
That is from “Human Action“, page 572.
At this point came an intervention to delight Cobden Centre readers:
Mr Cash: My hon. Friend’s contribution is very thoughtful; he knows a great deal about such things, in the tradition of Cobden. However, is the real problem one of human nature as well as of economics? People are competing in an environment in which there is no real or comparative advantage because the new world-if I may use that expression-of the Brits has a huge advantage over the others. Good money is being thrown after bad unless the real problem is tackled: cheap credit that is not based on real, tangible economic advantage.
Steve Baker: I absolutely agree with my hon. Friend. He makes an excellent point with which I am in full agreement.
Mr Redwood: Before my hon. Friend sits down, I hope that he will give the Committee the benefit of his advice on the order, because we are not yet quite clear what he would do about the £9.5 billion sub.
Steve’s concluding remarks pull no punches (emphasis mine):
The Government should avoid committing that sum of money; my view is that it will not help. I made a second point about the IMF and our monetary arrangements. If this is not the time of all times to question the fundamental basis of our financial system, I do not know when we ever shall. My third point was that I am afraid that the contemporary mainstream of economics is missing some vital information, which leads it to justify the very measures that we are discussing today. As I explained, as Mises set out, as Hayek followed in his steps and as others have predicted, we risk a final and total catastrophe for our currency system.
To conclude, we are in danger of simply kicking a can down the road and, as my hon. Friend the Member for Clacton said, ladling water into the boat. We are looking at further credit expansion, further monetisation of debts and further socialisation of risk. Throughout the western world, we are in danger of appearing as King Canute, trying to use politics to hold back the realities of social co-operation, which we usually describe as economics. The IMF is an institutional legacy from a monetary system that failed 40 years ago, and the successor to which is even now failing as well.
I looked at IFRS and how it boosts bank capital, and we found that RBS is possibly overstating its capital by £25 billion. That must meant that RBS at least is far more susceptible to financial shocks than is generally thought. It is my view, because of the weaknesses of IFRS, that all banks are substantially more susceptible to financial shocks than is generally understood. I therefore offer three points. First, the Government should please look at cross-cancellation of debt held by sovereign nations-I refer the Government to work by ESCP Europe and Dr Anthony Evans. Secondly, let us face the reality-not optional-and look at how we restructure outstanding debt. Thirdly, at this time of all times, rather than merely increasing our liability to the IMF, let us seriously rethink the foundations of the international financial system and, in particular, start planning for how to protect the payments system.
In his latest article for ConservativeHome, Steve Baker highlights the economic benefits of low, flat taxes:
Our austerity programme only deals with the deficit over five years, not the debt. We know we must lift our country’s economy and spirits in the context of an awful legacy. We know the public must continue to pay the British state’s inflated bills. We know we must create jobs. A flat tax would be an efficient way to set about it.
According to The Adam Smith Institute, countries which have introduced flat tax have increased tax revenue. The better off pay a lower rate than before, but higher total amounts and a higher percentage of the total tax take as the economy flourishes.
A flat tax would deliver simplification – an aim expressly included in the Coalition Agreement. It would do away with a huge amount of HM Revenue and Customs’ bureaucracy and wearisome headaches for millions of taxpayers. Capital stashed away would return from abroad. In a low, flat tax environment, many people would revert to simply paying the tax instead of buying expensive avoidance schemes from experts.
This morning we have announced the formation of the new TaxPayers’ Alliance and Institute of Directors (IoD) 2020 Tax Commission.
At the moment policymakers are trying to work out how to deal with the deficit, and at the TPA we’ve done a huge amount of work on how we can cut spending, and a previous joint project with the IoD set out £50 billion of potential savings. But those of us who think that we are better off leaving money in people’s pockets, having low taxes that reward the hard work and investment that is and will be the basis of our prosperity, need to go beyond TINA. Our pitch to the public can’t just be about dire necessity, in the face of the very real threat that Britain could have moved from the status of secure safe haven to the next Greece/Ireland/Portugal. We need a plan and to show why tax reform should be a priority once the economy and the public finances are recovering.
The Tax Commission boasts many familiar names, including Cobden Centre founding fellow Anthony J. Evans. For more information, visit 2020tax.org.
Lew Rockwell has announced an exciting opportunity in the US:
Ron Paul has been named chairman of the Domestic Monetary Policy subcommittee, and will have one committee staffer. Ron and his chief of staff Jeff Deist are looking for a smart, young economist, “thoroughly Austrian, and preferably with an advanced degree. The candidate needs strong knowledge of the Fed and monetary policy generally, and must be an effective writer. He or she will be responsible for organizing hearings; summarizing data and Fed actions for Dr. Paul; writing statements; dealing with Financial Services committee staff; and various other tasks.”
This can be a life-changing experience for the right young person. Imagine an 18th century classified: “Wanted, Economist-Assistant to Thomas Jefferson.” This is the equivalent, although Jefferson was not as principled in office as Ron Paul.
Let us hope that British monetary policy one day finds itself in the hands of a “thoroughly Austrian” economist.