Tuesday, 17 September 2002

Let's have some real money

I remember White Wednesday very well. I was away from work on a computer course and phoned the office during the afternoon break. Nothing much was going on, I was told, the company was surviving without me and, oh, by the way, interest rates have just gone up to 15%! When I told the other excel trainees the news there was a mad rush for the phones and we didn't think too much about spreadsheets for the rest of the day.

George Kerevan says that:

We were in the ERM as a way of getting rid of inflation, the endemic British problem that chased away investment and caused labour unrest. Inflation happens when too much credit causes demand to run ahead of supply. In postwar Britain, red tape and high taxes kept supply down while too much government borrowing flooded the markets with the financial paper that made credit easy. Mix in the oil prices rises of the Seventies, and inflation went out of control.
and:
Mrs Thatcher got elected in 1979 to fix this. In good faith, she adopted the doctrine of monetarism, reinvented by Milton Friedman but actually the work of the 18th-century Scot, David Hume. According to monetarism, if the government could set targets for the growth in money supply (what there is to spend), it could keep it growing in line with output. Sounds good, but it didn’t work in practice. First, in a globalised economy, governments can’t dam all the available sources of credit. Second, new kinds of credit are being invented every day, so that setting targets for monetary growth means trying to measure the unmeasurable.
Well, none of what happened ten years ago was surprising to those who had studied the Austrian School of Economics. Since 1913, the pound has lost 98% of its value and the dollar has declined by 95%. As long as we have a fiat currency with money being created out of thin air, inflation will continue. The Austrians showed that sound money can only exist if it is 100% based on a commodity, probably gold or silver. It doesn't really matter if the money counterfeiters are based in Frankfurt, London or Washington - the result will be destruction of the people's wealth. Where are the politicians - and journalists - who will call for the establishment of real money?