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The Next Prime Minister Must Choose: Working Class Britons, or the Neo-Keynesians

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Tags Labor and WagesMoney and BanksTaxes and Spending

Before Margaret Thatcher became prime minister in 1979, Britain’s epithet was "the sick man of Europe." The preceding drift into ever-greater socialism was accompanied by monetary inflation, which was driven in part by unionised labour in nationalised industries striking, or threatening to do so, for wages which were uneconomic. The differences between cause and effect during periods of monetary inflation only serve to conceal the root of the problem, and that is inflationary financing.

Without any factual basis, central bankers claim that some price inflation is a good thing. They set an inflation target to aim at, commonly agreed at 2 percent. There is no control over the expansion of money and credit, which is permitted to run riot, so long as the inflation target is not too obviously violated. But the fact remains that inflationary financing has become central to the state’s finances. 

Since 2010, the UK’s government debt has increased by 59 percent of 2010’s GDP. This has been financed by the expansion of money and bank credit. While statisticians often argue that so long as government borrowing is financed by private sector savings, it is non-inflationary. But this argument ignores the fact, that if savings are diverted from their use in the private sector, the gap is filled, one way or another, by the expansion of bank credit. And as we should know, the expansion of bank credit is simply monetary inflation.

Therefore, the expansion of both bank credit and base money is a good measure of the degree of a government’s inflationary financing, and we can confidently conclude that the dilution of people’s money is far greater than suggested by government price inflation statistics. 

This lack of apparent price inflation can only be for two reasons. Either statistics fail to reflect the degree of loss of purchasing power of the currency, or people have collectively increased their preferences for money over goods and services. But given the increase in consumer debt and the inability of eight out of ten British workers to survive between pay-days without credit, it is hard to see that preferences for money relative to goods have actually increased.1

Monetary inflation is barely understood by the public, which is why governments love printing money. They don’t let on that monetary inflation dilutes everyone’s earnings and savings. Instead, they promote a belief in easy money and cheap credit for businesses so they can employ more people. And because, as Keynes put it, not one man in a million will detect the theft, monetary inflation is irresistible to spendthrift governments.2

We can put inflationary financing in the same category of nonsense as believing a weaker exchange rate makes exporters more competitive and stimulates job creation. But any economist with a modicum of observation will know that an economy with a strong currency, such as Germany and Japan in the post-war years, achieves a strong economy more successfully than a state which has a policy of weakening the currency.

Of course, the empirical evidence, that in the long run a sound currency is always better than a weak one, takes some explaining to a neo-Keynesian audience. Confusingly, Japan has managed to expand the quantity of yen in circulation without appearing to undermine its purchasing power. Much of the explanation is found in the Japanese propensity to save, which put another way is the same as saying the population of Japan uses the expansion of money and bank credit to increase their bank balances instead of spending it. This contrasts with Keynesian consumption theories that abhor saving, preferring inflationary financing. It has predictably resulted in persistent trade deficits and a weak currency.

In the UK, a combination of fiscal and monetary policies aimed at discouraging savings dissuades ordinary people from accumulating wealth through thrift. No wonder an estimated 78 percent of the UK’s working population have no financial reserves and are unable to make ends meet between pay-days. We appear to have arrived at the end-point in Keynesian economics.

Unless something is urgently done to reverse this trend, the economic condition of low-income Britons will worsen. Furthermore, in the slightest down-turn more of them will become dependent on the state. The state then scrambles for more revenue, taking it from the productive middle-classes by higher taxes and yet more monetary inflation. Wealth, the life-blood of any economy, is destroyed at an increasing pace, and with it the ability of society as a whole to maintain a reasonable standard of living.

The solution is to halt the destruction of wealth and savings and have faith in the ability of ordinary people to manage their own affairs without government intervention. Central to these free-market policies is sound money. There are other policies that must accompany it, such as eliminating taxes on savings. Government must be downsized. It must rescind the tide of regulation. The banking system must be reformed so as to address destructive cycles of credit expansion and contraction. But central to it all is sound money.

The greatest resistance to a sound money policy will come from neo-Keynesian economists, whose beliefs are riddled with contradictions. Theirs are the policies that have ensnared the UK and other welfare states in debt traps, from which there is no easy escape. They are already discredited by the results of their dogmas. The political task facing a Johnson government will be not so much to convince economists of their errors but to promote the concept of sound money and associated policies over their heads to the general public. Card-carrying socialists may not like it, but properly presented the silent majority almost certainly will. 

It may be too late in the cycle to avoid an overdue credit crisis, likely to be made worse by American trade policies. In which case, a proper understanding of the destructive forces of monetary inflation compared with the economic benefits of sound money is urgently required. It has been done before: the UK emerged from the destruction and debt of the Napoleonic Wars to a gold standard under which the government reduced its debt burden and the economy boomed in an industrial revolution. It defied modern Keynesian explanation.

Excerpted from An Aide-memoire for Boris

  • 1. See https://www.consultancy.uk/news/18492/eight-in-ten-uk-workers-unable-to-make-ends-meet- between-pay-days 
  • 2. The actual reference was “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces on the side of destruction and does it in a manner which not one man in a million is able to diagnose.” (The Economic Consequences of the Peace, 1919).

Alasdair Macleod is the Head of Research at GoldMoney.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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