John Llewellyn and Russell Jones, a pair of experienced UK macro-economic experts, just put out a shock-jock paper advocating heresy. They write:
“Conventional wisdom is that monetary finance is not worth the perceived risks
“But such fundamental regime change could conceivably be just what is required
“The 1930s experience with the gold standard offers some salutary lessons
“Abandoning gold was viewed by most as a recipe for inflationary or other disaster
“But generally, to the extent that policy retained credibility, it offered a path to salvation.
“Eight years on from the global financial crisis, and despite any number of unorthodox initiatives,
governments and central banks struggle to stimulate aggregate demand sufficiently to deliver strong and sustained output growth. In this environment there has been growing discussion of ‘helicopter money’, or ‘monetary finance’.
“The subject excites strong opinions. To many, central bank financing of an expansionary fiscal
stance is the ultimate policy taboo. At a stroke it sweeps away constraint on government expenditure, and encourages a large and permanent increase in the monetary base. It thereby risks a loss of control over the public finances, and excessive inflation. Others assert that it would be pointless, given that interest rates are already around the zero bound. If governments can borrow in the capital markets at no cost, orthodox fiscal policy can do everything that monetary finance can do, with fewer risks.
“However, the antagonists on both sides of the argument may be failing to see what could prove to
be the real point, the factor that could make a real difference. Arguably, the underlying consequence of such an unorthodox strategy as monetary finance could be, through ushering in a new policy regime, to deliver a significant positive shock to expectations − of both prices and economic growth.
“Monetary finance could be viewed as important as the abandonment of the gold standard in the 1930s.
[Then], the gold standard – the link of domestic money supplies to gold reserves – had become an albatross around the neck of the world economy. Rather than a source of confidence, strength, and stability, it had become a major destabilising influence. With the global financial architecture lacking the necessary symmetry, flexibility, and oversight, and international co-operation conspicuous by its absence, the burden of adjustment fell on the economies with the weakest fundamentals, and bad policies in one country were transmitted to others. Financial turmoil and rapid deflation, together with their associated economic, social, and political ills, spread around the world. The net result was the propagation and amplification of the Great Depression.
“Initially, few believed there was any viable alternative. On the contrary. The notion of monetary and fiscal reflation to support domestic activity and prices was anathema. The gold standard was viewed as an indispensable discipline on politicians, whose inclination was to be wasteful and extravagant, and whose unbounded largesse could lead only to uncontrolled inflation.
“In the midst of the Great Depression, when deflation was the clear and present danger, inflation was the dominant fear among politicians and beyond. Given this rigid mindset, for the most part, governments came to abandon the gold standard only under extreme duress.
“Such thinking proved to be flawed. Leaving the gold standard – a regime change of fundamental proportions – in fact promoted recovery. Moreover, which countries escaped from the Great Depression and reversed deflation accords closely with their government’s decision to abandon this once-inviolate system, and thereby progressively tailor monetary conditions to domestic ends.
“Forsaking the gold standard, and thereby changing expectations about inflation, real interest rates,
and growth proved to be the path to salvation, rather than the road to perdition.
The Orthodox and The Heretic
“Sir Warren Fisher, Permanent Secretary to HM Treasury, summer 1931: [Leaving gold would result in] ‘the evaporation of confidence in money, hyperinflation, strikes, rationing and riots.’
“Clément Moret, Governor of the Bank of France, Summer 1931: ‘Hair-brained and irresponsible …. [it] would lead to uncontrolled inflation and complete chaos.’
“James Warburg, Financial Advisor to Pres. Roosevelt in 1933, after the president announced the removal of the dollar from gold: ‘This is the end of western civilisation.’
“And so to the heretic, John Maynard Keynes, a week before UK’s departure from gold: ‘I have now come quite clearly to the belief that devaluation is the solution for this country . . . I am almost alone in openly saying so. At present there is a vast wave of so-called patriotic propaganda to the contrary, which is trying to frighten the people with most fantastic accounts of what would happen if we slipped our anchor.’
“And a week after the UK left the gold standard: ‘We have at last a free hand to do what is sensible…I believe that the great events of the last week will open a new chapter in the world’s monetary history.’â€
