Just Money

Money: it’s on everyone’s mind sometimes. In recent years, however, many have suggested there are some fundamental problems with the way money presently functions in our economies.

No one is seriously denying money’s unique ability to serve simultaneously as a medium of exchange, a measure and store of value, and a means of calculation. Yet deep reservations about the current workings of the world’s monetary systems, both foreign and domestic, have been expressed by people ranging from Senator Rand Paul (who is fiercely critical of the Federal Reserve), to Pope Francis (who has denounced what he calls “the cult of money”) and France’s François Hollande (who once described “big finance” as his “greatest adversary”).

Some censures focus on the observable economic effects of particular monetary policy choices. There is, for example, no shortage of commentators who believe that the Greenspan Federal Reserve’s decision to keep lowering the federal funds target rate for five years after the bursting of the dot-com bubble and September 11 contributed to the excess money that fueled the housing-market bubble. Other concerns seem to have more to do with worries about greed per se than with the finer points of central banking.

Often missing from these discussions, however, is reflection on the more subtle ways in which the treatment of money and monetary policy by governments and central banks can undermine justice. An obvious example is those instances in which central banks appear to stray outside the limits of their defined charters. In February, for instance, Germany’s Federal Constitutional Court ruled that the European Central Bank’s program for purchasing sovereign bonds on secondary markets was most likely an attempt to circumvent EU law’s general prohibition against direct financing of governments by the ECB.

It is always problematic, to say the least, for any state institution to behave in an extra-legal manner. Sometimes, however, even the perfectly legal conduct of monetary policy, whether by independent central banks or by central banks operating under tight political leashes, raises many questions that have as much to do with justice as with their impact on economic life. Take, for instance, the seemingly benign choice of governments and central banks to pursue a stable low inflation policy, one that’s often expressed in terms of annual inflation targets of, say, 2 percent.

One argument for such policies is that they help provide a small, permanent stimulus for short to medium-term employment without letting the full-blown inflation genie out of the bottle. This idea is traceable to John Maynard Keynes’s General Theory, but even further back to the eighteenth-century Scottish-French financier John Law. The latter insisted that “addition to the money will employ the people who are now idle.” It’s worth noting that Law’s money-creation schemes contributed to the famous Mississippi Bubble that helped bring France to its financial knees in 1720.

The short-term benefits—but also the long-term problems—associated with these approaches to money have been known for several centuries. In his 1597 Treatise on the Alteration of Money, the sixteenth-century Jesuit theologian Juan de Mariana stated that the equivalent of inflationary policies of his time—currency-debasement—was “like the drink given the sick person unduly, which first refreshes him, but later causes more serious accidents and makes the illness worse.”

Certainly, Mariana observed, depreciation may temporarily stimulate production and lighten the burden of debt. Nevertheless, Mariana also maintained, it would certainly result in inflationary price rises and undermine commercial productivity as more people turned their attention away from innovation in the real economy and toward the wrong types of financial speculation. In his own lifetime, Mariana witnessed no fewer than five official state bankruptcies (1557, 1560, 1575, 1596, and 1607) of his native Spain—not one of which was averted by the successive currency debasements undertaken by Philip II and his successor Philip III.

Looking at the present, even small levels of inflation help governments—and other debtors—to reduce the real value of their debts. If, for instance, a government takes on debt in the form of bond issues, but also insists on maintaining low interest rates and big spending programs, the inflationary effect will be to reduce the bonds’ real value. A 2012 analysis suggested this was precisely the path consciously chosen by successive British governments after 1945 to address the enormous debt burden taken on by the United Kingdom during World War II. As a result, close to 80 percent of the reduction of Britain’s post-war debt by 1970 was the result of inflation.

There is, however, a price to be paid for this, and it goes beyond questions of raw financial loss. One group of losers is those who save their money. Between 2009 and 2012, for instance, savers in Britain lost an average of 11 percent of their savings’ purchasing power because of such policies. It is difficult to see how this could be just.

Another set of losers from even very mild inflation targeting by central banks are those on fixed incomes. Inflation, for instance, weakens the purchasing power of un-indexed pensions. Likewise, a salaried worker who receives a 3-percent wage increase in a given year will find the value of his raise halved by an inflation rate as low as 1.5 percent in the same year. Over the medium to long term, this makes it difficult for such income groups to maintain (let alone increase) their salaries’ purchasing power. Nor are these people usually in a position to invest in the stock market and at least keep up with inflation.

Making the situation worse, the same policies strengthen the economic position of those with the financial acumen and resources to navigate the resulting changes and/or who can profit from their closer proximity to the money supply. This arguably takes central banks into the realm of fiscal policy, insofar as the latter is concerned with the distribution of income, capital, and economic opportunity in ways that aid particular groups. Consequently, we not only end up with a gradual blurring of fiscal and monetary policy (which is often constitutionally questionable), we also see a hard-to-justify allocation of resources away from the not so wealthy toward the already wealthy.

In this context, it should be mentioned that one need not be a conspiracy theorist or Occupy Wall Street activist to worry about the revolving door that exists between some sectors of the financial industry and senior positions in central banks and government finance departments. Of course, it’s hardly surprising that people with significant private-sector financial expertise will be recruited for public service in the world’s treasuries or central banks, and vice versa. Nor should we simply assume impropriety. That would be unfair. Nevertheless, the very real potential for crony capitalist trends to develop in the conduct of monetary policy shouldn’t be underestimated, and crony capitalism is, by definition, unjust and corrupting.

Moving beyond these particular issues, accountability questions also feature in the response of central banks to financial crises. In 2008 and 2009, for example, the Federal Reserve’s forays into quantitative easing through purchasing bank debt, mortgage-backed securities, and US-government debt securities were partly about bailing out many heavily debt-burdened financial institutions. The most common defense of such decisions was that they prevented the widespread collapse of an overly indebted financial system. Whether this would have been the case, we will never know with certainty. What we do know is that many institutions were subsequently able to avoid accountability for choices that took them to the edge of bankruptcy and often beyond. We can also reasonably surmise that the same decisions by the Federal Reserve and other central banks reinforced the moral hazard problem that encourages financial institutions to undertake excessively risky ventures in the first place.

The evasion of responsibility enabled by monetary policy also extends to governments that are unenthusiastic about fulfilling their responsibility to make necessary but unpopular decisions to promote the common good. The capacity to manage the money supply creates an enormous temptation for governments to try to manipulate it (either directly or by leaning on central banks) in ways that favor short-term goals, such as their reelection. Many governments like easy-money policies. A quick boost to employment levels via a lowering of interest rates, for example, can direct attention away from governments’ failure to tackle deeper, more intractable obstacles to growth and higher employment, such as tariffs, inflexible labor markets, and crony capitalist arrangements.

This is not to suggest that anyone is capable of establishing a perfect equilibrium between the value of money and the supply and demand of goods and services. Some friction is inevitable, not least because of time lags in the formation of prices. It may well be that constancy in a given currency’s average purchasing power is the best we can aim for.

But perhaps the biggest long-term issue concerning our present money challenges is that serious monetary reform requires people beyond the worlds of finance and politics to understand the issues at stake. This is especially true in democratic systems. In his monetary treatise, Mariana wrote, if money is manipulated “without consent of the people, it is unjust.” He then immediately added, however, that “if it is done with their consent, it is in many ways fatal.”

Mariana’s point was that if a society, rather than only its rulers, begins to regard the manipulation of money as an antidote to contemporary economic challenges—regardless of the long-term effects—then a type of poison will start working its way through the body politic. The Spanish Jesuit’s world, in which metallic currencies and far more limited accountability prevailed, seems far removed from our own. Yet the basic logic remains: a citizenry that doesn’t care about the politicization of the money supply isn’t likely to be a citizenry inclined to look beyond its short-term self-interest.

In such circumstances, justice and the common good would seem to have no chance at all—at least in the economy.