Money needs reform

Reform are today enjoying a massive win as voters lose faith in both main parties. This could be seen coming in the aftermath of the Global Financial Crisis: money needs reform.

Reform have won their first by-election and mayoralty. It appears they will do tremendously well at council level. The Times writes,

More fundamentally, the failure of traditional parties to improve voters’ lives in the almost 20 years since the financial crisis has created profound disillusionment with politics and a receptive audience for Farage’s rallying cry — to tear down the system.

This is the fundamental point. With an understanding of the 2008 Global Financial Crisis (GFC) rooted in the nature of our monetary system, seismic political events could easily be foreseen. There will be several hundred people who may remember me foreseeing it in speeches after I was first elected in 2010.

My message was that 50 years – then 40 – of chronically easy money to fund the unaffordable promises of the welfare state had brought down the financial system. And of course people behaved recklessly: who wouldn’t in the circumstances?

While Labour were last in power, the quantity of money in the UK tripled. That had consequences: a gigantic credit boom and inevitable bust, plus an unjust reallocation of resources which caused people to question, rightly, the operation of market processes. When money is broken, injustice follows.

An ounce of silver. I always carry one. I can’t afford to lose an ounce of gold.

Since none of that has subsequently unwound, here we are: voters demand change.

Reform now must govern locally. They will find it is difficult when they have told people – I have heard Nigel do it – that governing would be easy if only the Conservatives/Labour would try.

Perhaps they will succeed. I doubt it because there is little sign they understand the fundamental force at work: unaffordable government ultimately funded for decades by expanding the money supply.

In a society based on the division of labour – one in which we do not live in isolation, producing everything for ourselves – money is the means of exchange, a unit of account and a store of value. It is fundamental to the process of life in society.

How much money there is and how it is created and destroyed is therefore really quite important. If we are serious about a future which is happy, prosperous and free, we will need to reform money.

Old money and ancient vices

Throughout the ages, rulers of all kinds have taken the property of the governed by force to meet their expenditures: they have taxed. Inevitably, they reach the limits of taxation so they borrow. And having exhausted the willingness of lenders, they resort to inflation: debasing the currency.

This is an ancient and unchanging vice, a tendency which is occasionally restrained either by the public or by disaster. I wrote about our present circumstances in a paper for Axiom which contains relevant references: Honest money and social progress.

Back when money was precious metal, creating coins was a way to provide assurance that the metal in your hand was of a definite quantity and quality. Having the privilege of minting money, rulers would withdraw these coins, clip them and remanufacture them with a higher proportion of a cheaper metal. That money was therefore worth less and prices rose. But the ruler who debased money had the advantage of buying before prices were bid up…

This was the historic form of debasing the currency to fund the state. Today, things are more subtle. Having severed the last link between money and gold in 1971, society has seen an unprecedented collapse in the value of money through new debt.

A price index from 1750: the value of money has been collapsing since 1971.