Denationalisation of Money: The Argument Refined
XXI. The Effects on Government Finance and Expenditure
The two goals of public finance and of the regulation of a satisfactory currency are entirely different from, and largely in conflict with, each other. To place both tasks in the hands of the same agency has in consequence always led to confusion and in recent years has had disastrous consequences. It has not only made money the chief cause of economic fluctuations but has also greatly facilitated an uncontrollable growth of public expenditure. If we are to preserve a functioning market economy (and with it individual freedom), nothing can be more urgent than that we dissolve the unholy marriage between monetary and fiscal policy, long clandestine but formally consecrated with the victory of ‘Keynesian’ economics.
We need not say much more about the unfortunate effects of the ‘needs’ of finance on the supply of money. Not only have all major inflations until recently been the result of governments covering their financial ‘needs’ by the printing press. Even during relatively stable periods the regular necessity for central banks to accommodate the financial ‘needs’ of government by keeping interest rates low has been a constant embarrassment: it has interfered with the banks’ efforts to secure stability and has given their policies an inflationist bias that was usually checked only belatedly by the mechanism of the gold standard.
Good national money impossible under democratic government dependent on special interests
I do not think it; an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order. A good money, like good law, must operate without regard to the effects that decisions of the issuer will have on known groups or individuals. A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly do so. But to use the control of the supply of money as an instrument for achieving particular ends destroys the equilibrating operation of the price mechanism, which is required to maintain the continuing process of ordering the market that gives individuals a good chance of having their expectations fulfilled.
Government monopoly of money and government expenditure
But we have probably said enough about the harm that monetary policy guided by financial considerations is likely to do. What we must still consider is the effect that power over the supply of money has had on financial policy. Just as the absence of competition has prevented the monopolist supplier of money from being subject to a salutary discipline, the power over money has also relieved governments of the necessity to keep their expenditure within their revenue. It is largely for this reason that ‘Keynesian’ economics has become so rapidly popular among socialist economists. Indeed, since ministers of finance were told by economists that running a deficit was a meritorious act, and even that, so long as there were unemployed resources, extra government expenditure cost the people nothing, any effective bar to a rapid increase in government expenditure was destroyed.
There can be little doubt that the spectacular increase in government expenditure over the last 30 years, with governments in some Western countries claiming up to half or more of the national income for collective purposes, was made possible by government control of the issue of money. On the one hand, inflation has constantly pushed people with a given real income into much higher tax brackets than they anticipated when they approved the rates, and thus raised government revenue more rapidly than they had intended. On the other, the habitual large deficits, and the comparative ease with which budgeted figures could be exceeded, still further increased the share of the real output governments were able to claim for their purposes.
Government money and unbalanced budgets
In a sense it is arbitrary to require governments to balance their budget for the calendar year. But the alternations of the seasons and the firmly established business practices of accounting provide a good reason; and the practice of business, where receipts and expenditure are regularly balanced over a period with known fluctuations, further supports the usage. If major economic fluctuations can be prevented by other arrangements, the conventional annual budget is still the best term for requiring such balancing. Assuming it to be true that the regulation of the supply of money by competition between private currencies would secure not only a stable value of money but also stable business conditions, the argument that government deficits are necessary to reduce unemployment amounts to the contention that a government control of money is needed to cure what it is itself causing. There is no reason why, with a stable money, it should ever be desirable to allow government to spend more than it has. And it is certainly more important that government expenditure does not become a cause of general instability than that the clumsy apparatus of government should (in the most unlikely event that it acts in time) be available to mitigate any slackening of economic activity.
The ease with which a minister of finance can today both budget for an excess of expenditure over revenue and exceed that expenditure has created a wholly new style of finance compared with the careful housekeeping of the past. And since the ease with which one demand after another is conceded evokes ever new expectations of further bounty, the process is a self-accelerating one which even men who genuinely wish to avoid it find it impossible to stop. Anyone who knows the difficulty of restraining a bureaucratic apparatus not controlled by profit-and-loss calculations from constantly expanding also knows that without the rigid barrier of strictly limited funds there is nothing to stop an indefinite growth of government expenditure.
Unless we restore a situation in which governments (and other public authorities) find that if they overspend they will, like everybody else, be unable to meet their obligations, there will be no halt to this growth which, by substituting collective for private activity, threatens to suffocate individual initiative. Under the prevailing form of unlimited democracy, in which government has power to confer special material benefits on groups, it is forced to buy the support of sufficient numbers to add up to a majority. Even with the best will in the world, no government can resist this pressure unless it can point to a firm barrier it cannot cross. While governments will of course occasionally be forced to borrow from the public to meet unforeseen requirements, or choose to finance some investments in that manner, it is highly undesirable in any circumstances that these funds should be provided by the creation of additional money. Nor is it desirable that those additions to the total quantity of money which are required in a growing economy to equip the suppliers of additional factors of production with the needed cash balances should be introduced into circulation in this manner.
Government power over money facilitates centralisation
There can be little doubt also that the ability of central governments to resort to this kind of finance is one of the contributory causes of the advance in the most undesirable centralisation of government. Nothing can be more welcome than depriving government of its power over money and so stopping the apparently irresistible trend towards an accelerating increase of the share of the national income it is able to claim. If allowed to continue, this trend would in a few years bring us to a state in which governments would claim 100 per cent (in Sweden and Britain it already exceeds 60 per cent) of all resources—and would in consequence become literally ‘totalitarian’.1 The more completely public finance can be separated from the regulation of the monetary circulation, the better it will be. It is a power which always has been harmful. Its use for financial purposes is always an abuse. And government has neither the interest nor the capacity to exercise it in the manner required to secure the smooth flow of economic effort.
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The suggestion of depriving government of the monopoly of issuing money and of its power of making any money ‘legal tender’ for all existing debts has been made here in the first instance because governments have invariably and inevitably grossly abused that power throughout the whole of history and thereby gravely disturbed the self-steering mechanism of the market. But it may turn out that cutting off government from the tap which supplies it with additional money for its use may prove as important in order to stop the inherent tendency of unlimited government to grow indefinitely, which is becoming as menacing a danger to the future of civilisation as the badness of the money it has supplied. Only if people are made to perceive that they must pay in undisguised taxes (or voluntarily lend) all the money government can spend can the process of buying majority support by granting special benefits to ever-increasing numbers with particular interests be brought to a stop.
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2 One alarming feature, the threat of which is not yet sufficiently appreciated, is the spreading tendency to regard a government pension as the only trustworthy provision for one’s old age, because experience seems to demonstrate that political expediency will force governments to maintain or even to increase its real value.
- 1[To assist readers of the First Edition to identify major additions, we have inserted a single asterisk at the beginning and double asterisks at the end of substantial, self-contained new passages. - ED.]
- 2It would, however, clearly be necessary that, though it seems neither necessary nor desirable that the issuing bank legally commits itself to maintain the value of its unit, it should in its loan contracts specify that any loan could be repaid either at the nominal figure in its own currency, or by corresponding amounts of any other currency or currencies sufficient to buy in the market the commodity equivalent which at the time of making the loan it had used as its standard. Since the bank would have to issue its currency largely through lending, intending borrowers might well be deterred by the formal possibility of the bank arbitrarily raising the value of its currency, that they may well have to be explicitly reassured against such a possibility. * *
