Government currency monopolies…can thus be understood as part of the tax system [and reflect] the preference of the fiscal authorities.
Santayana's famous quote, "Those who don't study the intellectual debates of the past are doomed to repeat them," has been turned into a saying that is especially true in economics and monetary theory, where ideas and events cycle together. Stefan Eich's book The Currency of Politics is a useful and very interesting review of specific monetary debates in their historical contexts over the past few hundred years of thought about how money and politics are linked. The author's own suggestions, on the other hand, are vague and show a naive trust in government. The history survey doesn't talk about the heated debate in the U.S. at the end of the 19th century about "the money question," which was led by William Jennings Bryan. We'll talk about that at the end of this review.
The Currency of Politics came out in 2022, just in time for the Great Inflation in the United States and runaway inflation in other countries. This has led to a new global debate about central banking, money, and inflation, with the global club of money-printing central banks on the defensive—at least for now. If there is ever a second edition, the current arguments and money problems must be a new chapter.
"Money is always already political," says Eich, and this is his main point. This does seem to be the case. I often say that the old name for the subject, "Political Economy," was a better fit than the current name, "Economics." We never see economics without politics in the real world. Also, there is no such thing as "Finance"; there is only "Political Finance."
One reason for this is that there are always new financial crises, which always lead to strong political responses.
A second reason is that it is very convenient for governments to control money, especially if they have their own central bank that will buy their debt when they don't have enough money. This was the reason why the first Bank of England was set up in 1694. This arrangement is so good for politicians that almost every country now has its own central bank. This is especially helpful during war, but it is also helpful in general when there are budget deficits.
In his 2017 study of how money works, George Selgin said:
Governments have come to supply currency, and to restrict the private supply of currency and deposits, not to remedy market failures, but to provide themselves with seigniorage and loans on favorable terms. Government currency monopolies…can thus be understood as part of the tax system [and reflect] the preference of the fiscal authorities.
This ability of the government to control money for fiscal purposes is exactly what politicians like when they want to spend more, as well as a statist academic like Eich, who wants "more precise political control over money" and "to reconceive of money as a malleable political institution" in order to have "more democratic visions," even though the "visions" are vague.
Eich goes back to Aristotle to show that money is political, which is true but not a big surprise. He says that Aristotle thought that "money could be an institution that would help keep the polis together, but it was not enough, it wasn't perfect, and it could have tragic results." In fact, this is what has happened to every country whose government caused hyperinflation. For example, Argentina's inflation rate in July 2022 was reported to be 71%.
From Aristotle, the book jumps ahead 2,000 years to another great philosopher, John Locke, and gets more interesting in my opinion. The setting is a debate about the great British re-coinage of 1696, which happened two years after the Bank of England was founded. Locke was one of the first shareholders in the Bank of England. Eich says that Locke was also a key thinker about money, even though he is best known for his influential political philosophy and theory of knowledge. (That wasn't taught in my philosophy classes, and I bet it's news to a lot of other people, too. Eich says, "Today, political theorists rarely talk about his writings on money." Kudos to Eich for bringing this up. Isaac Newton, a great scientist, was also involved in money matters at the same time. In 1696, he was named Warden of the Royal Mint. In 1699, he was given the job of Master of the Royal Mint, which he kept until his death in 1727.
Locke is the main intellectual enemy in the book because he wants the government to "call in all the circulating currency" (that is, coins) and re-coin them to make sure they have the same amount of silver as they did in Elizabethan times, which was a century ago. Eich writes, "For Locke, a pound sterling was and had to stay three ounces, seventeen pennyweights, and ten grains of sterling silver." This was done to "restore trust in the political and financial systems." In the end, Locke's unusual insistence that the monetary standard couldn't be changed won the day, which surprised many people. In January 1696, Parliament passed the act... Clipped and worn coins were taken out of circulation and replaced with new coins with milled edges. At the same time, a new focus was put on the unchangeable value of coins.
Eich thinks this is an attempt to make money less political, but he's right to point out that "Locke's intervention was itself political." In fact, both "sound money" and "inflationary money" are positions in Political Economy about what the best monetary system is.
After Locke, Eich moves on to Johann Gottlieb Fichte, a German idealist and nationalist philosopher whose ideas are more in line with his own. Fichte "made the most eloquent case" for "the political and philosophical implications of the new possibilities of fiat money." He thought that this would require a "closed commercial state" that doesn't allow any trade with other countries and a "commercial autocracy." Also, it would be "a state that had the full trust of its citizens and had all the powers of modern money at its disposal," and, as Fichte said, "it would guarantee the value of the money it gave out for all time." In the world of money politics, it goes without saying that there is no chance of that happening. A related question is whether or not it is ever smart to put your money in the hands of the government.
Eich knows that other people, like me, have doubts about how much you can or should trust the government. But could fiat money still work? A key event in history shows that it could, at least for a while: in 1797, the Bank of England stopped its notes from being exchangeable for money in order to help pay for the war against Napoleon. One hundred years ago, the Bank of England was set up to pay for England's wars against Louis XIV. One hundred years later, the Federal Reserve made its name by paying for the United States' involvement in the First World War.
Eich's talk about this time is very interesting to us people who live in a world with only fiat currencies now. On February 26, 1797, the British government did the same thing that President Nixon did on August 15, 1971. The Bank of England put a hold on... The pound sterling, whose name still referred to the weight of silver, had turned into a piece of paper backed only by the word of the government. "This was a dramatic start to a now mostly forgotten episode in the history of world money... Eich says that from 1797 to 1821, Britain tried out "pure fiat money," which was the most advanced way to handle money at the time, and with it, the politics of modern central banking. This changed not only how people thought about money at the time, but also what a modern nation state is and what its role is.
Like the U.S. in 1971, Britain in 1797 had no choice but to make this big change. Both countries were running out of the gold they had promised to pay their creditors on demand. Here's how things were in Britain:
"During the last part of 1796, merchant and banking houses all over the country went out of business. The fear of a French invasion made people even more worried, and when a single French frigate landed 1,200 men in Fishguard, Wales, in February 1797, a run on the Bank of England began. Consider that. Hayek says, "When a representative from the Bank told [Prime Minister] Pitt how things were going, he stopped the directors from making any cash payments by issuing an Order in Council." The ban lasted for more than twenty years.
Eich says that "prices were almost completely stable for the first three years." After that, though, they didn't stay like that. In Chapter 3, Footnote 85, he says, "Over the next two decades, prices went up by about 80% overall." Eich takes comfort in the fact that this is "less than 4% on an annualized basis." He didn't seem to understand how growth rates add up. At a rate of 4%, prices will increase 16 times over the course of 72 years.
In the same way, prices have not stayed stable in our fiat currency era, after a time when the central bank praised itself for "price stability."
In the historical British case, there was "a lively debate," which students of money history know about. In Chapter 3, footnote 86, it says, "Henry Thornton's An Enquiry into the Nature and Effects of the Paper Credit of Great Britain was the most important English contribution to the debate." Thornton does not make it into the book's main text or its index, which is a shame. We can make up for this with two of Thornton's most important ideas:
That the quantity of circulating paper must be limited, in order to the due maintenance of its value, is a principle on which it is of especial importance to insist.
To suffer…the wishes of the government to determine the measure of the bank issues, is unquestionably to adopt a very false principle.
At the end of the classic debate about money, in which Thornton played a big role, and after Napoleon had been defeated for good, Britain went back to letting people change their money into gold in 1821.
As the book goes on, Eich gives one chapter to his real hero, John Maynard Keynes, and one to Friedrich Hayek, who is one of the main intellectual bad guys in the book. There is a lot of interesting history in these chapters. For example, Keynes told Chancellor of the Exchequer Winston Churchill in 1925 that he shouldn't go back to gold at the old, pre-War parity because the War had destroyed the old parities for good. At the Bretton Woods Conference in 1944, Keynes proposed the impractical creation of a global central bank and an international fiat currency called "Bancor." He was speaking for Britain, which was broke and in debt at the time, so Britain lost the argument. The world then moved on to the Bretton Woods system, which was based on the U.S. dollar and made it possible for governments to trade gold with each other. This system fell apart in 1971. And on the other side, how Hayek intellectually led "the devastatingly effective politics of the 1970s, which not only paved the way to disinflationary discipline but also effectively buried Keynes, at least until...2008," and how Hayek proposed "depriving governments of their monopolistic control of money." Eich thinks this is a new form of the "depoliticization" of money heresy.
Eich likes Keynes' idea from the 1930s for "the euthanasia of the rentier," which is what would happen if there were no interest rates. But when central banks in our time set interest rates to zero, they brought about the "euthanasia of the saver" and made huge profits for rentiers by causing prices of bonds and stocks to go up.
In the book's Epilogue, Eich says, "Following the ideas of past thinkers is not meant to give a list of answers." Still, he brings up a few ideas, none of which are very clear or interesting to me, like bringing back postal banking or turning the Federal Reserve into a bank that lends money to the government. He wants "the greater democratization of money power," but he also says that "the whims of public opinion" should not affect money decisions.
He hopes that his history will help "by giving us a better way to talk about the politics of money, including its promises and limits."
The most surprising thing about The Currency of Politics is that it doesn't say a single word about the great American monetary debate, in which "the money question" dominated national politics, and especially the presidential election of 1896, which was dominated by the stirring speeches of William Jennings Bryan. Yet, it was clear, dramatic, and historically important because it was all about the politics of money.
Vachel Lindsay, a poet, said that "that Heaven-born Bryan, that Homer Bryan, who sang from the West," thrilled the Democratic National Convention of 1896 with his "Cross of Gold" speech, which was a high-flying attack on the gold standard and a call for the free coinage of silver as a way to promote an inflationist monetary program. One commentator calls it "the most famous speech in American political history," which is a bit of an exaggeration. It is the most famous speech ever given in the United States about money.
One history says that Bryan "leaped two steps at a time" to the speaker's stand and "looked like a Democratic Apollo." He said, "Issuing money is the government's job, and banks shouldn't be in the business of running the government." This is something Eich would agree with. After saying a lot more, which I wish I could quote, Bryan came to a memorable conclusion:
We shall answer their demands for a gold standard by saying to them, “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold!”
Bryan got three runs for the U.S. presidency and lost three times. Whatever your views on the substance of his ideas, he certainly gave us notable rhetoric. Eich might add it to his study while he searches for “a better language to capture the politics of money.”