Sudha Shenoy, “Government: the fastest growth area,” World Money Analyst, October 1979, p. 11. (With thanks to Mark Tier.)
Government has grown faster than any other “industry” — because there are no restrictions on its growth. The idea of “checks and balances,” supposedly so important in political institutions, should also be applied to government in the economic sphere.
In most countries outside the Soviet bloc, government is the fastest growing single entity. Even when the economies stagnate, the “public” sector continues to grow. At other times, government spending has grown faster than the economy as a whole, so that an ever-increasing proportion of total resources passes through the hands of some government department, board or nationalised industry.
There will soon be little difference, apart from nomenclature, between the Soviet and the non-Soviet areas. As usual, Britain has gone furthest in this direction in the developed world, where some 60% of the national income passes into the “public” sector. Should this trend continue, all economic activity will become a branch of government. So far, Parkinson’s Law seems to be irreversible: officials inexorably make work for each other, and they successfully demand more subordinates. The civil service has no built-in checks.
There is one important institutional reason for this state of affairs. Plans for restraint of the bureaucracy are demanded by politicians but are drawn up by the very bureaucrats who are supposed to go! Officials discover insuperable obstacles that prevent any cuts in the number of civil servants employed. Under extreme pressure, officials are shuffled from one department to another. After all, the politicians now in charge could easily be removed in the next election.
The bureaucracy continues forever because the government is not limited by the one restraint which checks every other economic unit: the necessity of funding finance. Government alone can compel its subjects to pay for its activities. Even the largest and most powerful corporation cannot escape the discipline of having to pay the going market rate of interest for its borrowings (or of paying out a minimum level of dividends) unless it gets government on its side. Taxation, compulsory acquisition of its citizens’ income, is thus one reason why it is so difficult to restrain government.
But government has one weapon which it always refuses to surrender: control of the money supply. By this means, it can always find finance for its spending. Moreover, expansion of the money supply is far less painful and visible than taxation. No one finds his income diminished; indeed, most people find the opposite — their income appears to be rising. There is no conspicuous connection between an increase in the supply of money some months ago and the increase in prices today. The government can always lay the blame for the fall in the value of money on some other body, preferably an unpopular group such as shopkeepers or foreign businessmen. It can also blame the greed of its citizens.
The issue of money is an important element in making the government budget uncontrollable. In the past when gold and silver coins were commonly used, governments relied on the clumsy method of debasement to finance their expenditure.
The fall in the value of money — the rise in prices — was long drawn out. Roman emperors took some two centuries to roughly halve the purchasing power of the basic Roman coin. With modern paper money and with the use of bank deposits, this can be accomplished in a matter of years.
Debasement of the money supply is legally permitted only to government: counterfeiters are usually sent to gaol (if caught and convicted). Government solves its immediate problem of finding finance — by imposing a range of difficulties on everyone else. Price signals are seriously dislocated because different prices rise at varying rates. Transmission of information about relative demand and supply for different products is thus confused. More important is the falsification of interest rates: the price of capital.
Monetary expansion prevents interest rates from rising to the level they might otherwise reach. In England, the result has been that interest rates lagged behind price increases — i.e., lenders have not received any interest in real terms, and they have lost a proportion of their capital into the bargain.
But even more seriously, false interest rates mislead businessmen into overexpansion, particularly in the capital goods industries. This overexpansion cannot be continually sustained. So there are eventual recessions. Government manipulation of interest rates is thus a significant cause of fluctuations in output — the “business cycle.”
One reform which would go to the root of the matter is to deprive the government of its monopoly over the money supply. If people were free to choose the currency they used and, more importantly, if banks and other financial institutions were free to issue alternative currencies which people and firms could accept or not as they pleased, competition would maintain monetary quality and prevent the twin evils outlined above: price dislocation and manipulation of interest rates. Firms and individuals would be able to move promptly out of any currency which showed signs of debasement long before any serious damage was done to their savings.
This vital option would minimise price dislocation: a currency dropping in value would rapidly go out of use once rejected by all concerned. If no-one had a money monopoly, interest rates would reflect the true costs of borrowing for different time periods. The government would be on the same footing as anyone else: it would have to pay the true cost of the borrowings. If it expanded its currency to pay for its expenditure, its money would be rejected as it fell in value: thus depriving the government of privileged finance.
It must be emphasised that such monetary reform rests on a denial of monopoly to anyone: including government, private firms and banks. It requires the repeal of legal tender legislation: people must be free to reject any currency which they felt was weakening. Exchange controls must also go: strong currencies need not fear competition; only a weak currency, an inflatable one, needs to keep out alternatives. Various currencies would trade like commodities on the basis of relative demand and supply.
Many border areas in western Europe operate at present with just such a system: two or more currencies circulate without difficulty or confusion. The proposed reform would simply generalise the situation. More ominously, in past hyperinflations people have painfully learned how to use currencies other than the one issued by their government. In Germany in the 1920s, for instance, farmers early on refused to accept paper marks and insisted on payment in gold, while the wholesale trade openly used foreign currencies. In the final stages, foreign exchange was sold at virtually every street corner and “every guttersnipe knew the latest foreign exchange quotation” as one historian found. Removal of the currency monopoly would prevent such a situation ever arising.