Hugh Morgan, The Australian, February 27, 1990, p. 8.
The Business Council of Australia’s Debt Summit on Thursday and Friday is helping us focus our minds on the underlying causes of our debt problems.
It is now generally understood that debt is an outward and visible sign, rather than a fundamental cause, of our national economic malaise and decline.
Similarly, it is widely accepted that inflation, together with our tax regime, generates very strong pressures against saving and for indebtedness at all levels of society: personal, corporate and throughout government.
Inflation always has been, and always will be, an unmitigated evil and inflation’s ugly sister, deflation, can be as evil in its effects as inflation.
The deflation of 60 years ago was causally connected to the Great Depression but while the depression is remembered by many, the deflation is understood only by specialists in monetary history.
Inflation and deflation together constitute unsound money. One of the great contemporary political leaders of the English speaking world, Enoch Powell, said about money many years ago: “Upon the sound working of the money system, and above all upon the stability and honesty of the currency, depend not only the operations of industry and commerce but the structure of society itself.”
The most vivid documentation in this century of Powell’s argument was the destruction of Germany that took place in 1945. This destruction was the culmination of Hitler’s success in winning political power in 1932.
The single most important factor in Hitler’s rise to power was the breakdown of German society caused by Germany’s 1922 inflation.
It is argued by some that that horrendous situation was the German response to the Treaty of Versailles. If that is true, it is doubtful that the architects of that inflation had Hitler in mind when they installed the new high-speed printing presses for the Bundesbank.
That inflation was dramatic and devastating in its scope and speed.
Australian inflation since World War II has been far less dramatic but the consequences have, none the less, been destructive not only of important institutions but also of government and commercial morality.
Inflation begets debt and destroys the incentive to save. The rich and powerful, the “smart money set” can borrow heavily. The widows and orphans who lend out their patrimony find their inheritance dwindling before their eyes.
The poorer and less knowledgeable members of the community, who save by accumulating deposits in their bank accounts and who dutifully pay income tax on interest payments, find their assets declining in real value year by year.
The term “yuppie” has become a pejorative term but it was originally from the “young urban professionals” who worked hard, borrowed heavily and lived well. They were doing what the unsound money to which they had become accustomed (they had never known any other kind) told them was the obvious thing to do.
Since “yuppie” is now a pejorative word, we should be clear that the yuppiest of all borrowers have been our governments, federal and State.
This needs restating today because there will now be a concerted attempt to lay our debt problems at the feet of those of our high-flying Icarus-like entrepreneurs who have flown too close to the sun for their own survival.
Our various governments have behaved like yuppies not because they have borrowed but because they have borrowed in order to consume, rather than to invest in sound, profitable assets.
Commonwealth government debt, particularly, is hazardous to the nation because that government, having monopoly powers over the base money supply, is then tempted to devalue the currency in which it has borrowed so heavily. At 8 per cent inflation per annum, the Commonwealth government halves its dollar debt every nine years.
Government leaders will defend their record on the grounds that they were doing what the community wanted. Marginal voters in the marginal electorates wanted this or that benefit and the community generally wanted reduced tax rates.
The strong inflationary bias of all 20th-century democracies with government-controlled fiat money is demonstrated by the Germans and the Swiss. Those two countries have epitomised responsibility in central bank behaviour and practice since the war.
None the less, the Swiss franc and the D-mark have been reduced in value during the period 1950 to 1980 by 61.5 per cent and 60.6 per cent respectively. These inflation figures correspond to half-lives of 42.8 and 41.5 years respectively.
Australian money has been much less sound than the Swiss franc or the D-mark. It should be recalled just how unsound our money has been, and how unsound it still is.
In July 1989, the value of the dollar had been reduced to 61 per cent of its July 1982 value. This is equivalent to a half-life of 9.8 years.
In the period 1975-82 it was reduced to 50 per cent of the 1975 value, a half-life of seven years. In the period 1972-75, it was reduced to 63 per cent of the 1972 value, a half-life of 4.5 years.
Those dates, of course, mark the Whitlam, Fraser and Hawke governments.
Two questions immediately follow.
The first: Do governments, and businessmen, want sound money?
The second: If governments really want sound money, can they, with the best will in the world, provide it?
I focus on government in this matter because businessmen, however unscrupulous they may be in using inflation, cannot have any influence as businessmen on the monetary base. It is that monetary base which controls, or does not control, inflation.
The way in which governments do well out of inflation is now well documented and understood. An 8 per cent per annum inflation is a huge tax take from those citizens who have bank deposits or securities denominated in dollars, and it reduces government debt in proportion.
It is a tax that is not discussed or voted on in Parliament and therefore particularly dear to the hearts of our politicians, both those now in government and those who have been.
With progressive income tax, of course, 8 per cent inflation now drags in an extra 11 per cent of tax revenue. The Whitlam years were memorable in this regard and because of the time lags involved, the inflation of the early Fraser years was attributable to the former government.
Since the ’70s, there has been increasing public concern in Australia, as well as the rest of the Western world, about inflation. In the United Kingdom, Margaret Thatcher campaigned in 1979 on a sound money policy. Her strong commitment to sound money has never been questioned.
In Australia, we have the problem that any of our present political leaders, who thought that inflation really was a national problem of grave dimensions and who went to the people on a zero inflation, sound money election policy, would be regarded at best as hopelessly idealistic or, more likely, as simply a nut.
The first question such a politician would have to answer is as follows: “Margaret Thatcher, beyond any doubt or argument, is convinced of the evils of inflation. She has manifestly failed to bring sound money to Britain. How will you succeed where she has failed?”
This question is of the utmost significance. It raises the general question: Can any government, no matter how determined, give us long-term, stable prices and sound money?
Fortunately, several very clever people have been thinking about this problem. The most important is Nobel Laureate F.A. Hayek, who suggested in 1976 that it may be impossible for a nation to have sound money while governments retain a monopoly control over money supply.
In Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies, he wrote: “The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.”
His suggestion has been energetically pursued by a number of younger economists around the world. They have studied the periods of our economic history that did have sound money, and Australia is an important source of these historical investigations.
They have also debated the theoretical framework surround the provision of sound money and a stable banking system.
Two conclusions have emerged. First, it now seems to be established, both empirically and theoretically, that a monopoly supplier of fiat money cannot supply money at a zero inflation rate except by accident for a short period of time. Second, that money which promises the bearer absolutely nothing by way of redemption, fiat money, eventually delivers on that promise.
If these conclusions are valid, and historical evidence certainly supports them, then we can begin to understand why Margaret Thatcher has failed to deliver what she manifestly wants to deliver, sound British money.
The argument that while the Bank of England remains a monopoly supplier, she cannot deliver sound money is an argument against which the British monetary authorities must now perforce defend themselves.
Prior to 1910, Australia had sound money, a competitive issue of currency by a number of banks and bank notes which were redeemable in gold.
I will be accused of being a gold bug unless I acknowledge, which I do, that whether redeemability of bank notes is in terms of gold or silver or platinum, or other valuable commodities, is fundamentally irrelevant provided they are redeemable in something! The market will decide which form of redemption it prefers.
The 1910 Commonwealth Banking Act, which established de facto monopoly government control over money supply and the illegal refusal to redeem notes with gold (which took place during World War I), took Australians into an era in which the value of their money was as good, or bad, as the value of Commonwealth government promises.
That promise, usually implied rather than explicit, was that a dollar issued today would retain its value, long into the future.
These institutions which have been responsible for the unsound money of post-war Australia now have to explain why the Australian pound of 1949 is not worth, in purchasing power, the two 1990 dollars that is the face value equivalent but is equivalent to 25.3 1990 dollars.
Putting it in more comprehensible form, the pound of 1949 has declined in value over 40 years to 19 pence. (It is worth recalling that the period 1946-49 had been a period of serious inflation, and one of the important slogans of the 1949 election campaign was the Liberal Party’s “Let’s put value back into the Pound.”)
Australia’s performance in money, considered in terms of inflation rates, has been twice as bad as the OECD average. A football team that performed in this way would face bitter recrimination and become a takeover target for ambitious sporting entrepreneurs.
At the very least, the institutions that have been responsible for our money since World War II should seek to explain why their continuing custodianship would be better for us than the other options available to us.
We have become accustomed to warnings that Australia is heading towards an Argentinian future. Some advice to Argentinian President Carlos Saul-Menem from Forbes magazine is advice from which Australia could also conceivably benefit: “President Carlos Saul-Menem should take a step that might hurt national pride but would certainly save his economy: make the US dollar the country’s official currency.
“The move would not be a difficult one: the US dollar is already the unofficial transaction money in Argentina. Experts estimate there are $5 billion of greenbacks there now. Further there is some $50 billion of flight capital, much of which would come back in a US dollar economy.
“Inflation would rapidly decline. Subsidised companies would be forced to shape up quickly. Entrepreneurship and innovation would suddenly flourish as people could direct their energies to producing and providing goods and services instead of coping with an increasingly worthless money.”
Some Australians may feel wounded that advice for Argentina is put forward as useful advice for Australia. It is true that Argentina is in a much worse shape than Australia, at least at present.
Regardless of such indignation, the truth remains that inflation begets debt and debt begets bankruptcy. If the Debt Summit leads to a hard-hitting debate over our unsound money, the BCA will have performed a very great public service.
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