A plea for good economics: Pedro Schwartz vs Paul Krugman

(Originally published in GoldMoney Research, 18th July 2012)

 

“The trouble with some Nobel Prize-winners is that they are tempted to pontificate on matters outside the speciality in which they have excelled. When Professor Krugman expatiates on macroeconomics, he tends to oversimplify complicated questions of theory and policy, and to misrepresent crucial periods of the past, all to suit his political pre-conceptions”.

These were part of Professor Pedro Schwartz’s opening words in his critical comment on Paul Krugman’s presentation of his new book in Madrid (End This Depression Now!, Norton ed. 2012). As Krugman’s book title suggests, we are going through one of the worst economic crises since the 1930s Great Depression. But does this mean, as Krugman argues, that more government intervention in the economy is the solution?

Following his own rationale (see video, minutes 10-30), it is as if we are faced with an easy choice: do we want to overcome the crisis with expansionary demand policies at the cost of a little more inflation? Or do we prefer instead painful austerity measures that condemn us to a long recessive and stagnated economy, but not much inflation? Well, the answer is easy then. Let’s have some inflation!

During the so-called Keynesian years of the 1950s and 1960s, we were told that there was a trade-off between inflation and unemployment, that is, easy money promotes employment while hard money does the opposite. Yes, those were the years of the traditional Phillips Curve. But the recession and inflation that accompanied the oil crises in the 1970s and the stagflation of that decade – the dreaded combination of high unemployment and high inflation – showed that inflation is, after all, a monetary phenomenon; in other words the result of excessive money creation. Regardless of past evidence, Krugman keeps on saying that fiscal and monetary expansion is the only way to fill the gap left by the bursting of the housing bubbles in countries like Spain. In addition, he supports this inflationary policy mix as it would result in an improvement of the economy’s competitiveness, as it would be a feasible way to cut real wages and prices. Throw in a call for increased financial regulation, and et voila: the neo-Keynesian brew is complete.

Professor Schwartz’s intervention (see video here, minutes 35-48) was a blessing. He refuted Krugman’s recipes and rejected the expansion of aggregate demand as an effective way to address the current recession. As he remarked, were not expansionary fiscal and monetary expansionary policies large contributors to the present crisis? How then are they going to be the solution now? As Menger pointed out many years ago, economics must deal with the unintended consequences of human decisions; so a good economist must not be tempted to just please the public with popular solutions. He must be prepared to stick his neck out in favour of difficult decisions. I fully share Professor Schwartz’s views and think that more spending would be myopic and counterproductive in the long term. We have learnt painfully in the past that increased public deficits financed by a loose monetary policy is neither an effective nor a sustainable long-term solution to such crises.

Juan Castañeda

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A plea for monetary competition

Article originally published in GoldMoney Research, 9th January 2012.

 

Most students of economics today do not even know that monetary competition was the norm rather than the exception for large periods of human history. Even worse, almost none pay attention to this question at all. Tacit acceptance of legal tender laws and currency monopolies is the norm. This has resulted both in a true intellectual loss for those who are already or want to become economists, and in the absence of a public and academic debate on a true exception and even an anomaly of a market economy. In the following lines, I will try to contribute to this missing debate, even though quite modestly.

Following the definition espoused by the Austrian economist K. Menger, money is not a specific good but a property of the goods. In fact, different goods have been used as money according to their ability to (1) make transactions and (2) to be a proper store of value. For centuries, even millennia, the exercise of commerce served as a practical and unintended test to select the best money. First, it was those essential goods widely used and exchanged in a community – such as cattle, wheat, grains or salt. Then – because of the high transportation and storage costs, low durability and the lack of divisibility – those goods were substituted by precious metals for ordinary transactions, as metals were much easier to transport and store at a very low cost. Both gold and silver coins were efficient means both to settle payments and store wealth. They were goods that, in the words of Hayek, had “currency”, as they were very liquid and readily accepted as money across different communities and cultures.

Governments have regulated the content of gold or silver of the currencies, and they earn profits associated with their right to print (or mint) money (seigniorage). However, this does not mean that the state is the only one able to do it. With the massive use of paper money and the decline of gold coins, the state granted the monopoly of issue to a single (commercial) bank in exchange for easy and privileged credit; and it also established the legal tender clause of the paper notes issued by that bank. Thus arise central banks. Legal tender clauses mean the end of a free market in money. Within this framework, the state could easily increase its profit by expanding the notes in circulation with no difficulty at all.

There were many successful episodes of monetary competition during the 19th century (in Scotland, Sweden and Australia, among other countries). In this competitive market, banks accepted the notes of the competence, which were regularly taken to the issuer bank in exchange for reserve money (in most cases, gold). Thus, the banking practise in such a scenario created a sort of club of commercial banks which preserved the purchasing power of the money and public confidence in the payment system. Confidence in so-called “clearing houses” was essential. If a bank over-issued paper notes, the rest of the banks could redeem those notes quickly through a clearing house. Thus, the over-extended bank soon suffered the consequences in terms of a fall in its gold and silver reserves, which acted as a corrective to that bank’s unsound policy. However, the effectiveness of the money market adjustments just described relied on the timely running of those clearing houses, so that the imprudent bank could see the consequences of its policy.

In this hypothetical more open money market, competence will restrict the supply of money in the economy, as people will gravitate towards the currency that maintains its purchasing power on a long-term basis. As far as sustainable economic growth is concerned, this would be a blessing.

Juan Castañeda

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¿Cómo funcionaría un sistema monetario más competitivo?

Artículo originalmente publicado en GoldMoney Research, el 9 de Enero de 2012:

 

Un alegato en favor de la competencia monetaria

La competencia en el mercado monetario es hoy en día casi un mito, casi olvidado, una especie de leyenda de la economía liberal clásica condenada a ocupar un espacio marginal en los libros de historia. Casi ningún estudiante de economía ni siquiera sabe que la competencia entre distintos emisores de billetes fue la norma y no la excepción durante muchos años. Lo que es aún peor, casi nadie se preocupa ya por ello, dando por hecho que el dinero del banco central es el único posible o, a la luz de los desastres monetarios y financieros vividos desde 2007, el menor de los males posibles. Ello no sólo supone una verdadera pérdida intelectual para quienes son o quieren terminar siendo economistas, sino también la desaparición del debate público de lo que es de hecho una autentica excepción y anomalía en el funcionamiento de una economía de mercado. Intentaré paliar, si bien muy modestamente, esta atronadora ausencia.

El dinero no es lo que el Estado sancione como tal. Siguiendo al economista austriaco Carl Menger, el dinero es una propiedad, una cualidad de los bienes . De hecho, el dinero ha sido siempre, y sigue siendo, todo bien que nos sirve para (1) realizar transacciones y (2) atesorar y conservar el valor de parte de nuestra riqueza. A lo largo de siglos, diría mejor milenios, la práctica comercial cotidiana ha ido seleccionando naturalmente los bienes que mejor cumplían ambas funciones. Primero lo fueron los bienes más necesarios y de uso general, como el ganado, el grano o la sal; luego, ya fuera por sus altos costes de transporte y de almacenamiento, ya fuera por su escasa durabilidad e imposibilidad de ser fraccionados en pequeñas unidades, los comerciantes y consumidores fueron optando por los metales preciosos por su facilidad para transportar valor de pago en el tiempo y en el espacio, con el menor coste posible. Eran, en definitiva, medios eficientes para liquidar operaciones y deudas, así como conservar riqueza; lo que F. Hayek, siguiendo a Menger, entendía como una elevada dinerabilidad de estos bienes, en alusión a su elevada liquidez.

Por supuesto que los Estados regularon la fineza y peso de las monedas y las acuñaron, y claro que recibían un beneficio por ello (el llamado señoreaje de emisión). Pero esto no implica que sea el único que pueda emitir dinero. Con la sustitución de las monedas metálicas por el papel moneda el Estado encontró en el monopolio de emisión de billetes una fuente privilegiada de financiación. Y lo hizo declarando los billetes del banco central como los únicos billetes de curso legal, una cláusula que eliminaba de raíz toda posibilidad de competencia. Los gobiernos de turno habían encontrado una cómoda manera de obtener ingresos a través del aumento de la emisión de billetes del banco central (lo que multiplicó su señoreaje de emisión).

Ahora bien, ha habido muchos ejemplos exitosos de competencia monetaria a lo largo del siglo XIX tanto en Escocia, como en Suecia y Australia (entre otros casos). Por regla general, los emisores encontraron beneficioso para todos ellos la aceptación de los billetes de la competencia, billetes que luego presentaban en el banco emisor correspondiente para ser canjeados por la moneda de reserva (en su mayoría, el oro). Por la vía de los hechos, ello fue creando auténticos clubes de bancos emisores de billetes privados que funcionaron bastante bien, dado que desarrollaron instrumentos que favorecían la circulación y el mantenimiento del poder de compra del dinero. Uno de estos instrumentos esenciales fue la compensación regular y organizada de sus saldos (acreedores y deudores) en las llamadas “cámaras de compensación bancarias”. Si un banco sobre-emitía billetes, éstos llegaban rápidamente a las ventanillas de la competencia, quienes podían acudir con celeridad a dichas cámaras para entregar ese exceso de billetes a cambio del oro correspondiente. La caída de las reservas del banco sobre-emisor pronto detendría esa política de exceso de emisión. La fiabilidad y eficacia de este mecanismo corrector de la inflación monetaria dependía de la rapidez con la que el banco imprudente sufría la merma de sus reservas, consecuencia de su excesiva emisión de medios de pago. Si bien es cuestionable que en el siglo XIX los mecanismos de liquidación de los saldos entre los bancos podían ser más o menos rápidos, en la actualidad el desarrollo tecnológico podría hacerlo en tiempo real, lo que disuadiría de la práctica de políticas imprudentes o excesivamente arriesgadas.

En ese hipotético mercado de concurrencia de emisores de dinero, la propia competencia del mercado limitaría las emisiones de los oferentes, dado que los usuarios sólo aceptarían las monedas y billetes con probado poder de compra a lo largo del tiempo. En definitiva, es la cláusula de curso legal lo que está impidiendo la sana competencia en este ámbito y nos condena a un mercado gobernado por procedimientos no competitivos. 

Juan Castañeda

Nota: Acaba de publicarse en 2011 la edición española del magnífico libro de G. Selgin sobre esta cuestión: La libertad de emisión del dinero bancario. Crítica del monopolio del banco emisor central. Ediciones Aosta, Cato. Madrid.

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