FRESH START AFTER BREXIT
One of last Monday's blog-readers, WinstonSmith", challenged me to describe
what I would do if, after Britain has finally left the EU, I were to be appointed
Prime Minister!
Well, I can't miss out on an invitation like that.
Recognising that a fresh approach requires a fresh mindset, the question is: how
am I to make the most of this unique opportunity?
(1) Money
In the eye of every financial storm you will find the Central Bank's contribution
to the crisis - in particular, you will note the transformation of its primary role as
guardian of monetary integrity into the factotum that destroys it, whether by
unchecked and unbridled expansion of the money supply, or by the larcenous
practice of fractional reserve banking.
One of my main reforms is therefore to relieve the Central Bank of powers it
should never have been given, and hence of its need to engage a multitude of civil
servants to support its exercise of those powers. They will now be free to go out
and find something fruitful to get on with.
In more detail:
(i) The Central Bank's power to set interest rates was handed to it by the new
Blair government in the first flush of its 1997 landslide election victory. This is
another power the Bank should never have been given because it has no
understanding of the role of interest rates in the economy.
It has misused it by manipulating rates to facilitate its destructive monetary
policies. Uncertainty on future interest rates leaves businesspeople unduly risk-
averse and unable to finalise production plans and budgets.
Therefore the Central Bank will no longer be permitted to dictate interest rates.
These will be set by the market in accordance with the economic principle of
time preferences as between borrowers and lenders. Interest rates will thus
arise quite naturally, and will represent the price to the borrower of gaining his
desired liquidity now, rather than at some future point in time.
(ii) Instead of pursuing policies that destroy purchasing power the central bank
will protect our purchasing power by ensuring that every issue of new money
(whatever form it takes) is linked in a fixed ratio to an equivalent quantity of
indestructible commodity in limited supply, held by the government on the
nation's behalf.
The practice of quantitative easing, whereby money is conjured out of thin air by
the Bank's electronic printing press, will not be repeated.
(ii) At present, commercial banks are required to retain only 10 per cent of
every deposit they accept and are free to lend 90 per cent to other customers or parties in the market As a first step in the process of dismantling the egregious practice of
fractional reserve banking I shall alter these percentages with a view to
eliminating this habitual source of unsupported credit expansion as soon as
possible, allowing for a short period of adjustment . Existing loan maturities shall
not simply be re-lent, but shall be either settled by the customer or rolled over in
the same amount.
Banks will in future be subject to the discipline of (a) evaluating the soundness of
their lending practices and (b) will make a charge to customers for the service of
acting as custodians of their deposits - and, under the new practice of 100%
reserve banking, all new deposits will be retained in full,
(2) Free Trade
Let's stop talking about free trade and actually do it!
Some basics:
(i) If any foreign country wishes to penalise its citizens by using tariffs to force
them pay more for our goods, so be it. Nothing we can do about that.
(i) If any foreign country wishes to use its taxpayers' money to pay subsidies to
selected industries to enable them to compete with cheaper goods from
overseas, so be it. Nothing we can do about that.
But note that in both the above cases it is the citizens of the country that
applies protectionist policies who suffer. Not us.
Ifin both cases our home-produced goods are of good quality and are reasonably
priced, their producers will have no difficulty in exporting them to a market in
which there is a demand for them.
If industry leaders lobby our government, pleading for protection, we should not
punish our own citizens by acceding to their demands. By the economic law of
comparative advantage, if a foreign company can send us goods of merchantable
quality at a competitive price, why should we punish our citizens by placing an
embargo on their entry?
Note the usual objections and counter-arguments:
(i) "The exporting country employs "slave labour" at below subsidence rates and we
should not support that regime by accepting its imports, whether as goods in our
shops or parts in a supply chain.
ANSWER: Those labour rates, no matter how low, keep thousands of indigenous
families fed and clothed, Short of allegations of violent bayonet-point coercion,
those labourers would rather have that job than face the miseries of
unemployment. Are we clever enough to take the moralistic high ground and
arbitrate on what should happen in another nation's economic circumstances?
(ii) "The quality of the other country's goods is so inferior that they should be banned ANSWER: "Inferior" by reference to what? If the company that is importing them
believes there is a market for them, why should our government ban them? If the
importing company is mistaken and can't sell the goods, commercial forces will
soon wake them up!
(ii) "The other country's goods involve production methods, such as soaking
chickens in chlorine, that are injurious to consumers' health, and they should
therefore be banned.
ANSWER: The role of government certainly includes protection of the life and
health of its own citizens. Therefore, assuming the allegations are well founded,
the government should (a) ban the noxious products; and (b) prosecute the
importer for allowing the lives of fellow citizens to be endangered in this way.
(iv) "The other country allows its industries to engage in production processes that
are cruel to animals, or endanger the environment. Goods derived from such
processes should be banned.
ANSWER: It is not the government's function to second-guess the views and
opinions of citizens who are perfectly capable of decide such issues for
themselves. There is plenty of publicity about the evils of battery farming, or the
effect of harvesting palm oil from trees in which indigenous animals feed. If
citizens wish to take a stand against such practices by boycotting the products
concerned, and exhort others to do the same, they are free to do so and don't
need to invoke government action. However, processes proven to be
environmentally damaging are ultimately a hazard to life itself, and merit a place
on the banned list.
()" An entire domestic industry is at risk ofextinction because of the import of
competing goods at lower prices from countries that employ subsidies as a weapon
There will be redundancies and thousands of unemployed ifthe offending goods are
not subjected to a stiff protective tariff
ANSWER: We have come full circle. The subsidising country cannot continue
with such a policy indefinitely as its own citizens will rebel. As for causes other
than subsidy, history is littered with instances of destructive creation from
Luddite insurrections, to the American rust belt. Adaptation and retraining in
alternative trades may be disruptive, time-consuming and painful, but that is the
way of industrial progress.
Government may in certain cases of extreme hardship (America in the '30s) step
in to alleviate human suffering, but that is never a permanent solution.
Charitable foundations are often set up, as has happened in the USA on a huge
scale.
The impact of competition from overseas is unavoidable and it has the effect of
redirecting capital, effort and skills to where they are best placed to benefit the
largest number of citizens.
(vi)"Creating a trade deficit is dangerous for the whole economy, and government
should therefore subsidise exports to balance the imports.ANSWER: It is impossible for all countries to have a trade surplus at the same
time. As long as we can pay for what we import, in a currency acceptable to the
exporter, a trade deficit is not a concern. It is nonsense to fall for the "exports,
good/ imports, bad" myth.
In the UK, if Staffordshire cloth manufacturers are threatened by low-price
competition from cloth manufacturers in Lincolnshire because the latter are
better trained and organised, or because they have sourced cheaper raw
materials or more effective automated machinery, the message is NOT for
government to intervene, but rather that producers and employees in
Staffordshire need to reorganise their working methods more cost-effectively; or
raise funds to invest in improved capital equipment; or to retrain to take up an
alternative occupation. But leave the government out of it!
Why should international trade, in principle, be any different?
(3)_ Government and Taxation
The amount that needs to be raised in taxes is clearly a function of the
government's own size and scope, and you will have gathered already that my
aim as Prime Minister is to transform my government into a meaningful,
coherent presence, peopled by civil servants who know they are servants of the
citizens. My government will obviously be smaller than the rambling,
uncoordinated and bloated behemoth we have today.
Curiously, since normal government virtually ceased to function while it was
frozen in its bureaucratic Brexit torpor, we have been given a clue: How little we
missed it!
Yet we survived this regulatory vacuum. Indeed, Belgium survived well enough
for 19 months without a government in 2011/12 when Walloons and Flemish
could find nothing that they could agree on; and Northern Ireland holds the
record - over 600 days (so far) without a devolved government. And hardly
anyone has noticed!
FOOTNOTE
The opportunity to make a fresh start reminds me of how Germany achieved
its astonishing, unprecedented turnaround from its immersion in deep and
desperate economic ruin in 1945 to become, in record time, one of the world's
most dynamic industrial economies.
By the mid-1940s both the Nazi war machine and allied bombing had
destroyed Germany's post-war economy, The country was in ruins and people
were starving. The British and American military solution was to extend and
intensify rationing and throw more aid at the problem.
Then Ludwig Erhard was appointed director of economics, in effect the
finance minister. He decided, despite British and American misgivings, and
opposition from the Social Democrats, to do away with price controls and
rationing, which he did in 1948, These moves followed his currency reform that contracted the money supply
by 90%, ending the reichsmark hyperinflation and instituting deutschmarks
instead. He also slashed income tax from 85% to 18%.
Erhard's reforms went totally against the prevailing bureaucratic grain. The
military governor of the US Zone, General Lucius Clay, to whom he reported,
duly upbraided him.
""Herr Erhard, my advisers tell me what you have done is a terrible mistake,
What do you say to that?"
Erhard replied, "Herr General, pay no attention to them! My advisers tell me
the same thing.
Then a US Colonel confronted Erhard: "How dare you relax our rationing
system when there is a widespread food shortage?"
Erhard replied, "1 have not relaxed rationing, I have abolished it. Henceforth
the only rationing ticket the people will need will be deutschmarks. And they
wilwork hard to get those deutschmarks, just wait and see.
The US Colonel did not have to wait long. Within days of Erhard's currency
reform, shops filled with goods as shopkeepers recognized that the money
they sold their products for would retain its purchasing power. People no
longer needed to forage for the basics in life, so absenteeism from work
halved, and industrial output rose more than 50% in the second halfof 1948
alone.
By the way, Erhard had spent the war years studying free-market Austrian
economics.
[My thanks to Alasdair Macleod for this true story]