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]

Previous
Previous

Debunking Economic Mythology

Next
Next

DEBUNKUNG ECONOMIC MYTHOLOGY - PART3"THE FUTILITY OF INSTITUTIONAL MEDDLING"