Cart, Horse, Money, Growth

Is "dangerous defeatism" really blocking good monetary policy...?

MUCH OF OUR WORK aims to refute muddy thinking, writes Toby Baxendale, chairman of the Cobden Centre, and this recent article by Telegraph journalist Ambrose Evans-Pritchard is most confused.

Given the "dangerous defeatism" he finds in arguments against fresh quantitative easing, I would love to hear from AEP, or from Professor Tim Congdon – whom he cites at length – exactly how creating money is supposed to create wealth.

If the central banks of the world buy private-sector bank debt, they create new demand-deposit money that the private-sector banking system can then lend. But more money units chase the same goods and services, so where is the new wealth?

Many people associate rising money supply measures with rising GDP and increased prosperity. Mistaking correlation for causation, they view an increasing money supply as the source of prosperity. This puts the cart before the horse.

Wealth is only created when entrepreneurs make better goods and services, satisfying more of the needs of consumers, in better and more convenient and cheaper ways, via more capitalistic and hence more efficient methods of production. Both the capital investment and the subsequent purchase of the new goods and services should be supported by real savings (meaning forgone consumption).

If such genuine wealth creation occurs, it will prompt banks to increase lending, and under our current system of fractional reserve banking this will necessarily entail an expansion of the money supply. This expansion is the result, not the cause, of wealth creation. Artificially increasing the supply of money will not create wealth, any more than injecting mercury into your thermometer will cause a rise in temperature.

As it is wealth we need to get us out of this hole, all policy should be directed at lowering taxes and reducing the burdens on entrepreneurs.

When it comes to central bankers, it is not dangerous defeatism we should fear, but catastrophic hubris.

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