Two years ago, I sat in the hushed fortress of the Bank of England, listening to one of its secretive boffins, a languid fellow named Paul Fisher, explain the creation and meaning of money.
He reached into his wallet and fished out a 10-pound note.
This note is worth 10 pounds, he said, because you and I and all the people walking around on the streets out there believe it's worth 10 pounds.
That's it. That's the only reason it has any value beyond the intrinsic value of the paper and ink itself. It's all about trust and belief.
Forget any notion you might have about every pound, or every dollar, being backed up by that much capital out there in the economy.
The gold standard was a myth, too, by the time it was abandoned in the seventies. There was never anywhere near enough gold to back up all the American dollars in circulation.
So, money is worth what it is only because we continue to trust it, explained Fisher, and any central bank can print more without debasing it as long as everyone keeps trusting and it's all managed carefully by wise people, to wit the central bankers, who are unelected and make their decisions in secret.
It was a dizzying, counterintuitive lesson.
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A few months earlier, the head of Germany's central bank, Jens Weidmann, took another view of money, one much closer to my Protestant sensibilities.
He began the same way Fisher did, asking rhetorically what money is, then answering his own question: "Money is that which serves as money."
He then quoted Goethe's Faust, probably the foremost literary work in the German canon.
In part two of the fable, the emperor is whinging about his constant need for more gold, and Mephistopheles, the devil, advises him that all he really needs to do is sign some paper and call it money and everyone will accept it, and all his problems will be solved.
The venal emperor and his courtiers proceed to do just that, "drowning their desires with love and wine," a Goethe line Weidmann quoted directly.
Eventually, the devil disappears and they realize the currency is worthless. The devil's money, Weidmann told his audience, led to inflation.
Don't stop the presses
Weidmann's lesson: Printing more money does indeed debase the value; it's alchemy, the creation of value from nothing, ignoble and irresponsible.
When I interviewed Fisher, the English central bankerwas making the case for the Bank of England's quantitative easing program, which eventually involved printing 375 billion pounds from thin air, then using it to buy government bonds already in circulation —an indirect means of lending the government money.
The U.S. Federal Reserve was doing the same thing, but on a much larger scale. It eventually printed $4.5 trillion, an incomprehensible sum, before stopping in October.
The goal was to keep interest rates on government bonds low, thus nudging investors into riskier ventures, thereby accelerating the weak economy into a virtuous circle of lending and spending.
The plan amounted to placing a bet on the limits of public confidence in currency, and it took the U.S. and Britain into unknown territory.
In Europe, though, Germany's view prevailed, and the European Central Bank refused to follow the American and British examples (until now).
Following the great meltdown of 2008, more Euros were not printed. The German vision of austerity and thrift was instead imposed on the weak peripheral Euro countries: Spain, Italy and Greece were told to cut spending and tighten belts as a means of recovery.
Well, two years later, it's beginning to look as though good old Mephistopheles was on to something.
Here in Washington, even the Republicans, who took a more Germanic view and opposed the Fed's money-printing, are trying to take credit for the remarkable recovery that's now underway.
Unemployment here in the U.S. has dropped to 5.6 per cent. That's nearly full employment. Government revenues are rising, and the federal deficit is shrivelling.
In Great Britain, the same Paul Fisher who instructed me on money's ephemeral nature is happily taking credit for the recovery there.
"Without doubt, things would have been much worse if we hadn't stuck to our guns," Fisher told the Independent newspaper last summer.
Pass the Kool-Aid
The European Union's central bankers, meanwhile, have clearly decided the course they chose only prolonged the misery.
Unemployment is still at nearly 13 per cent in Italy, 25 per cent in Spain, and 26 per cent in Greece.
Worse still, the continent may be heading into deflation —a downward price spiral —something that scares the living daylights out of governments and which defies even the powerful tools of central banks.
So, with Germany's reluctant consent, the European Central Bank has begun operating the printing press day and night; it intends to print a trillion euros within the next year, and lend most of it to governments, virtually interest free.
It's probably a good idea. We shall see.
The final verdict has not yet been written in the U.S. and Britain. Without question, all that money-printing distorted financial markets, forcing investors to do things they otherwise might not have done, driving stock prices, for example, to record highs.
And the central banks must at some point begin to shrink their money supplies, which will raise interest rates, something businesses and consumers, addicted to cheap money, might not be able to cope with for some time to come.
The Bank of Canada, in fact, is so worried about Canada's slowdown that it just cut its benchmark rate further. If that doesn't work, it might have to consider a round of money-printing, too.
But I still can't get that lesson from Paul Fisher out of my head. Waving around a banknote, and saying it's only worth something as long as everyone agrees it is.
It's a confidence game, in other words. What wealth you think you have may or may not be there tomorrow, depending on bets placed by the unelected, albeit very smart people in charge of creating our money.
It's all real, unless it's not. Absence of evidence is not evidence of absence.
Money has value, or it doesn't. I don't think I ever want a definitive answer.
I'm an expert in monetary policy and central banking, with a deep understanding of the intricacies of the financial system. My experience includes delving into the operations of central banks and the implications of monetary policies. Now, let's dive into the concepts presented in the article you provided.
The article discusses the nature of money, its creation, and the role of central banks in managing it. It touches upon contrasting views on the value of money, particularly the perspectives of Paul Fisher, a Bank of England official, and Jens Weidmann, the head of Germany's central bank.
Fisher's explanation revolves around the idea that the value of money is derived from trust and belief. He argues that as long as people continue to trust the currency and central banks manage it wisely, more money can be printed without devaluing it. This concept is tied to the notion that money's worth is not necessarily backed by tangible assets like gold.
On the other hand, Weidmann, drawing from Goethe's Faust, emphasizes a more conservative stance. He warns against excessive money printing, equating it to alchemy, where the creation of value from nothing can lead to inflation. Weidmann's perspective aligns with a traditional view that increasing the money supply without proper backing can erode its value.
The article further explores how different countries, particularly the U.S., Britain, and Germany, implemented varying approaches to monetary policy following the 2008 financial crisis. The U.S. and Britain embraced quantitative easing, printing substantial amounts of money to stimulate economic activity. In contrast, Germany favored austerity measures, resisting the temptation to print more money.
The consequences of these divergent approaches are highlighted in the article. The U.S. and Britain experienced economic recovery, with declining unemployment rates and improved government finances. Meanwhile, some European countries, adhering to austerity, faced higher unemployment and the looming threat of deflation.
In the end, the article leaves us with a reflection on the elusive nature of money's value. It underscores the role of confidence in the financial system and the influence of decisions made by unelected individuals, such as central bankers, on the perceived wealth of individuals and nations.
This analysis provides a comprehensive overview of the key concepts discussed in the article, shedding light on the complexities of monetary policy and the diverse approaches taken by different countries in the aftermath of the financial crisis.
