How inflated does a currency have to be before accounts in that currency are condemned by auditors as neither true nor fair? Auditors may undertake meticulous verification work on assets and liabilities, but what use is it if the money itself fails as a measure? Inflation accounting was familiar enough to our profession 35 years ago, but it’s not history yet: the present money-printing frenzy, as a cure for the world’s debt crisis, is like trying to put out a fire with a bucket of petrol.
In this year’s Reith Lectures Niall Ferguson, history professor at Harvard, touched on the lessons of the banking crisis. He cited the writings of Walter Bagehot, editor of “The Economist” in the late 19th century, who noted that greed is an ever-present menace in banking circles, and when it spills over into irregularity or worse, commensurate punishments must be applied – a sentiment that would find resounding support today.
Yet of the core issue, the nature of money itself, not a word.
Paper money is dangerously ephemeral when not anchored to a stable and finite measure. Theoretically, production of goods and services underlies the money supply, prices providing the link. But if the production of money itself is out of control, and unrelated to any stable measure, it will fall prey to the whim of some benighted ideology and the only thing those prices will measure is the loss of purchasing power. Recognise it?
As Alan Greenspan, for 18 years Chairman of the US Federal Reserve, pointed out in 2005: “We can guarantee cash benefits of whatever size you like, but we cannot guarantee their purchasing power.” Greenspan, who between 1995 and 2005 increased the US money supply by 65% or $1.9 trillion, appears to have come to his senses when, aged 84, he reasserted his belief, written when he was less than half his present age, that: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.”
Link with gold
There is a widespread misconception that linking currency to a stable and universally respected store of value such as gold is an archaic notion. Nothing could be further from the truth. Although President Roosevelt took the USA off the gold standard domestically in 1933, the convertibility of the dollar into gold sustained it as a reserve currency around the world until Nixon severed the link in 1971, since when the whole world has been on a paper money standard.
For the first time in history money could be created out of nothing
For the first time in history money could be created out of nothing, at no cost, and without limit. In just over two years following the 2008 Lehman collapse the Federal Reserve “created” twice as much money as it had done since its inception in 1913, and this destructive practice has been replicated in Europe with a vengeance. The Austrian School economist Ludwig von Mises said it in 1949: “There is no means of avoiding the final collapse of a boom brought about by credit expansion”.
Bailout? Financial stability fund? Target2 Settlement mechanism? Eurobonds? They are just names for ballooning debt that has zero chance of being repaid. And the victim is democracy