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David T Breaker: Printing Money - Warnings from History

David T Breaker is studying Politics, Philosophy & Economics at the University of Essex and blogs at News Junction. He warns here that history does not suggest that quantitative easing - or printing money - is the right way to kick start the economy.

Sir Winston Churchill once said that those who fail to learn from history are doomed to repeat it. Well it looks like Andrew Rosindell’s recent proposal for British History in schools is a bit late as our failing government attempts to kick start our failing economy by “quantitative easing”. Get ready for printing money.

Now there are times when you need to print money – otherwise there wouldn’t be any – but I am firmly of the view that doing so when we are still in an inflationary mode, and with Sterling already alarmingly weak, now is not a good time.

I’m also fairly certain that whatever you call it, and however you do it, it equates to much the same thing, just as all the complex banking-jargon terms bandied around in the early credit crunch amounted to the same old thing; namely, banks buying over-priced Pandora’s Boxes of mystery mortgages (I like to consider it a kind of terrifying version of Deal or No Deal).

So whilst Alistair Darling and Mervyn King are refilling their ink cartridges over the sink, revving up their Lexmarks and Epsons, and attempting to un-block that printer jam caused by Gordon Brown bulk making Christmas cards to send himself (he starts early), it might be wise to look at some historical precedents.

Japan has been the comparison of choice. After their 1986-1990 housing boom and “lost decade” bust of the 1990s they decided to go QE’ing in the early 2000’s. It doesn’t appear to have worked, and the Japanese economy has again slumped and there are fears of another lost decade. But Japan is very different to the UK – they save, for one thing, and seem to lose decades like most people lose socks – so what of earlier examples, pre-dating the term “quantitative easing”?

Take for example Henry VIII, best known for his unique style of divorce but slightly less so for England’s first serious era of inflation. Wolsey issued new coinage with a lower silver content to match foreign coins in 1526, but further debasement between 1544 and 1551 left coins so bad they contained just one-sixth of the silver as those issued by Henry VII – just three ounces per pound of weight.

People favoured older coins with higher silver content, and at one point an old Henry VII shilling bought four of those issued by Edward VI. Traders rejected the new coins or demanded more, and during the 1500s agriculture prices rose over four-fold.

Elizabeth I recalled over £638,000 worth of her brother and father’s debased coinage for re-minting as a purer £244,000 – the first coins struck at the Tower by herself – in an effort to control inflation, which in 1551 had been widely linked to debasement and by French philosopher Jean Bodin from 1574 as related to the quantity of money circulating*. But inflation had already set in and many suffered, and there were food riots in the 1590s leading to the 1601 Poor Law.

Debasement again followed under Charles I, who also melted down and minted anything he could grab – particularly the silverware of Cavalier families – ushering in the Stuart era of inflation. Debasement was finally stamped out by William and Mary, whose 1695 re-coinage doubled the weight of coins at a cost of nearly £2 million.

But perhaps the real lesson is Ancient Rome. Debasement reduced the denarius to just a twentieth of its original silver content, leading to 1970s style price controls, and contributing greatly to its fall.

In fact I have yet to find an example of quantitative easing, printing money or debasing coins working. So it might therefore not be the best of ideas.

*There is evidence earlier governments knew this. Those who clipped the edges of coins for forgeries were severely punished, but 1551 and 1574 are dates where this theory became more widely known and codified.


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