Twenty twenty-two is turning out to be the year that puts the politics back into monetary policy.
For 30 years or more, inflation was quiescent — even despite the violent shocks of the tech crash and the global financial crisis. As a result, even the unprecedented monetary policies implemented after 2008 failed to provoke much real controversy.
But this year, things have changed. With inflation topping 9 per cent in the UK and US, the questions of when and by how much interest rates should rise — and who will be the winners and losers when they do — are back at the top of the political agenda.
That is just the start. Public satisfaction with the Bank of England’s performance hit the lowest on record in June. Liz Truss, the leading candidate to be the UK’s next prime minister, has taken note, and pledged to review the central bank’s mandate. The once sacrosanct idea of monetary policy independence is now explicitly under threat.
How should we evaluate these radical developments? Surprisingly, modern macroeconomics itself is not really much help. The current consensus set-up was a victim of its own success. The fact that it hit its target of low and stable inflation for so long meant that higher-order questions of objectives and governance were regarded as largely settled — and attention turned elsewhere.
Fortunately, though economists lost interest, political theorists did not. A new generation of scholars have been busy crossing the beams of economics, political philosophy and legal studies — and are as a result well positioned to offer guidance through the oncoming monetary maelstrom.
A professor at Georgetown university, Stefan Eich is a star of this school — and his new book is a prime example. Structuring his story around five great theorists of the western tradition, The Currency of Politics offers a fresh and splendidly clear guide to the intellectual history of monetary policy.
In the beginning was Aristotle. Eich commends him for the accuracy of his famously ambivalent characterisation of money. Particular currencies are the creatures of particular political communities, Aristotle rightly observed, and are as such mere conventional fictions. Yet they are fictions that must retain coherence and consistency through time and space to be useful — and so must be managed to make them seem as if they are real things. Thus the philosopher of classical Greece identified the tensions between easy and sound money, and discretionary and fixed standards, that have dominated monetary history ever since.
Eich illustrates the extremes in these perennial debates with brilliant overviews of two of the great monetary thinkers of the early western canon. The first is John Locke, whose successful intervention in favour of a fixed and immutable metallic standard in the great recoinage debate of 1696-97 set Britain — and thereby much of the rest of the world — on the path to the gold standard. The other is Johann Gottlieb Fichte, the first rector of Berlin university, whose 1800 work The Closed Commercial State emphasised by contrast the benefits of an actively managed domestic currency able to respond flexibly to changing economic conditions.
Locke’s vision was deliberately anti-political: he taught that the currency must be ruthlessly defended from democratic interference if it is to be made safe for commerce and investment. Fichte’s, by contrast, saw political supervision as the whole point of the enterprise: monetary policy is one of the primary tools of a sovereign national government. It fell to Marx and Keynes, Eich’s fourth and fifth monetary apostles, to identify escape routes from this seemingly intractable disagreement.
Marx argued for cutting the Gordian knot. Relying on monetary policy to achieve social and economic reform is a waste of time, he wrote. The proper solution is to abolish money altogether, and attack the underlying shortcomings of capitalist class relations at their source. It is a radical prescription, of course — and so found takers only in revolutionary communist states, and even then only on a temporary basis.
Instead it was Keynes who formulated what became approximately the modern consensus for liberal, democratic states. In one of his characteristic coups of synthesis, Keynes’s mandarin economic liberalism found a way of accommodating both Fichte’s conviction that monetary policy should serve political ends and Locke’s preference for insulating it from democratic debate. The stage was set for technocratic central banks subject to the oversight of elected politicians.
Yet like so much of Keynes’s legacy, the question has always been how long it could outlast the great man’s gradually receding aura. As Eich writes, today’s “central banks — and the private banks they supervise — exist in a peculiar constitutional blind spot in our polities”. With the real value of national currencies evaporating and digital competitors multiplying merrily in the wings, it is hardly surprising that this blind spot is now coming under increasingly intense scrutiny.
We should not be shocked if the current model of making monetary policy is therefore the next pillar of the Keynesian consensus to crumble. The Currency of Politics is an invaluable guide to why — and how to think about what comes next.
The Currency of Politics: The Political Theory of Money from Aristotle to Keynes by Stefan Eich, Princeton University Press, $35/£28, 344 pages
Felix Martin is the author of ‘Money: The Unauthorised Biography’
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