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Privilege of Printing Money

The 1980s and 1990s have witnessed two major trends in the world of political economy: privatisation and globalisation. The first represents the shift to a greater reliance on the private sector and on markets to run economic activity, to determine the distribution of wealth and the allocation of resources. The second is represented by the collapse of barriers between countries, with labour in distant countries competing head-on with labour elsewhere, with products being assembled in connected factories across the world, with economies integrating as in Europe, and with powerful communications and computation bringing the world closer together.

There is a growing concern that this dash for privatisation and globalisation is putting the world at risk, that perhaps it is going too far and that it is time for some reversal or review. Such concerns come from people across the political spectrum—from global investors such as George Soros to those on the left who have long deplored the privatisation trend and to both conservative and liberal politicians who have long been suspicious of globalisation, the growth of multinational corporations, etc.

It would be pointless to argue for and against globalisation or privatisation or markets as if they were such simple subjects. Money itself is purely an item of information governed by rules. We need some rules to govern what we mean by the forms of money we hold, whether we talk of conch shell money or plastic money. The information revolution has altered the ways in which we can hold money, how we can carry out transactions with money and how we can use money as a unit of account and record its value. We have globalised money already, insofar as it is possible to travel around and use a piece of plastic to carry out transactions without having to use one form of cash or to worry about carrying different currencies. The issuers of the plastic card deal with all that. I hope to inform the debate with my own observations as well as prejudices. Let us assume for the moment that the dominant drive at present is towards the world of free market (privatisation et al.) and fast growth of information technology. Let us recognise what we have at the moment.

Governments have four key privileges: the privilege to print money; the privilege to borrow money at prime rates compared to other borrowers; the privilege to impose taxes to raise money for government spending; and the privilege to write the rules that govern the financial and economic system, including rules that influence the directions of savings, e.g. into government bonds. Our currencies are issued by public bodies or quasi-public bodies like the US Federal Reserve System, who are charged with upholding the value of the money they issue, under the typical slogan of "promising to pay the bearer" the sum inscribed on the money. What that money is worth bears a direct relation to how it is valued, either in terms of other currencies or in terms of goods and services. While economists will argue (as they do) about the niceties of the theory, if too much of the stuff is printed, at a much faster rate than real economic growth, then eventually the money won't be worth quite as much as it once was (i.e., prices of goods and services, measured in money terms, go up, or the exchange rate with respect to other currencies is devalued).

We trust our central banks, the issuers of that money, to protect the value of the money. (They never get perfect at this. The target is usually a loss no greater than five percent per year.) In turn, the central bank has to try to ensure that the government does not do things that will force it to print too much money. The best way for governments to defeat the central bank's intent is to spend too much money, borrow what the bank does not have, and then force the central bank to print more money to pay off the debts (the alternative being a government default). We as citizens also try to monitor that overborrowing on our own behalf and, through elected officials, have to say yes or no to the spending that takes place.

To simplify horribly, the shift towards privatisation is partly driven by the failure of governments to run their financial affairs. Governments have tremendous financial privileges and in many cases these privileges have been abused, or stretched, close to breaking point. Let me explain.

These privileges have been entrusted to governments by citizens, with the understanding that governments then use the tax revenues to pursue the desires of citizens, to spend on roads, social security, etc. Once upon a time these privileges were taken by force by governments, imposing taxes to finance wars and the monarch's expenses. Even today tax dodgers can be jailed. Printing excessive amounts of money, or debasing the coin of the realm, is another way of imposing taxes by the back door, but it is not something governments can do for long before the citizens rebel.

By the 1980s governments hit two money-based constraints. First, they had, in many cases, begun to reach the limits of borrowing, which in effect means the limits beyond which they could no longer get citizens to accept more taxation. And secondly, the discipline of international markets increasingly punished those governments who abused these privileges, especially by attacks on their currency. It no longer requires a revolution to lower taxation on people and companies. Companies, on behalf of profits and shareholders, can vote with their feet and move to another currency or labor force, in effect choosing another government with which to entrust their savings.

Now we could take a very liberal, if not libertarian, approach to this and say wonderful, the citizen's ability to discipline spendthrift government is now being supported by the marketplace. And if those citizens who have some "disposable" income do not approve of what government is doing, they or their pension funds have a choice of alternative places to entrust their savings. Once upon a time citizens had to take whatever their governments offered.

Government Heartaches

The trouble with this, of course, is that this makes it harder for governments to pursue their objectives such as social justice, fighting wars and paying for munitions, income equity, access to health care, environmental protection or destruction, etc. In reality, they no longer have influence over, or are influenced by, just their own citizens, but are subject to many more outside pressures. One result is: our national currencies have to compete against other currencies even more than in the past. Thus the privilege of printing money is circumscribed by the need to ensure that money is worth something versus goods across a wider geography or in comparison to other currencies.

As a result governments are now trying to pool their financial resources, to cooperate financially across the globe, to stop tax loopholes, to uphold together the value of the currencies they issue, to control capital flight and drug money, to balance in-migration or out-migration of labor, and to work together to minimise the likelihood that the markets will disrupt what they, as governments, are trying to achieve. They hope that if they meet the financial market's discipline, they should have fewer problems in doing what they want.

There is another reason why governments have a problem: the welfare states built up since the 1950s have passed their sell-by dates. Societies are finding it harder to offer safety nets for those who need them, while stopping those who do not need them from abusing the safety nets. We want the money to go to the "right" place at the right time but find it hard to decide how to allocate those monies. In Britain, therefore, the Labour Government is having to attack several sacred cows: Should there be a means test to say who can get assistance? Should people be cut off from benefits if they turn down a number of options offered such as training, part-time work, etc.?

We have now reached the point, in some places, where we ask, why have separate currencies if they have to retain a similar value to each other, if (de facto if not de jure) we have only a limited ability to alter their value? The most obvious reason is that it allows our governments, when they wish to avoid certain pressures, to print money to get out of a tight corner, even if, invariably, use of that privilege will have to be redressed later. Against that, the fluctuations cause problems for those making investment and trading decisions who are hurt (or helped, of course) by the currency swings.

If we decide to use the same currency as some other community (i.e. nation) we are deciding to abandon the privilege of printing the stuff as an option from time to time. That means that we have also decided to combine our national monetary printing privileges with those of the other nation. That will mean that we have to be prepared to consider more closely the spending and taxing activities of the governments combined. For some this is recognising reality, for others it means combining power where we may have doubts how combined we want to be. You might say it is a bit like a married couple deciding to have joint financial affairs or not: the decision depends on an overall understanding of trust and a sense of whether the activities will be treated as one, or whether a degree of independence is still desired.


And Europe. Citizens face the big question in 1998 of switching from their national currencies to the Euro. A final decision will take place in 2002 when the Euro will have run alongside the national currencies. The privilege of issuing your own money is a great privilege which governments can be expected to give up only reluctantly. In this case, governments are pooling their privilege to issue the Euro currency. We will have to debate at a European level how we distribute resources, how we spend taxes, etc. We are moving towards a future when we will find that, yes, French savings will be used to pay for German pensions or Spanish redevelopment or Latvian welfare, and vice versa. Europe is moving towards greater political union and cooperation. It is driven by the desire to reduce tensions between nations. But we will find that tensions within nations may rise. Twice in the past, attempts at monetary unions (the Latin Monetary Union of France, Belgium, Switzerland, Italy, and Greece, and the Scandinavian attempt at a common "crown") failed after a few decades.

Whether some countries say yes or no is partly a matter of "luck." The Danes are staying out of the single currency while the French will be in, with only two percent difference in their respective referenda on the subject. The citizen cannot hope to be able to know or judge whether a single currency is a good idea or not. What the citizen and democracy will have to accept is an increasing willingness to cooperate at international levels as well as devolve many more powers to local levels. The world of globalisation is in fact a world of centralisation and decentralisation. But that is another story.