Hyperinflation is born in extremis

Financial Times has published the letter by Ben Dyson, founder of Positive Money, in response to Philip Booth’s Comment from April 29th. Philip Booth argues that  Martin Wolf’s proposal to “strip banks of their power to create money” (Comment, April 25) would “put this power in the hands of the “greedy or profligate” governments who have been responsible for many of the great inflations of the past.”

Ben Dyson explains in this letter that he draws the wrong lessons from history:

A Cato Institute study of all 56 recorded hyperinflations (Hanke and Krus, 2012) found that hyperinflations only occur under extreme conditions such as war or a complete collapse in the productive capacity of a country (as in Zimbabwe). They are not a result of politicians turning on the printing presses just before an election.

To design a system of checks and balances that prevent the abuse of the power to create money, we have to think about the incentives of the people involved. If those who are creating money benefit personally from doing so, then this conflict of interest will lead them to create too much money. This is why relying on banks to create an economy’s money is never optimal.

But politicians would face similar conflicts of interest. So it is essential to transfer the power to create money to a body that has as few conflicts of interest as possible. The Bank of England Monetary Policy Committee could be responsible for decisions on money creation.

Read the whole letter here.