WEBVTT - Forget Everything You Know About Money 0:00:02.720 --> 0:00:15.920 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:17.640 --> 0:00:20.000 Welcome to Merin Talks Money. The podcast so much people 0:00:20.000 --> 0:00:22.520 who know the markets explain the markets. I'm Meren Sum's 0:00:22.520 --> 0:00:25.120 that web. This week, I'm speaking with Felix Martin. He's 0:00:25.160 --> 0:00:27.440 an economist, he's a fund manager, he's an author. He 0:00:27.520 --> 0:00:30.280 was educated in the UK, in Italy, and in the US, 0:00:30.320 --> 0:00:32.879 where he was a Fulbright scholar. He's got degrees in classics, 0:00:32.920 --> 0:00:36.559 in international relations and in economics. He has worked at 0:00:36.560 --> 0:00:39.199 the World Bank, and he has worked in several different 0:00:39.320 --> 0:00:42.839 fund management companies. Crucially, he's also an author of a 0:00:42.880 --> 0:00:46.480 book called Money, The Unauthorized Biography, and that's in part 0:00:46.560 --> 0:00:48.599 what we're going to talk about today. It was published 0:00:48.600 --> 0:00:50.360 more than ten years ago, but I'm afraid it is 0:00:50.440 --> 0:00:53.800 more relevant than ever today. We talk about that, we 0:00:53.920 --> 0:00:58.080 talk about modern monetary systems, ancient monetary systems. We don't 0:00:58.120 --> 0:00:59.840 have time to go into everything I would have liked to, 0:01:00.000 --> 0:01:01.560 so where I really would urge you to get the 0:01:01.560 --> 0:01:03.440 book and when you get it, read the story of 0:01:03.480 --> 0:01:06.080 the Money of Yapp and definitely read about the Bank 0:01:06.120 --> 0:01:08.800 of England and Tally Stones. We are going to talk 0:01:08.800 --> 0:01:12.080 about a variety of other things, Felix, welcome to Merin 0:01:12.080 --> 0:01:12.760 talks Money. 0:01:13.040 --> 0:01:14.840 Well, thank you very much for having me, Marin, it's 0:01:14.880 --> 0:01:15.280 a pleasure. 0:01:15.600 --> 0:01:17.399 Well you'll find out, won't you. Maybe it will be, 0:01:17.480 --> 0:01:20.440 maybe it won't be. Now, you are not the first 0:01:20.480 --> 0:01:23.920 person to write a book called money, although everyone has 0:01:23.959 --> 0:01:26.120 a different subheading, but yours I got to say it. 0:01:26.120 --> 0:01:29.800 It's particularly good, and I do recommend it to everybody listening. 0:01:29.840 --> 0:01:31.880 Go up by this book. You think it's just about money, 0:01:31.880 --> 0:01:34.320 but that's because you don't really understand what money is. 0:01:34.400 --> 0:01:38.440 It's really a very granular history of pretty much everything 0:01:38.440 --> 0:01:40.679 you've ever thought of. So I think what I want 0:01:40.760 --> 0:01:45.959 to do, Felix, is start by asking you what exactly 0:01:46.000 --> 0:01:49.080 it is that money is, and what is the big 0:01:49.240 --> 0:01:52.520 mistake that people make when they think about the nature 0:01:52.560 --> 0:01:54.800 of money? Going through your book through the way that 0:01:54.840 --> 0:01:56.720 you think, there are two things to think about money, 0:01:56.720 --> 0:02:01.760 what money actually is and who should control money, manage money, 0:02:01.800 --> 0:02:04.680 manipulate money, and for whose benefit? Right, So there's two 0:02:04.760 --> 0:02:07.600 parts to the story of money, but you can't talk 0:02:07.600 --> 0:02:09.800 about the second unless you've really got a good grip 0:02:10.120 --> 0:02:11.400 of the first. 0:02:12.040 --> 0:02:14.240 Absolutely right, you did an excellent summary, Marion. What can 0:02:14.280 --> 0:02:15.799 I say and thank you very much, indeed for those 0:02:15.880 --> 0:02:18.760 very generous words. I also, of course urge everyone to 0:02:18.760 --> 0:02:20.840 go out and get a copy and they'll have a 0:02:20.840 --> 0:02:24.639 more comprehensive version. And I'll give here the basic story 0:02:24.639 --> 0:02:26.519 which I try to tell in the book, which I 0:02:26.520 --> 0:02:29.560 think is very important, is that what I call a 0:02:29.600 --> 0:02:34.200 conventional view of money and its history, this is the 0:02:34.200 --> 0:02:37.040 one that you can find in every sort of children's book, 0:02:37.080 --> 0:02:40.960 and it's the one that's sort of ingrained in people's minds, 0:02:41.360 --> 0:02:45.239 is wrong. That conventional story is that in the beginning 0:02:45.280 --> 0:02:48.839 there wasn't any money, and people just started with each other. 0:02:48.960 --> 0:02:52.200 You know, I had fish and you had corn, and 0:02:52.280 --> 0:02:55.320 in order to exchange with one another, you had to 0:02:55.320 --> 0:02:56.919 want my fish and I had to want your corn, 0:02:57.480 --> 0:02:59.280 and in fact we had more than the same time 0:02:59.320 --> 0:03:02.840 as well, what economists call a double coincidence of wants, 0:03:02.880 --> 0:03:04.960 and otherwise no trade could take place. And that's all 0:03:05.040 --> 0:03:09.520 terribly inefficient. And therefore, at some point in the distant past, 0:03:09.600 --> 0:03:12.160 probably a different times, in different places, somebody come up 0:03:12.360 --> 0:03:14.280 with a bright idea, which is, why don't we choose 0:03:14.480 --> 0:03:18.240 one particular sort of commodity to serve as a so 0:03:18.320 --> 0:03:20.840 called medium of exchange, that is to say, something which 0:03:20.880 --> 0:03:23.600 people don't want for its own sake, but just so 0:03:23.720 --> 0:03:27.480 that it can be used to settle and liquidate exchange. 0:03:27.480 --> 0:03:31.240 And that basically was the invention of money. And typically 0:03:31.480 --> 0:03:33.960 it was precious metals that were chosen for this use 0:03:33.960 --> 0:03:36.800 because they've got lots of nice properties when they last 0:03:36.840 --> 0:03:38.960 for a long time, and so and so forth. That 0:03:39.080 --> 0:03:41.480 was the invention of coinage. And then people had an 0:03:41.480 --> 0:03:43.720 even better idea, which is why didn't we start lending 0:03:43.760 --> 0:03:46.520 and borrowing this money commodity? And that was the invention 0:03:46.880 --> 0:03:50.160 of credit. And then even later in that there were 0:03:50.320 --> 0:03:55.520 institutions that were built up which specialized in organizing credit, 0:03:55.560 --> 0:03:57.520 and those were banks. That was the invention of banking. 0:03:57.600 --> 0:04:00.680 That's the kind of conventional history that you find throughout 0:04:00.880 --> 0:04:02.240 literal money, and it's the way that a lot of 0:04:02.280 --> 0:04:05.320 people think about it, but it basically has it all 0:04:05.360 --> 0:04:11.720 completely the wrong way round. In reality, money is a 0:04:11.800 --> 0:04:17.320 system of ideas. It is the institution of credits and debts. 0:04:18.120 --> 0:04:21.240 It is the various technologies which have been developed and 0:04:21.279 --> 0:04:27.120 deployed for recording credits and debts and for transferring credits 0:04:27.120 --> 0:04:31.080 and debts from one person or one company to another. 0:04:32.120 --> 0:04:36.839 It's therefore basically a set of ideas and institutions. I 0:04:36.839 --> 0:04:38.520 don't mean that in a sort of wooly sense. There 0:04:38.560 --> 0:04:41.720 are very specific ideas which are extremely important in the 0:04:41.760 --> 0:04:45.200 development of money and which really constitute what it is 0:04:45.240 --> 0:04:48.160 to live in a monetary society. The most important one 0:04:48.240 --> 0:04:54.880 of these is the monetary standard, the standard unit economic value. 0:04:55.080 --> 0:05:00.440 Monetary value is the key concept in money. It hasn't 0:05:00.480 --> 0:05:03.960 always existed in human history. It is an idea, a 0:05:04.040 --> 0:05:07.080 concept of value, which was invented at a certain point 0:05:07.120 --> 0:05:11.560 in time and has been developed. Most concepts of value 0:05:12.120 --> 0:05:15.560 don't have standard units. So esthetic value or religious value, 0:05:15.600 --> 0:05:17.760 all kinds of different measures of value that we talk about, 0:05:18.000 --> 0:05:21.120 but they don't have standard units. You can't enumerate the 0:05:21.240 --> 0:05:24.080 esthetic value or the religious value of something. But the 0:05:24.120 --> 0:05:26.680 monetary value, the economic value of things, what distinguishes it 0:05:26.880 --> 0:05:30.599 has a standard unit. Just like physical concepts like length 0:05:30.640 --> 0:05:33.080 and weight and so on, they have standard units kilogram, 0:05:33.160 --> 0:05:35.400 a meter and so on, and this is what The 0:05:35.440 --> 0:05:38.200 standard unit in money is, something like a dollar or 0:05:38.240 --> 0:05:41.560 a pound or a euro. And that's incredibly important and 0:05:41.880 --> 0:05:46.040 the key questions around which all of monetary history revolve, 0:05:46.200 --> 0:05:49.680 and you alluded to this at the beginning, are what 0:05:49.960 --> 0:05:53.200 is that monetary unit, what does it actually mean in 0:05:53.279 --> 0:05:55.760 real terms, what do you get for it? And who 0:05:55.760 --> 0:05:59.640 gets to decide today? The answers to those questions for 0:05:59.680 --> 0:06:04.359 something like the pound sterling are that we define a 0:06:04.400 --> 0:06:08.640 pound sterling according to the rate of change of prices 0:06:08.640 --> 0:06:12.560 for a particular basket of goods and services. So we 0:06:12.600 --> 0:06:14.640 don't have, say a gold standard, which is where you 0:06:14.680 --> 0:06:18.440 define what a pound is by reference to one particular commodity, 0:06:18.560 --> 0:06:21.040 gold and a particular weight of it. We do it 0:06:21.040 --> 0:06:23.080 with the whole basket of goods and services, the so 0:06:23.160 --> 0:06:26.560 called CPI basket, and we do it with the rate 0:06:26.600 --> 0:06:28.880 of change of prices. So we say we want prices 0:06:28.880 --> 0:06:32.039 to go up at two percent a year. In other words, 0:06:32.040 --> 0:06:34.680 we want the pound sterling, this abstract monetary unit, to 0:06:34.720 --> 0:06:37.560 depreciate in real terms by two percent a year. So 0:06:37.680 --> 0:06:39.520 that's the answer to the first question, what is the 0:06:39.560 --> 0:06:42.160 monetary standard today for the pound sterling? And then the 0:06:42.200 --> 0:06:45.240 answer to the second question, who gets to decide that 0:06:45.480 --> 0:06:49.200 in our current version of the monetary system, Well, that's 0:06:49.400 --> 0:06:51.760 actually the Chancellor of the Excheque. He actually, I was 0:06:51.800 --> 0:06:54.280 sure she sets what that standard is, but of course 0:06:54.279 --> 0:06:58.159 it's it's implemented and operationalized by the Bank of England, 0:06:58.200 --> 0:06:59.920 which sits under democratic control. 0:07:00.440 --> 0:07:02.320 Okay, let me just take you back a little bit, 0:07:02.400 --> 0:07:04.839 because one of the things that I found fascinating little 0:07:05.240 --> 0:07:07.840 side points in the book was when you asked how 0:07:07.880 --> 0:07:11.040 it could be that this mistake about what money is 0:07:11.200 --> 0:07:14.360 I is in is actually a system not a token, 0:07:14.760 --> 0:07:17.360 How this mistake could have been made for so long 0:07:17.480 --> 0:07:20.680 by so many historians. And the answer to that, you say, 0:07:20.760 --> 0:07:23.760 is because it is the coins that survive, not the 0:07:23.760 --> 0:07:25.480 evidence of the system. 0:07:26.200 --> 0:07:30.320 Yes, I think there are several answers to that crucial question, 0:07:30.720 --> 0:07:33.240 and one of them is exactly that. When you're doing 0:07:33.360 --> 0:07:36.280 monetary history, when you dig into the past and try 0:07:36.280 --> 0:07:38.400 and work out how things were back then, of course 0:07:38.440 --> 0:07:41.240 what survives is physical evidence. In the case of money, 0:07:41.800 --> 0:07:46.800 that means coins, for example. But we actually know that 0:07:47.400 --> 0:07:52.760 in many past societies a great deal of monetary credit 0:07:52.880 --> 0:07:56.920 and debt and financial balances and transactions were not of 0:07:57.000 --> 0:08:01.679 course represented by coinage, and transactions weren't settled in coins. 0:08:02.120 --> 0:08:06.160 They were very often settled by entries in ledgers, for example. 0:08:06.160 --> 0:08:08.680 But the ledgers don't exist anymore. And there'll be a 0:08:08.680 --> 0:08:12.760 whole lot of other transactions and balances which were recorded 0:08:12.760 --> 0:08:15.000 simply by word of mouth or in other formats, and 0:08:15.040 --> 0:08:17.400 they don't exist. So that can definitely skew and has 0:08:17.520 --> 0:08:20.600 skewed the perception of things. But let me take it 0:08:21.320 --> 0:08:23.560 back a step. I think in a sense it's sort 0:08:23.600 --> 0:08:25.960 of simpler than that. The curious thing about money as 0:08:25.960 --> 0:08:29.240 an institution is that from the bottom up, when you 0:08:29.280 --> 0:08:33.440 as an individual are interacting with the monetary system, certainly 0:08:33.920 --> 0:08:36.920 in the pre digital age, when notes and coins were 0:08:36.960 --> 0:08:40.280 the primary form of representation of money, from the bottom up, 0:08:40.320 --> 0:08:43.080 of course, money does look like this real thing that 0:08:43.240 --> 0:08:46.280 is what you deal with every day. It's only when 0:08:46.320 --> 0:08:48.720 you look from the top down, as it were, and 0:08:48.760 --> 0:08:51.400 you try to understand the system as a whole, it 0:08:51.440 --> 0:08:56.400 becomes completely obvious that notes and coins are just physical 0:08:56.600 --> 0:08:59.400 representations tokens, and there are lots of different kinds of 0:08:59.440 --> 0:09:03.800 tokens up of an underlying system of credits and debts 0:09:03.800 --> 0:09:08.280 which is much larger, much less substantial, and essentially abstract. 0:09:08.520 --> 0:09:10.920 I hope that allami just say, there's another important reason, 0:09:10.960 --> 0:09:13.680 which I go into in my book, as to sort 0:09:13.679 --> 0:09:17.400 of historically in Europe, and in Britain in particular, which 0:09:17.480 --> 0:09:20.559 was the financial innovator at the time. Why it is 0:09:21.320 --> 0:09:25.360 that this conventional view held sway in the face of 0:09:25.400 --> 0:09:29.679 the fact that the economy became much more financialized, banks 0:09:29.720 --> 0:09:32.079 became much more important. And even today, you know, when 0:09:32.080 --> 0:09:33.640 we live in this digital world where I think from 0:09:33.640 --> 0:09:36.160 to mas people is pretty obvious that money is an 0:09:36.200 --> 0:09:38.640 abstract thing. And it's because people don't use you know, 0:09:38.880 --> 0:09:41.960 coins and notes anymore. Why did it hold such sway? 0:09:42.360 --> 0:09:44.960 And there I tell the story of a very important 0:09:45.000 --> 0:09:49.640 debate that happened right back immediately after the founding of 0:09:49.679 --> 0:09:52.959 the Bank of England, which was a pretty epochal moment 0:09:53.040 --> 0:09:56.880 in monetary history generally and certainly in Britain, there was 0:09:57.120 --> 0:09:59.880 a genuine huge debate over this very question which we 0:10:00.080 --> 0:10:04.280 began with of what the monetary standard should be, How 0:10:04.320 --> 0:10:07.240 should a pound sterling be defined? Because with the creation 0:10:07.320 --> 0:10:11.040 of this new Bank of England, money was henceforth going 0:10:11.080 --> 0:10:14.400 to be issued not by the sovereign and the Mint 0:10:14.480 --> 0:10:17.320 as it always had been, but by this bunch of 0:10:17.400 --> 0:10:20.439 private in those days, private bankers, the Bank of England. 0:10:20.480 --> 0:10:25.080 So this question was crucially important and it all played 0:10:25.120 --> 0:10:30.040 into an existing political debate about the constitutional changes that 0:10:30.080 --> 0:10:32.679 have been going on in Britain and the shift towards 0:10:32.800 --> 0:10:36.079 what we would now call a constitutional monarchy, so political 0:10:36.120 --> 0:10:39.880 power being taken away from the absolute monarch into a 0:10:39.920 --> 0:10:44.280 system where it was shared with parliament. And as a 0:10:44.320 --> 0:10:47.400 result of that, there was a big debate between one 0:10:47.440 --> 0:10:51.240 of the most famous philosophers in British history, John Locke, 0:10:51.320 --> 0:10:54.440 the great father of political liberalism, and his sort of 0:10:54.480 --> 0:10:58.880 Tory opponents, And as a result of that, Locke made 0:10:58.920 --> 0:11:03.080 a fateful intervention in which he came down hard on 0:11:03.160 --> 0:11:05.760 the side of the conventional view of money, but for 0:11:05.800 --> 0:11:08.680 political reasons. It's a big question in my mind whether 0:11:08.720 --> 0:11:11.640 he actually believed what he was saying philosophically. But he 0:11:12.000 --> 0:11:15.360 made the argument that listened, a pound sterling just is 0:11:15.880 --> 0:11:19.440 a certain weight of silver. In those days they were 0:11:19.440 --> 0:11:22.160 talking about silver, not gold. That's what it is, that's 0:11:22.200 --> 0:11:25.760 what it means. No one can change what that weight is. 0:11:26.320 --> 0:11:29.920 Anyone who tries to change what that weight is is 0:11:30.040 --> 0:11:34.679 effectively lying, defrauding the public. So he was arguing very 0:11:34.720 --> 0:11:40.200 strongly for a fixed precious metal standard, for the idea 0:11:40.320 --> 0:11:43.600 that money is a real physical thing. But he was 0:11:43.640 --> 0:11:46.080 doing it basically for political reasons, because he wanted to 0:11:46.160 --> 0:11:50.240 tie the hands of this new institution, the Bank of England, 0:11:50.240 --> 0:11:52.840 which he thought would otherwise fall into the hands of 0:11:53.360 --> 0:11:56.439 revolutionaries and the whole republic would fall to pieces. 0:11:56.800 --> 0:12:01.160 Okay, and so she's just reading that bit in your 0:12:01.160 --> 0:12:03.960 book earlier. But that brings us can take us forward 0:12:04.040 --> 0:12:08.360 by quite a long way. This idea that money should 0:12:08.400 --> 0:12:11.439 be stable, that it should always be worth the same 0:12:11.600 --> 0:12:15.240 roughly the same sort of thing, that inflation should constantly 0:12:15.320 --> 0:12:18.480 be contained, and the idea that as we know it 0:12:18.520 --> 0:12:21.040 came out of New Zealand a couple of decades ago, 0:12:21.280 --> 0:12:24.920 that inflation should be kept by central banks at a 0:12:25.040 --> 0:12:29.760 level of two percent every year forever. And that's something 0:12:29.960 --> 0:12:32.600 that a hasn't worked for a while. And be that 0:12:32.720 --> 0:12:34.880 you have taken issue with along the way. And there 0:12:34.960 --> 0:12:38.280 is a bit in your book about the financial crisis, 0:12:38.280 --> 0:12:41.120 about how it happened where you point out that everything else 0:12:41.320 --> 0:12:45.240 was ignored, ignored completely in pursuit of this idea that 0:12:45.280 --> 0:12:48.400 nothing mattered except stable inflation. So booming house prices, a 0:12:48.440 --> 0:12:51.520 drastic underpricing of liquidity, and as it markets, the emergence 0:12:51.520 --> 0:12:54.560 of the shadow banking system that declines in lending standards, 0:12:54.640 --> 0:12:57.560 bank capital and liquidity ratios were not given the priority 0:12:57.600 --> 0:13:00.920 they merited because unlike low and stable and inflation there 0:13:01.000 --> 0:13:04.800 was simply not identified as being relevant. So I don't 0:13:04.800 --> 0:13:06.800 think very many people would accuse central banks of being 0:13:06.840 --> 0:13:09.200 wedded to sound money. But this is what it is, 0:13:09.360 --> 0:13:12.240 is the idea that money must be stable, and if 0:13:12.280 --> 0:13:15.640 you put that above everything else in a modern monecary system, 0:13:15.679 --> 0:13:17.120 you can run into all sorts of trouble. 0:13:17.480 --> 0:13:19.400 Yeah, but it's very interesting what you just said there, 0:13:19.760 --> 0:13:22.000 that no one would accuse central banks of being whaded 0:13:22.040 --> 0:13:25.440 to sound money. But that, of course is exactly now. 0:13:25.440 --> 0:13:27.200 I think if you are central bankers, they would say 0:13:27.240 --> 0:13:30.920 that's exactly what they're wedded to. And most modern important 0:13:30.920 --> 0:13:35.320 central banks do operate an inflation targeting standard these days, 0:13:35.320 --> 0:13:38.800 which intrinsically is targeting stable value of money. I mean, 0:13:38.920 --> 0:13:43.360 to be sympathetic to Lock, let's take him as the 0:13:43.360 --> 0:13:46.640 patron saint of stable money for a moment. I mean, 0:13:47.440 --> 0:13:50.880 of course, the paradox is that the monetary standard does 0:13:50.960 --> 0:13:55.120 have to be stable over time and across space, so 0:13:55.240 --> 0:13:58.439 within particular jurisdiction for it to be useful. I mean 0:13:58.480 --> 0:14:02.520 that obviously is true to some degree, but one also 0:14:02.679 --> 0:14:07.080 has to remember that because it is the unit that 0:14:07.120 --> 0:14:10.360 you're using to denominate credit and debt, and because credit 0:14:10.600 --> 0:14:12.960 and debt can grow and can go in all kinds 0:14:12.960 --> 0:14:16.560 of funny directions, and can become very inequitable, and can 0:14:16.600 --> 0:14:19.560 become become very inefficient. And we've seen that over and 0:14:19.600 --> 0:14:22.520 over again throughout monetary history. It's the nature of financial 0:14:22.640 --> 0:14:27.800 capitalism that can happen. The devaluation of the monetary unit 0:14:27.920 --> 0:14:32.320 is also an absolutely crucial escape valve for when things 0:14:32.360 --> 0:14:37.280 become unsustainable. Caines John Maynard Knes. He has a great 0:14:37.320 --> 0:14:40.160 passage where he talks about this and says, the real 0:14:40.560 --> 0:14:45.760 parents of revolution are the absolutists of contract. In other words, 0:14:45.800 --> 0:14:49.720 it's people who obsess to the exclusion of everything else 0:14:50.440 --> 0:14:53.720 about this important truth that money must be kept stable 0:14:53.880 --> 0:14:56.720 to be useful. That are the real people that end 0:14:56.840 --> 0:15:02.080 up creating revolutions. Because debt becomes completely unsustainable, one half 0:15:02.120 --> 0:15:03.920 of the population is i think he puts, it becomes 0:15:04.040 --> 0:15:05.840 enslaved to the other and so on and so forth. 0:15:06.000 --> 0:15:07.800 Now this is all a bit hyperbolic, and so and 0:15:07.840 --> 0:15:11.720 so forth. But what is totally obvious and what only 0:15:11.720 --> 0:15:14.480 becomes clear when you have a clear view of money 0:15:14.640 --> 0:15:18.400 as a system of credit and debt rather than as 0:15:18.600 --> 0:15:21.840 some sort of physical thing, is that one of the 0:15:21.880 --> 0:15:27.320 primary economic forces, and therefore one of the most important 0:15:27.720 --> 0:15:31.240 decisions that any government or central bank can make is 0:15:31.520 --> 0:15:34.680 over the value of the monetary unit because of its 0:15:34.760 --> 0:15:40.760 distributional consequences. It's distributional consequences, and that's what gets missed 0:15:40.800 --> 0:15:42.800 and has been i think missed in a lot of 0:15:42.840 --> 0:15:45.560 the last thirty years thinking about these things. It was 0:15:45.600 --> 0:15:48.080 certainly what was missed in the lead up to financial crisis. 0:15:48.120 --> 0:15:53.000 If you're focusing solely upon keeping the value of money 0:15:53.040 --> 0:15:57.720 stable in order to make transactions efficient, you lose sight 0:15:58.240 --> 0:16:01.320 of the fact that this is the most important distributional 0:16:01.680 --> 0:16:02.800 tool that the government. 0:16:02.960 --> 0:16:06.640 Yeah, yeah, Now, this is something that as you talked 0:16:06.680 --> 0:16:08.560 about on this podcast quite a lot, the idea that 0:16:08.840 --> 0:16:11.600 in many ways what we call monetary policy is effectively 0:16:11.640 --> 0:16:15.400 a fiscal policy because it has this distributional mechanism. And 0:16:15.440 --> 0:16:19.200 that brings you back to the question of whether really, 0:16:19.680 --> 0:16:24.840 really a central bank should be independent of government, because 0:16:24.960 --> 0:16:28.800 central bank policies do effectively enact what we would consider 0:16:29.200 --> 0:16:32.280 to be the results of fiscal policy or the type 0:16:32.280 --> 0:16:35.120 of results of a fiscal policy might have have. So 0:16:35.360 --> 0:16:37.440 if that is the case, and it is particularly we 0:16:37.440 --> 0:16:41.080 saw that during the Quey period, etc. Is it reasonable 0:16:41.800 --> 0:16:44.520 that a central bank should be independent of government. 0:16:45.600 --> 0:16:47.400 Yeah, I mean, of course it's a good question. The 0:16:47.440 --> 0:16:50.280 debates got sort of slightly mixed up because it's probably 0:16:50.320 --> 0:16:51.320 a bit of a bit on a bit of a 0:16:51.360 --> 0:16:54.320 rent when I wrote my book which was published more 0:16:54.360 --> 0:16:59.479 than ten years ago now and arguing against central bank independence. 0:16:59.560 --> 0:17:01.600 I mean it all comes down, of course, to the 0:17:01.640 --> 0:17:07.119 details the principles of delegating power from a sovereign parliament 0:17:07.280 --> 0:17:10.520 or from the government that it's chosen to an independent 0:17:10.600 --> 0:17:14.440 agency of any sort, a technocratic agency of any sort. 0:17:14.560 --> 0:17:16.359 I mean, the central banks are the most important example, 0:17:16.359 --> 0:17:19.000 but a lot of other examples in the modern system 0:17:19.040 --> 0:17:23.840 of governance. The principle is that you're not delegating these 0:17:24.200 --> 0:17:31.000 crucial top level political distributional decisions. Those should be made 0:17:31.560 --> 0:17:35.760 by the political authorities, legitimate political authorities, and it's the 0:17:35.840 --> 0:17:39.200 operational aspects that should be delegated to the central bank. 0:17:39.200 --> 0:17:41.119 And that is the principle of it. And as I 0:17:41.160 --> 0:17:45.520 was just describing a few minutes ago. The monetary standard 0:17:45.640 --> 0:17:48.080 the inflation type, which is inflation targeting, a two percent 0:17:48.080 --> 0:17:50.080 inflation target. In the case of the UK, for example, 0:17:50.200 --> 0:17:53.560 it is set by the chancellor. It's not set by 0:17:53.600 --> 0:17:56.600 the central bank. They can't choose their own target. So 0:17:57.280 --> 0:17:59.560 that would be the defense of central bankers, and it 0:17:59.600 --> 0:18:02.680 is legit, but up to a point, because these things 0:18:02.720 --> 0:18:06.280 do get a bit fuzzy inevitably in practice. 0:18:06.680 --> 0:18:09.160 Is the answer then to remove the target the target. 0:18:08.840 --> 0:18:11.720 Is wrong, yes, exactly. I mean all. 0:18:11.640 --> 0:18:13.760 Targets will lead to disaster. We know there and those 0:18:13.760 --> 0:18:15.600 are the things the target that doesn't lead to some 0:18:15.680 --> 0:18:16.320 kind of desire. 0:18:16.359 --> 0:18:18.760 Well, that's a very very important thing you've just mentioned, 0:18:18.800 --> 0:18:21.880 because my favorite and I think the most important precept 0:18:21.960 --> 0:18:24.560 in all of military policy, and it applies much more broadly, 0:18:24.600 --> 0:18:27.879 and it's the topic of my next book, Listeners, is 0:18:28.320 --> 0:18:32.600 Part's Law, named for the great British monetary economist Charles Goodheart, 0:18:32.920 --> 0:18:35.280 and that law. He voiced it in the context of 0:18:35.280 --> 0:18:38.200 monetary policy, and he said, any metric, when it's chosen 0:18:38.280 --> 0:18:40.639 as a target, eventually ceases to become a good target. 0:18:40.640 --> 0:18:43.280 And what he's talking about is the tendency of systems 0:18:43.440 --> 0:18:47.400 economies societies and so on to adapt, of course, around targets, 0:18:47.440 --> 0:18:51.000 to game targets so that they cease being useful. An 0:18:51.000 --> 0:18:55.320 inflation target is of course an absolutely primary example of that. 0:18:55.480 --> 0:18:58.480 So what you were describing and what I write about 0:18:58.600 --> 0:19:01.280 in my book in that part about the way that 0:19:01.400 --> 0:19:04.920 the focus on inflation targeting and your parentscept not a parent, 0:19:04.920 --> 0:19:08.000 I mean the success in targeting inflation for whatever reasons 0:19:08.040 --> 0:19:12.240 we can debate those prior to the financial crisis meant 0:19:12.280 --> 0:19:15.280 that the system adapted around it, and all the kind 0:19:15.320 --> 0:19:20.119 of imbalances which genuine economic and social imbalances which the 0:19:20.160 --> 0:19:24.080 inflation target was intended to measure and tame, in fact 0:19:24.200 --> 0:19:27.679 just emerge in all kinds of other places. It was 0:19:27.720 --> 0:19:30.560 a phenomenon that had been predicted and written about many 0:19:30.640 --> 0:19:34.200 years earlier by the American economist Simon Minsky. He said, 0:19:34.240 --> 0:19:38.760 stability breeds instability. It's the same idea. So yes, it's 0:19:38.760 --> 0:19:41.480 the system as a whole, and not just the particular 0:19:41.520 --> 0:19:44.120 system of inflation targeting, but the idea that you can 0:19:44.680 --> 0:19:49.400 choose a particular metric and you can then design policy 0:19:49.440 --> 0:19:51.919 around that particular metric, using it as a target, and 0:19:51.920 --> 0:19:56.960 that that is a sensible, effective way of trying to 0:19:57.560 --> 0:20:01.120 govern a complicated modern economy. That's where the problem lies. 0:20:02.359 --> 0:20:05.600 Okay, let's move to the problems of today. Then we 0:20:05.640 --> 0:20:08.720 talked to earlier about how when when things go wrong, 0:20:08.800 --> 0:20:13.720 you end up with unpleasant distributional impacts. We look across 0:20:13.720 --> 0:20:15.560 the Western world at the moment and what we can 0:20:15.600 --> 0:20:20.760 see exactly that a distributional problem, particularly intergenerational. Can we 0:20:20.840 --> 0:20:23.639 blame money for that system of money? How money has 0:20:23.680 --> 0:20:24.320 been managed? 0:20:25.119 --> 0:20:26.760 It's a good question. I mean, are lots of things 0:20:26.800 --> 0:20:28.800 which go into it. I mean I always tell the 0:20:28.840 --> 0:20:33.720 story about my mother and her sisters and my grandparents 0:20:34.400 --> 0:20:38.440 were trying to try to explain this generational aspect and 0:20:38.480 --> 0:20:41.040 why monetary policy is important to When I was young, 0:20:41.080 --> 0:20:43.520 I would sit around my mother and her sisters. They 0:20:43.520 --> 0:20:47.640 were always complaining about the fact that their father had 0:20:47.680 --> 0:20:50.840 been He'd been a distinguished fellow, he'd ended up running 0:20:50.880 --> 0:20:53.840 a university and vice chancellor. Wasn't quite as well paid 0:20:53.880 --> 0:20:55.359 by the way as it is these days being a 0:20:55.440 --> 0:20:57.280 vice chanceer. So but nevertheless he'd been a sort of 0:20:57.720 --> 0:20:58.000 in there. 0:20:58.200 --> 0:21:00.439 Maybe that may be temporary. By the way, get in 0:21:00.480 --> 0:21:02.639 the state of the ukc University is a bullet in 0:21:02.680 --> 0:21:04.719 the history of what Chancelett get paid well. 0:21:04.720 --> 0:21:06.720 He certainly would have been absolutely amazed if he'd seen 0:21:06.760 --> 0:21:08.560 modern university. Any Way, at the point is that having 0:21:08.600 --> 0:21:12.000 done all this, he had retired in about nineteen seventy, 0:21:12.440 --> 0:21:15.399 and he'd retired to a tiny little house back in Oxford, 0:21:15.440 --> 0:21:18.000 which he'd bought in the thirties, and he'd lived out 0:21:18.000 --> 0:21:21.280 his days, and then when he came to expire, there 0:21:21.280 --> 0:21:23.439 was nothing left. There was no sort of great inheritance 0:21:23.840 --> 0:21:27.480 to pass on. And they were just baffled by this, 0:21:27.520 --> 0:21:29.520 and they said, how could this be that this was 0:21:29.560 --> 0:21:33.640 a situation now. The reality was that at the same 0:21:33.680 --> 0:21:35.479 time that when they were making all these complaints, they 0:21:35.480 --> 0:21:39.159 were sitting in their own great, big houses in lovely 0:21:39.280 --> 0:21:42.760 university towns in England, which they had bought actually at 0:21:42.760 --> 0:21:45.200 the very beginning of the seventies. And my father used 0:21:45.200 --> 0:21:47.199 to tell me the story about how when he'd had this, 0:21:47.240 --> 0:21:50.680 they'd had their third child, me, and they outgrown their 0:21:50.720 --> 0:21:53.520 house and they went to look around bigger houses. And 0:21:53.560 --> 0:21:56.520 he'd gone around looking around with the burster of one 0:21:56.560 --> 0:22:00.240 of the colleges in Oxford where he lived. He was fretting, way, 0:22:00.240 --> 0:22:02.520