Hyperinflation is born in extremis

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From Mr Ben Dyson.

Sir, Philip Booth (Comment, April 29) believes 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. 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.

Crucially, such a proposal does not “allow the state to pay for its activities by minting fresh cash”, as Mr Booth suggests. HM Treasury would still need to borrow funds from the markets if it found that taxes plus the money created by the BoE were not sufficient to cover expenditure.

Ben Dyson, Author, Modernising Money, London EC1, UK

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