Page 5, 26th February 1993

26th February 1993
Page 5
Page 5, 26th February 1993 — Sound money and the Pope

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Sound money and the Pope

Professor Stephen Frowen explores ethical issues in European monetary policies RISING unemployment and economic recession, incurring further reductions in living standards, will remain Britain's prime problems unless the UK Government's easing of monetary policy is continued with further cuts in interest rates in the near future.

It was easy for the UK authorities to deepen the present recession by means of a prolonged and severe restrictive monetary policy; it will be difficult finally to get out of it. Admittedly, the aim of lowering self-imposed inflation rates was achieved, but the objective of retaining an over-valued pound sterling within the European Exchange Rate Mechanism failed dismally as was to be expected.

Any talk now of raising the basic rate of interest, should the inflation rate rise in response to the depreciation of sterling, cannot but kill any economic revival in the bud. Only a dramatic jump in inflation would justify a reversal of present government policy.

The moderate recent reduction in German short-term interest rates by the Bundesbank's policymaking Central Bank Council should be of some help to the Prime Minister and the Chancellor of the Exchequer in persisting with present policy measures.

There is a firm belief at the Bundesbank that high levels of both employment and living standards largely depend on a stable value of money which is regarded in the long run as the prerequisite of economic growth. In fact, this line of argument was brilliantly developed by the Deputy Governor of the Deutsche Bundesbank, Dr Hans Tietmeyer, in his recent Von Hugel Lecture at the University of Cambridge entitled The Value of Monetary Stability in the World Today (published by the Von Hugel Institute, St Edmund's College, Cambridge CB3 OBN).

Speaking at once as an economist and a Christian, ethical considerations dominated his talk. He highlighted the socio-ethical dimension of monetary stability, which throughout the post-war period has been the prime objective of Bundesbank policy. It was certainly reassuring to hear one of the world's leading central bankers emphasising the "bonum commune" as a yardstick for social ethics and pleading for an economy "as just as possible". Inflation", he stressed, "no doubt conflicts with this goal", hereby supporting John Maynard Keynes who regarded the greatest evil of a change in the value of money as being derived from its social consequences. The reasons given by Keynes in his 1922 paper on The Consequences for Society of Changes in the Value of Money are a lower living standard for the underprivileged, who suffer further as a result of adverse distributional effects and the aggravation of income disparities, while the benefits of inflation are going to those in power who hold fixed and human capital.

The stability of the value of money as a prerequisite of a sound economy has also been stressed by Pope John Paul II in his recent encyclical Centesimus Atoms (para 48). The Bundesbank quite obviously feels that not keeping short-term interest at a high level to minimise the inflationary impact of high public spending caused by the phenomenal high cost of rebuilding East Germany, would go against this spirit.

However, this policy important for Germany has international repercussions in view of the rule of the Deutsche mark as the anchor currency within the ERM. The divergence between the domestic policy needs of Germany and the UK forced us into a rapid inflation incurring. in the words of the Governor ol the Bank of England in an LSE lecture last year, "a real risk of these disinflationary forces doing quite unnecessary damage to the real economy".

It is reassuring to know that the outstanding president of the Bundesbank, Dr Helmut Schlesinger, and his widely experienced deputy, Hans Tietmeyer, are fully aware of the repercussions of their apparently rigid stability policy on other countries, and the burden it imposed on them and the ERM mechanism.

Yet, because of their conviction that a Europe unstable in monetary terms cannot lastingly be a basis of growth and employment, any substantial reduction in short-term interest rates must be excluded until the rising trend in German money supply and inflation rates is reversed or a deepening of the German recession itself induces more Central Bank Council members to opt for expansion.

Of course, it may be questionable whether it is ethical in the short run to look after one's own country first even if in the long run everybody benefits. Or should it be regarded as natural? Perhaps even the hitherto so successful Bundesbank should consider the policy prescriptions of Keynes in his General Theory not, of course as a long-term stimulus, but as an essential shortterm remedy.

Professor Stephen F Frowen is Senior Research Associate at the Von Hugel Institute, Sr Edmund's College, University of Cambridge: Honorary Research Fellow at University College London; and was formerly Bundesbank Professor of Monetary Economics at the Free University of Berlin.

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