Monday, 27 October 2014

Money IV

This is the fourth of six posts.

If the monetary standard should not be fixed, then neither should it be flexed (by the fiat of an eighteenth-century sovereign). It should be, as Martin notes in the previous post, evolved (by democracy).

Nonetheless, Martin needs first to face the lingering legacy of Locke.

First, if money is a commodity (as Locke argued), then banks should hoard money in a financial crisis because money will be in short supply. But if money is credit (as Bagehot argued), then banks should distribute it [202-204, 210, 234].

Banks should be able to borrow from the Central Bank in order to appease customers who are demanding money. This should help to restore confidence because customers will then have more claims on the Central Bank (with all its creditworthiness) and less on the individual banks. (Keynes later echoed this [216].) But Locke completely misses the dimension of money that is credit.

Second, and following Locke, comes Sayʼs Law, in which supply determines demand [211]. This is because Say assumes market equilibrium: that supply and demand will cancel one another out. Therefore excess supply must be met by equal demand.

According to this law, a recession is not due to a shortage of demand (because of a shortage of money). A recession is due to a shortage of supply. Since the supply problem must be sorted out before the monetary one, and because governments cannot do much about supply, governments will, according to this law, not interfere in recessions.

But if one does not accept Sayʼs assumptions (about market equilibrium, for example), and if one does not hold that money is a commodity, then Say’s very categories of supply and demand seem somewhat beside the point.

(Sayʼs Law also goes against Keynes’ proposal, which, in the spirit of Bagehot, asserts that governments should spend in a recession. So one's economic assumptions really do make a “real world” difference. Note also, for example, the failure of the British Government to respond to the Irish potato famine. This was because the British assumed that as a “market issue”, the market knows best. So they let things lie [147f.])

The third facet of Locke’s legacy will be considered at length in the next post.

Tuesday, 7 October 2014

Money III

Felix Martin, Money: The Unauthorised Biography (London: The Bodley Head, 2013), 328 + vi pp.

This is the third of six posts.

In the previous post, we saw how the Bank of England functions as an intermediary between the sovereign and private investors. We then considered John Locke’s attempt to fix the monetary standard (to a precious metal).

As a foil to Locke, Martin introduces the fiscal thinking of John Law. Whereas Locke erred towards fixity, Law erred towards flexibility.

What if we run out of precious metals? [171] What is the alternative?

For Law, the standard was simply the sovereign’s say-so. (This is what we now know as fiat money.) And if this changes, then the distribution of money changes. As we have seen, seignorage – or “crying down” the value of money – redistributes wealth from society to the sovereign.

Similarly, if more money can be circulated to stimulate inflation, then prices go up, and the value of money goes down. And if too little money is circulated, and deflation kicks in, prices go down, and the value of money goes up. Both redistribute wealth. Inflation helps debtors (debts become less), and deflation creditors (debts become more). So inflation helps homeowners, and deflation banks.

Since the sovereign can change the standard, the distribution of money is a political decision.

To get France out of debt, Law encouraged people to swap bonds (where the government owed them money) to equity stakes in a government company [174]. However, Law’s system was subject to a crisis of confidence [177], and his system was subsequently abolished [178]. His mistake was to peg everything on the sovereign. Sovereigns could not always pay their debts.

Besides, Martin notes that monetisation brings social mobility. Some move up. Others move down. But too much inequality brings revolution. (That is what the jubilees of the ancient world served to curtail.) So as the distribution of wealth changes, so must the standard. It must reflect ʻwhat society believes to be fair. Only politics – democratic politics, in constant activity – can furnish such an evolving standardʼ [187].

So the standard should neither be fixed nor flexed (by the fiat of an eighteenth-century sovereign) but evolved (by democracy). However, before he can proceed, Martin will face the lingering legacy of Locke.

Monday, 29 September 2014

Money II

Felix Martin, Money: The Unauthorised Biography (London: The Bodley Head, 2013), 328 + vi pp.

This is the second of six posts.

In the previous post, we have followed Martin’s argument from monetisation to seignorage.

(In seignorage, we therefore see the seeds of Quantitative Easing: if the sovereign circulates more currency, then the value of money goes down, prices go up, and inflation ensues.)

Anyway, the central question in Martin’s work is who controls money?

Since there is no sovereign between countries, international banking could take off [105]. However, what makes bankersʼ private money work – the fact that it is private: credit notes circulate among them, and among them only; and excessively secret – meant it could not displace sovereign money [115].

Besides, ‘There are good reasons, we recall, why sovereign money is generally the default. No private issuer enjoys the same extent for its markets, the same capacity to coerce demand for its liabilities, or the same psychological association with confidence in societyʼ [114].

So what of the relationship between the sovereign and private bankers?

Martin examines the Bank of England as an intermediary between the two [117]. On the one hand, the sovereign (or the state or the government) gives the Bank authority. On the other, the Bankʼs investors give it creditworthiness. And the Bank itself is given an exclusive license to print money (which represents its own liabilities, its own IOUs).

ʻThe quid pro quo nourished a virtuous circle. The stateʼs blessing afforded general circulation to the Bankʼs notes. The commercial ownership and management of the Bank improved the stateʼs creditworthinessʼ [119].

So if the Bank controls money, what is the standard by which they do so?

This raises the second theme that Martin explores: the fixity or flexibility of the standard.

He notes the way in which John Locke fixed monetary value to (precious) metal [127]. The result was that clipped coins gained a shelf-life as legal tender (since they were worth less than they should be) [128]. Before they expired they could be used to pay taxes or buy government bonds, when they would be re-minted according to actual silver content. 

Opportunists exploited the fear of those with no taxes to pay by buying clipped coins from them. Corrupt officials then exchanged these light coins for full-weight ones. After the expiry date, those holding the light coins lost out.

£4.7 million collected by the government, was worth a mere £2.5 million. The poor (who were unable to devolve themselves of light coins) rioted. The number of coins in circulation dropped. (And many of those were exported being worth more as bullion overseas.) The result was deflation.

Locke failed to recognise that ʻthe value of money depended not on the stuff that the coinage was made of but on the creditworthiness and authority of the sovereign who stood behind the tariff that specified the nominal value of the coinʼ [129-130]. After all, coins were clipped and shaved anyway but retained their nominal value. Indeed,
Amongst the ancients, the general understanding was that economic value was quite obviously a property of the social world, and that money was an archetypal social phenomenon. The very term that the Greeks used for money was nomisma, “something sanctioned by current established usage or custom” [130].
Nonetheless, Locke’s legacy persists to the present day, and will be picked up in the final post. In the next post, however, we will see that whereas John Locke erred towards fixity, John Law erred towards flexibility.

Monday, 22 September 2014

Money I

This is the first of six posts. These continue our exploration of the kingly sphere of economics.

Although monetisation is not Martinʼs point of departure, it provides a useful way-in to his argument. Monetisation occurs when social obligations are replaced by financial transactions, by IOUs [61-62]. Money becomes the glue that holds society together. This begs the question of who controls it – a question amplified by the social mobility (and therefore control) that money promises. Martin’s Unauthorised Biography is, in many ways, an answer to this question.

He notes that money is not a commodity but a System of credit and debt. Notes and coins may suggest the former but, in fact, are symbols of the latter. So not all credit is money, but money is transferable credit [26].

Your private IOU to me – my private credit – is, in itself, not transferable to a third-party. There needs to be trust in you from that third-party for credit to work. That arises when our IOUs are backed (or guaranteed) by the sovereign. In fact, we use the sovereign’s IOUs in place of our own.

Thus transferability or liquidity arises in the presence of a sovereign. (Liquidity is the market’s ability to quickly convert assets to their monetary value.) It arises because the sovereign gives us the confidence that money will “work”. We trust that the sovereign could pay their debts. Conversely, the sovereign’s absence – or, at least, their perceived inaction – can give rise to a liquidity crisis, when money is hoarded.

To put the point another way,
“[i]f men were angels, no government would be necessary”. And if men were angels – if there was never any question of their overspending, or defaulting, or simply skipping town, and if they trusted on another implicitly – no government money would be necessary either. Everyone could issue their own IOUs, those IOUs would be readily accepted by all, and the entire economy would operate as a vast mutual credit network [73].
In the absence of utopia, a sovereign is required. So in what sense does a sovereign control money?

Traditionally, the sovereign’s authority (to act as money’s guarantor) is not derived from its creditworthiness in the market [74]. (I imagine that this would give the market too much authority.) Rather, it is derived from its political power outside of the market. This is primarily expressed in its ability to raise taxes.

The sovereign can also raise money through seignorage [87]. Seigniorage is to reduce value of coins by decree (thus they are “cried down”). So if I were to exchange one pound of gold for a one-pound note, endure a sovereign reduction in the value of said note, and then exchange note back for, say, half-a-pound of gold, then seigniorage has occurred. (And the sovereign has twice as much gold!)

But silver and gold coins have an intrinsic worth, which acts as a collateral – a lower limit – against which their value can be decreased. Go below this value and one could sell oneʼs silver and gold for a higher price (as bullion) than their value as coins.

Against this, a sovereign might respond by reducing the silver content when coin is re-minted. Debasement, then, allows for a sovereign to cry the value down further.

So, on the one hand, monetisation extends the reach of seigniorage. ʻThe more activities were monetised, and the more people were drawn into the money economy, the larger the tax base on which seigniorage was leviedʼ [88]. But, on the other hand, seigniorage canʼt go on forever. Sooner or later the people will object – a point not lost on the fourteenth century philosopher, Nicole Oresme, who argued that money was owned by society.

So the sovereign’s control should not be totalitarian [91].

In the next post, we will see how the Bank of England functions as an intermediary between the sovereign and private investors. We will then consider fixed and flexible standards by which monetary value can be set. 

Thursday, 18 September 2014

All That Is Solid III

This is the third of three posts.

So what can be done?

First, we must recognise that our well-being is tied up with those poorer than us [165]. Second, ‘What is needed is a cultural change away from greed’ [187]. Third, we need to see property primarily as a home, and not as a (speculative) investment [265].

In short, ‘We need to remember that housing is a special kind of good – a social good – which brings with it wider benefits. In this it is like education and health. It is better for all of us if others are also well housed, well educated, and healthy’ [306].

To this end Dorling makes ten proposals:
1. Extend the current council tax bands up to band “Z” with a view to transforming the tax into a fairer national land and property tax.
2. Enhance the existing “right-to-stay” into a “right-to-sell”, giving mortgagors the right to become tenants rather than face eviction.
3. Second homes, holiday homes and empty commercial property need to be included in a fairer property tax system to discourage waste.
4. Spare bedrooms should not be taxed. Every family should be able to live in a home with a spare room for visitors. We already have enough rooms. Every single adult who wants their own space should have it.
5. An enhanced home-building programme will be needed if more people come into the UK than leave, as has been the case in recent years.
6. Benefits are now so low that they must soon rise faster than wages, which must rise faster than salaries – all of which must rise faster than home prices. Rents need to stay still, if not fall. All these are out of balance.
7. Greater income and wealth equality would be improved by the reintroduction of rent controls, which would also reduce housing benefit bills massively. The already calculated Local Housing Allowances could be used to set the maximum fair rent in an area.
8. Squatting and all other acts that are done purely to seek shelter and not to steal items for a profit should again be a civil, not a criminal, offence. Squatting is a symptom of a problem, not the problem.
9. Illegal actions by landlords and bankers that deprive people of their home and shelter should become criminal, rather than civil, offences.
10. We have to recognize that housing is central to environmental sustainability. When we build, we need to build for the very long term [314-315].
All That is Solid is incredibly stimulating. Yes, Dorling sits unapologetically on the left, but favours evolution over revolution. (The System can be slowly redeemed!) However, he also has a tendency to tar all landlords with the same brush. Here, I would urge some caution, since the landlord whom my wife and I left for social housing exhibited much of the (other-centred) virtue that Dorling so desperately seeks across the board.

In the next series of posts, we turn to Felix Martin’s book Money.

Monday, 15 September 2014

All That Is Solid II

This is the second of three posts.

Dorling’s argument unfolds as follows (according to chapter):*

1. There is a crisis.
2. People are myopic, only looking out for themselves (and for their immediate family) rather than for society [cf. 56]. Thus our inheritance laws require revision [33, 39], as do the laws governing empty properties [47 cf. 67]. Such properties could be used for the greater good. ‘There is enough housing for all, even in a crowded island like Britain, even in the heart of London (where it really cannot be repeated enough that there are still more bedrooms than people). What we lack is a housing policy that is collective, not individualistic’ [285].
3. The issue of inequality cannot be solved by increasing (the housing) supply, because the supply-demand argument assumes that consumers have economic equality (which patently they do not – some are rich, some are poor) [102 cf. 9]. In fact, although there might be a short-term trickle-down effect when an area is gentrified, there is a long-term trickle-up effect as people are priced out, and wealth moves from the poor to rich. This happens as taxes subsidise the rich (via housing benefit), as do guarantees for property development (funded by taxation).
4. Vacant space (whether land or housing) should be taxed to bring prices down.
5. The cost of housing rises ‘not because the cost of building or of maintaining homes has suddenly become greater, but because a few have found better ways to more fully feather the nests of those with money to lend: the “investors”’ [135].
6. ‘The free market does not balance supply and demand well when it comes to housing; it usually increases the imbalances that already exist’ [195].
7. We need to see property primarily as a home, and not as a (speculative) investment [265].
8. Suggested solutions include a land-value tax [75, 94-95, 305-306] designed to fund the right-to-sell [70, 309-310].

The theme of chapter 3 runs throughout the whole book.

Ours is a system that favours the rich over the poor. He observes that ‘given current trends, many of the [affordable] homes being built are likely to end up in landlords’ hands’ [7]. This happens as affordable homes are sold back to the open market. So (like housing benefit) help-to-buy ultimately benefits private landlords. ‘All this keeps rents and prices high. All this puts more and more people into even greater debt’ [9].

Taxes also favour the rich over the poor. For example, Dorling notes the irony of the Bedroom Tax (where those on housing benefit are taxed for what is deemed excess space). Aside from the subjectivity of determining what is “excess” – Dorling deems a guest room reasonable [189] – irony abounds because the poor tend to use space more efficiently than the rich anyway [111, 200]!

Besides, there are not enough one-bedroom places (into which people could down-size) [153]. And it is hardly the tenants’ fault if developers find it more lucrative to build two- and three-bedroom places!

He also notes that the upper limit on council tax is essentially a concession to the rich [204] – ‘You pay proportionately more council tax the lower your tax band’ [205] – and that the rich are more likely to know how to evade tax in the first place [122, 179].

* The structure of All That is Solid is somewhat gem-like. Whereas each facet is a window into the gem as a whole, each chapter in All That is Solid is a window into the others. Thus, in my synopsis, I have occasionally cited text on the subject of a particular chapter from the perspective of other chapters looking into it.

Thursday, 11 September 2014

All That Is Solid I

The story so far: we are in the middle of a series of posts reviewing the priestly (relationships) and kingly (economics) spheres of life. On the priestly we’ve looked at:

Then, we took a brief excursus on the Powers in Acts. There we saw that the Powers divide, whereas the Kingdom unites. With that in mind, we move on to two books that both consider the kingly (economic) sphere of life:
This is the first of three posts on the first of those two books.

The Powers divide us: the in-crowd, the out-crowd; the haves, the have-nots. So it is always worth asking, “what divides us?” “Where are we excluded?” “Where do we have no voice?” “Where do we exclude others?” “Where do we deny others a voice?”

Since ‘housing has become the defining economic issue of our times’ [15], consider the current housing crisis. The rich get richer. The poor get poorer. Society becomes divided into property owners and tenants. Not every property owner is a landlord. But every tenant has one.

To address this, Dorling takes his title from the Communist Manifesto: ‘All that is solid melts into air, all that is holy profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind’ [307].*

Although Dorling argues for evolution rather than revolution, the resonance with Marx and Engles strikes a cord nonetheless. Under the current free market, housing is no longer solid, at least not in London. This loss of solidity is why my wife and I fled the private rental market for the refuge of social housing. Dorling describes the environment:
In the year to 2013 median rents in London rose by 9%, while median London earnings rose by only 2%; and the typical young renter has been forced to move (on average) every twelve months by his or her landlord to enable that landlord to find a new tenant to pay the higher rent [10].
Accommodation is not only fleeting, but also very often wanting – unfit for purpose. Moreover, there is a deep correlation with freedom here (or the lack thereof). Dorling is worth quoting at some length.
[P]eople who talk of freedom but who are not concerned about housing – and about the extreme of homelessness – are not really concerned about freedom at all. They might be concerned about their personal freedom to do what they like and live as they like, but they are apparently less concerned that others should have the most basic freedom of having somewhere safe to live. Often people who advocate what they think of as the great freedom of the ‘free market’ find it hard to consider the basic freedoms of others. 
You are likely to be reading this book because you believe that housing is a crucial issue of our times. You are very unlikely to be homeless of even to have been homeless. However, we all need to be concerned, not only about homelessness and those who are very insecurely housed, but also about the very rich, and the affluent, and the average, and the modest, and the poor and other minorities, if we are to ensure that the current deleterious housing situation improves. The way to guarantee greater freedom is to think more widely than just about ourselves and our families. If there is to be enough good housing for all, and if our friends and family are to be well housed in the future, we cannot just look after our own short-term interests.
It is when everyone concentrates too much on their own interests that those very interests are harmed: we find that most of us are squeezed into too little space to be well housed, and that the growing wealth of a few affluent landlords and multiple property owners translates into growing insecurity and financial volatility for the majority. Ultimately, when the super-rich are encouraged to speculate on housing, they fuel a property bubble that grows exponentially with their wealth before it bursts. Those who find they have invested in whatever is next most profitable, often out of luck, become the new rich. But they know their position could easily be usurped. Each person acting purely from self-interest creates a future that is in almost nobody's interest. It is in how well or how badly we are housed that this becomes most evident, day in, day out. 
There are wider arguments than greater efficiency for demanding that we better manage our housing. The way we currently organize housing literally makes us sick with worry; it is a grossly unfair allocation of scarce resources ... More become homeless and fewer are well housed when a fraction of the population is encouraged to speculate in ways that do more harm than good – when they are encouraged to treat property as a financial investment [52-53].
In the next post, we will look more closely how Dorling’s argument unfolds.