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"...Scrabbling in the earth for a fresh source of cash, the gold
& silver miners of 13th century Europe proved that the money supply never
simply increases as if by magic..."
YOU MIGHT THINK Ben Bernanke's way with words mere cant, just so much
sophistry learnt from the Maestro.
But words matter when we're talking about inflation or denying it. Choosing the mot juste can prove as crucial as selecting (or denying) the
right data.
At the turn of the 20th century, for example, a German scholar,
Wilhelm Abel, noticed how medieval chroniclers writing nearly seven centuries
earlier had made a curious shift in their choice of words to describe rising
grain prices.
Over the three decades between A.D. 1230 and 1260, wheat prices rose
by about one quarter in Italy, one-third in France, and nearly as much in
England. Writing about these increases year-by-year, Abel found, the
chroniclers slowly switched from blaming fames or shortages and famines to blaming caristia,
a word derived from carus, meaning costly or dear.
The middle of the 13th century, in other words, saw a switch in how
people described what was happening to grain prices. The cost of living as measured by the cost of
having enough to eat was no
longer related to good or bad harvests, not according to the chroniclers'
choice of words. Instead, the cost of living had become dearer. That changed
the way people thought about prices. It also changed the way they responded
to rising prices, too.
General price levels kept growing more costly for the next century, in
fact, in a phenomena identified by David Hackett Fischer as the Medieval
Price Revolution.
"People responded to the discovery of caristia
[costliness] by deliberately expanding the quantity of money," writes
Hackett Fischer in his tome, The Great Wave (OUP, 1996). "During the
thirteenth century, a major effort was made to expand the supply of silver in
Europe. Old mines opened again in Hungary...New mines were brought into
operation. Output was increased by new technology."
Scrabbling in the earth to uncover fresh supplies of money proved that
extra cash didn't simply appear out of thin air, as if by magic. It "was
not a deus ex machina,"
writes Hackett Fischer, "that descended inexorably upon the economy. It
was an artifact of human will and purpose."
Put another way, "the most important thing to remember," as
Ludwig von Mises reminds us, "is that
inflation is not an act of God, that inflation is
not a catastrophe of the elements or a disease that comes like the plague.
Inflation is a policy."
Who's making policy today? Let's agree that semantics do matter; let's
also imagine for a moment that the word "inflation" only describes
an increase in the money supply. Then let's bend an ear to the latest choice
of words.
"Inflationary pressures have been a feature of the major
industrial economies in recent times," said Gordon Brown, the UK finance
minister this week.
"Inflation has risen not just in this country but in most of the
major countries," said his political partner and rival, Tony Blair the UK prime minister earlier this year.
"Inflation rates have been pushed upwards across oil-importing
countries," noted José Manuel González-Páramo,
an executive of the European Central Bank (ECB) at a seminar in Helsinki last
month.
"How should central banks react?" asked the ECB man. And
what about the rest of us?
The same pattern that Hackett Fischer found in the Medieval Price
Revolution of the 13th century
a pattern of higher price levels preceding a determined attempt to
increase the money supply
was also identified in the Price Revolutions of the 16th and then 18th
centuries. Steadily rising prices for basic foodstuffs are recorded long
before new sources of gold and silver were first tapped.
The Price Revolution of the 16th century, says Hackett Fischer's
research, actually began as early as 1480 "many years before American
silver and gold arrived in Europe. In England and Germany, prices nearly
doubled during the half century before American silver could have had a
significant effect on their economies."
Whatever the initial cause of rising prices and Hackett Fischer cites
population growth in all four of the Price Revolutions he identified between
the 13th and 20th centuries
observing the age-old response of human nature to higher prices reveals
the true problem of modern central banking. For both the policy wonks
themselves and for anyone trying to invest profitably under their fiat money
dominion, the natural response to rising prices is actually a search for
fresh supplies of cash.
Older, more studied and apparently wiser today, mankind of course
knows to meet higher prices with higher interest rates instead. Pace this
week's mini-China shock to the Shenzen and global
stock markets, tighter reserve ratios are also expected in the commercial banking
sector. That should decrease the multiplier effect, or so theory says, thus
reducing the availability and growth of credit.
When rising prices become clear in the data, rising interest rates are
sure to follow. The supply of money must be restricted, not increased.
But that's not quite what happens.
In the compact and compressed little Price Revolution we've
experienced so far in the 21st century, global interest rates slowly began
turning higher in late 2003. The Bank of England moved first, followed a year
later by the Fed...then the ECB in Frankfurt...and finally the Swiss National
Bank and the zero-rate crazy Bank of Japan. Yet the global money supply has
by no measure decreased.
The broad supply of Sterling has risen at a double-digit rate annually
for the past two years; M3 in the United States is now estimated by John
Williams' ShadowStats to be growing at nearly 12%
year on year; Eurozone money supply is growing at 10% per year, the fastest
rate since 1990.
Let's give the Fed, ECB and Bank of England their heads, and imagine
that they actually want rising rates to counter rising prices by restricting
money-supply growth. It simply hasn't worked over the last 12 months and
more.
Could it be shhhhhh
that modern central banking is impotent in the face of a genuine and
sustained rise in living costs? Are the wonks undone by the rest of us and most especially the
commercial banks scrabbling
in the dirt for fresh supplies of money to overcome the loss of purchasing
power that higher prices produce? Or will it take a surprise and shocking
increase in interest rates, a hike up to double-digits throughout the
industrialized world, to cut money supply growth and so cut the rate of
inflation in prices?
"In cultural terms," writes Hackett Fischer of the 13th
century gold and silver seekers, "their actions helped individuals and
institutions to cope with high prices, but had the collective effect of
driving prices higher."
High prices demanded more money; more money led to increased prices.
If you ever thought today's rising cost of living would somehow slow down by itself, you failed to account for human nature.
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Adrian Ash
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