By Friday, 26 September 2025, 3:30 Pm Opinion: Keith Rankin
Copyright scoop
On Monday (Pushing
a String; Ineffective Monetary Policy, 22 September
2025) I wrote about how, in circumstances of economic
depression or structural recession, monetary policy is
ineffective as the sole policy to induce a country’s
economic recovery. Here I look at the historical antecedents
of today’s monetary policy narrative.
Understandings
Human understandings of money go back to the
prehistoric development of accountancy, the world’s first
profession. (Other professions, by definition, require at
least some basic method of accounting.)
three broad historical concepts of money: money as
wealth, money as a veil, and money as
circulating promises. (If we think of coins as a
promise, it is the sovereign whose head is on the coin who
gives value to that coin, and not the amount of silver or
gold that the coin contains. If we think of banknotes, the
promise is made by the senior banker whose signature is on
For the first two concepts, money is a
commodity with innate value (such as gold or silver) which
is co-opted to act as (among other things) a medium of
exchange. For the third (correct) conceptualisation of
money, it’s a social technology which arose out of the
practice of accountancy and its derivative,
In the intellectual history of money, the
important decades were those either side of the year 1700.
The two most important names are the English philosopher
John Locke (advocate of commodity money) and the Scottish
radical banker John Law ( advocate of bank money).
Discussion of events in those times is beyond the scope of
what I’m writing here; but I recommend the book Money,
the Unauthorised Biography (2013), by Felix
(I would also like to mention here John Law’s
banking rival, Richard Cantillon, of Irish Catholic
upbringing and living his professional life in Paris and
London. He made his money through the financial crisis of
1720 by pioneering the practice of short-selling, made
famous to lay-audiences by the movie The Big Short;
this made Cantillon very unpopular with his many rivals who
lost their money only to watch Cantillon become very rich.
Cantillon went on to write the most important economic
treatise of the first half of the eighteenth century –
Essay on the Nature of Commerce in General – in
English; it is a book that particularly plays up the
importance in the new capitalism of entrepreneurship. The
book was written in English, but only the French translation
survived; Cantillon was murdered – a crime believed to
have been instigated by one of his many enemies – in a
fire in his London home, with the fire consuming the
original manuscript. The French translation was able to be
published, however, and eventually the book was retranslated
into English. When I was reading Cantillon’s retranslated
book many years ago, I was struck by the frequent use of the
word ‘undertaker’ to mean ‘entrepreneur’. Later, in the
2000s, US President Bush apparently claimed that “the
trouble with the French is that they have no word for
‘entrepreneur’.” I could not help but think of
Cantillon.)
The differences in conceptions of money
can be summed up as the philosophers versus the bankers. The
philosophers, and their economist ‘descendants’, prevailed
in a misframed and misadjudicated debate. The bankers, in
reality, were more correct. Misunderstandings about money
are as prevalent today as they ever were.
that even modern money can be construed as a commodity; a
‘silver’ florin – still in circulation in New
Zealand as a 20c coin – buys much less today than it did
in the past. Using CPI inflation as a proxy for monetary
inflation, the Reserve Bank’s inflation calculator tells me
that a florin’s purchasing power was 120 times greater 125
years ago than it is today, a result of an average annual
inflation rate of 3.9%. (In New Zealand we also have a
crown still in circulation; it’s the 50c coin. In the
1950s and 1960s New Zealand did not then have a crown coin,
but it did have a half-crown coin [25c today] in circulation
alongside the florin [20c] and the shilling
[10c]; these still-existing New Zealand coins reference the
principal coins used by the merchants of Sweden,
Netherlands, and Austria – all ‘G10’ nations in the
Nevertheless, that is despite its superficial
history as a commodity, money is in its essence a
technology, not a commodity. While money is a
technology of trust, hence the explicit or implicit
signature, it is a technology whose power is based on its
circulation. ‘Currency’ is like an electric current; it must
flow in order for it to perform its function.
as Gold or Silver or modern equivalents such as Bitcoin and
Real Estate
The idea that money is wealth is known as
‘mercantilism’. Belief in merchant capitalism – the
mercantile system, mercantilism – drove the European
global commercial expansion from around 1490 (Columbus) to
1790 (French Revolution). Nevertheless, mercantilism is to
economics what alchemy is to chemistry; hence
most economists know nothing about
mercantilism, just as most chemists know
nothing about alchemy, and as most doctors know nothing
about humoral medicine. Both belief in alchemy and in belief
in humoral medicine represent critical pathways in the
evolution of those modern scientific
disciplines.
The present United States
president is an unreconstructed
mercantilist, in that he believes – by fair
means or foul – his country becomes wealthy (aka ‘great’)
by ‘making money’ through the exploitation of land and
labour and foreigners. In particular, unreconstructed
mercantilists want their countries – as presiders, or
through their identification with their national ruling
class – to make money at the expense of their
In this crude understanding,
money is conceived not as a circulating medium but as a
stash of wealth. Monetary policy, as such, is simply to
augment that hoard. Modern ‘assets’ such as real estate
(land considered as a financial commodity) and
cryptocurrencies represent modern developments in the ‘money
as wealth’ paradigm; hence the ‘mining’ of cryptocurrencies
is an exploitation of nature (through its wasteful use of
electricity) just as is gold and silver mining. For our
monetary system – connected to silver and gold only in the
abstract – those metals may as well still be under the
ground as in bank vaults.
Money as a Veil
(incomplete) debunking of mercantilism was performed most
notably by two Scotsmen: David Hume around 1750 and Adam
Smith in 1776. Smith pointed out that nations could best
accumulate money through free market mechanisms (rather than
through extortionary mechanisms), relying in part on
capitalists’ innate patriotism as a determinant of their
enlightened self-interest.
It’s Hume to whom I wish to
turn. He was the first to fully conceive of commodity money
as a ‘veil’. The idea was that money is simply a scarce and
durable commodity, such as silver or gold; silver was the
more important monetary commodity in his time. (Anyone
visiting Fremantle, Australia, should not miss the Shipwrecks
Museum, which features many silver coins recovered from
the Batavia and other ships of the Dutch East India
The idea, today known as the crude
quantity theory of money, was that the price of silver
(as a commodity) was effectively the price of circulating
money. So, when silver was scarce, the price of silver would
be high, the price of silver coins would be high, and
therefore the prices of all goods and services (and of
labour) would be low (ie low relative to highly-valued
silver coins). Cabbages and carriages and personal services
would be cheap; wages would be low. And, when silver was
relatively abundant, the price of silver would be low, and
therefore the prices of all goods and services would be
high. Cabbages and carriages and personal services would be
dear; nominal wages would be high. It didn’t really matter
if prices were high or low; the economy would work just the
same. Hence the notion of money as a veil.
price of silver was falling there would be inflation. When
the price of silver was rising, there would be deflation.
While neither inflation nor deflation were huge problems,
both were destabilising; the biggest concern was that, with
inflation, the purchasing power of hoarded money would
decline. Thus, it was seen as preferable that prices were
either low or high, but not rising too much. (The ruling
classes – the owners of private and royal treasure hoards
– clearly quite liked deflation, while hating inflation.)
Royal hoards of silver and gold belonged in the sovereign’s
‘Treasury’.
Hume developed the veil idea into a theory
of monetary economics as applied to international trade.
(While the modern concept of a nation as a territory defined
by its borders was only just emerging in Hume’s time, the
G10 of the 1750s were: Great Britain, France, Spain,
Austria, Netherlands, Sweden, Ottoman Turkey, Russia, Mughal
India, Qing China; all imperial powers, some waxing others
waning.) Hume also noted that money had some real value; not
as absolute wealth, but as circulating oil, as
Countries with balance of trade surpluses
would accrue silver ‘reserves’, whereas countries with trade
deficits would deplete their silver reserves. The quantities
of money in circulation – especially silver coins or
‘specie’ – were assumed to be a constant proportion of
those reserves. (And, as a more tacit assumption, private
stashes of silver were presumed to be at a stable proportion
to public reserves.) Hence, there would be predictably more
money circulating in a country following an inflow of
silver; and less money in a country when there had been an
outflow of silver. The mechanism, as stated by Hume, came to
be known as the price-specie
flow mechanism.
Based on earlier mercantilist
habits of thought, all countries’ ruling classes wanted
inflows of silver and wanted to avoid outflows. In effect,
Hume claimed, it wasn’t such a big deal. The international
monetary system would self-regulate. Countries with inflows
of silver would experience rising prices; countries with
outflows of silver would experience falling
The world economy would self-regulate as if it
was under ‘thermostatic’ control. Costs of production would
fall in deficit countries, and would rise in surplus
countries. Hence deficit countries would increase their
exports and decrease their imports; surplus countries would
decrease their exports and increase their imports. Money
flows would reverse, until those cost discrepancies were
eliminated; it’s an elegant mechanism.
three problems. At an increasing rate, and especially after
1750, un-understood bank money was growing rapidly, so –
for that reason and others – the money supply in the
growing G10 countries (especially Great Britain) had become
increasingly detached from the silver supply. Second, price
levels never varied proportionately with the quantity of
money; the velocity of circulation (ie turnover) of money
varied substantially in the short-and-medium term, with new
forms of un-understood money making up for long-term
But, at the time, the main issue was the
resistance to inflation (rising prices) on the part of the
nations’ ruling classes. In particular, in the eighteenth
century, the G10 economies were highly protectionist; Great
Britain became the worst offender, mercantilist trade
barriers morphed into open warfare. Later, in the nineteenth
century, silver (and gold) flows between nations were
minimised through the use of international credit
arrangements; the unbelievers in bank money allowed full use
of the banks so as to shore-up their countries’ ‘wealth’.
Indeed, at the end of the nineteenth century in Great
Britain (now the United Kingdom), prices in 1900 were half
of what they were in 1800 despite massive increases in the
actual money supply.
The more people believed in
commodity money the less important it became. I remember
learning from a lecturer of mine (indeed a recent persona in
New Zealand’s monetary policy governance) that the most
sophisticated treatise on money in the whole of the
nineteenth century was An
Enquiry into the Nature and Effects of the Paper Credit of
Great Britain, by banker Henry
Thornton, written in 1802. Meanwhile, ‘monetarism’
became the intellectual weak link of the Ricardian
classical system (reflecting the tradition of the
philosophers rather than the bankers). And the huge disputes
about money in the 1840s, between the currency school and
the banking school, were settled by the elites in favour of
their favoured philosophical narrative rather than through
truthful observation.
There was also elite resistance
to deflation (falling prices) on the part of nations with
depleted reserves of silver and gold. While deflation
boosted the (largely unrealised) purchasing power of the
treasure hoards of the small numbers of rich people, falling
incomes to peasants and other workers diminished the local
demand for goods and services, leading more to business
failures and the concentration of ownership of economic
assets in favour of the already rich.
International Financial Game
In the second half of
the nineteenth century, the formal gold standard emerged;
although most money was neither silver nor gold, then bank
money (especially paper money and bank deposits) in the
Euro-capitalist would be treated as if it was gold. In
principle, countries’ gold reserves would be shuffled across
the floors of the bank of England’s vaults in accordance
with countries’ trade deficits and surpluses; with the Bank
of England being tantamount to a global central
But short-term finance – much like inter-bank
finance today – would stabilise countries’ money supplies;
meaning that countries with trade surpluses would not
experience monetary inflation, and countries with trade
deficits would not experience monetary deflation; so those
patterns of destabilising surpluses and deficits would not
be resolved. Money as a thermostatic veil had become
completely ineffective. Further, international money flows
were increasingly divorced from imports and exports; much
more they had become cross-border flows of ‘investments’,
profits, interest, rents, and royalties.
This process
was not well understood at the time; today we understand it
by focussing on ‘current account’ balances rather than
‘trade balances’. Indebted countries today are countries
with repeated large current account deficits. (Thus, New
Zealand is easily one of the most indebted countries in the
world; although the New Zealand government has low
indebtedness by international standards. One of the puzzles
of our time is why professional and media commentators focus
so much on government indebtedness and so little on national
indebtedness.)
To make up for the by-now
irrelevance of the price-specie-flow mechanism, the leading
lords of finance – especially those who became governors
of the emerging central (Reserve) banks – developed the
first international-rules-based
Countries experiencing more
inflation (rising prices becoming more common after around
1905) saw themselves as becoming ‘less competitive’, so –
rather than addressing root causes – the rule for them was
to instigate a price deflation by placing downward pressure
on their money supplies. The principal means to do this
monetary deflation was to jack-up interest rates; to raise
the rate of interest at which the leading banks or central
bank would lend to other banks, thereby reducing banks’
willingness to make new loans and in turn diminishing the
amount of money in circulation.
The deflation
mechanism, a response to the implicit overvaluation of the
problem country’s exchange rate, was expected to force a
downward adjustment of prices and wages in such countries.
We saw exactly this mechanism of internal
devaluation at work in Greece in the mid-2010s as it’s
bearing the burden of the Euro-crisis. The Euro currency is
an effective system of fixed exchange rates between member
nations; therefore the only solution to an overvalued
exchange rate is a costly internal devaluation. We note that
nations such as Germany and Netherlands try not to follow
the same rules by having an internal revaluation; this means
that the Euro-zone as a whole has uncorrected current
account surpluses.
Monetary policy as we know it
today, through interest rate manipulation, was born. A major
problem was that the whole capitalist free-market economy
depends on prices – including interest rates – adjusting
freely in accordance with market forces; interest rate
manipulation is contrary to capitalist freedom. The
hijacking of interest rates for an interventionist purpose
disabled a central feature of self-adjusting liberal market
The rules of the game that applied in the
early twentieth century created a powerful ‘deflationary
force’, interrupted for a while by World War One during
which those rules were suspended. The financial lords did
generally raise interest rates in accordance with the rules,
but were often reluctant to lower interest rates when those
same rules required them to do so. When inflation was
relatively low, however, rather than ‘reflate’ or ‘inflate’
their nations economies the lords of finance and their
political masters saw this as an opportunity to run trade
surpluses and to thereby augment their national gold hoards;
in the 1920s, France and the United States were the biggest
culprits. This one-sided adherence to the rules led directly
to the Great Depression, the suspension of the gold
standard, and the return to war. But the rules could never
have worked; they were predicated on a stable relationship
between money in circulation within each country and that
country’s prices.
Post World War Two
WW2, the gold standard was revived under American leadership
as a gold-exchange standard, with the value of the US dollar
pegged to gold, the other ‘hard currencies’ pegged to the
$US, and the other currencies (such as the £NZ) pegged to
hard currencies (eg the £NZ was pegged to the £UK). There
would be periodic devaluations (mostly) or revaluations
(occasionally, as in New Zealand in 1948 and 1973); although
the $US could neither devalue nor revalue. This last issue
led to the end of the gold-exchange standard in 1971, when
Richard Nixon suspended the convertibility of the $US to
gold; this enabled the $US to devalue, a monetary matter
necessitated by the Vietnam War and the associated American
current account deficits. What happened next was a mix of a
US-dollar standard (whereby, the $US was treated ‘as if’ it
was gold) and a floating exchange rate mechanism, meaning
that the free (or free-ish) foreign exchange market would
set the price of participating countries’ currencies. New
Zealand became a participant in 1985.
International Financial Game
A world of free-market
currencies represented a new international financial game,
with rules in the same spirit as the price-specie-flow
mechanism (as described in the 1750s by David Hume) and the
gold-standard interest-rate rules developed in the years
just before 1900.
The idea was that trade flows (or at
least ‘current’ flows, distinct from ‘capital’ flows) would
be the principal determinant of currencies’ exchange rates,
and that countries with current account deficits would see
depreciating exchange rates (albeit with some inflation) and
thereby increases in ‘competitiveness’, and that countries
with trade surpluses would see appreciating exchange rates
(albeit with some deflation, or at least disinflation)
and thereby face decreases in ‘competitiveness’.
the late-1970s, the world of monetary policy and finance saw
a return to the ‘economic liberalism’ which peaked in the
1920s; this time under the misleading names of ‘monetarism’,
‘neoliberalism’, ‘public choice’, ‘rational expectations’,
‘economic rationalism’ and ‘free-market economics’. The
momentum for this financial coup-d’etat had been
gathering in the 1960s, through the work of Milton Friedman
and other members of the ‘Chicago School’; indeed, the
revival of monetarism probably go back to Friedrich Hayek
(also at Chicago, though not a direct colleague of
Friedman), author of the popular 1944 anti-Keynesian book
The Road to Serfdom. The Chicago School went on to
manage the economic program of the neofascist Pinochet
regime in Chile; more the politics of serfdom than the
economics of freedom.
The name ‘monetarism’ harks back
to David Hume, though misleadingly. Milton Friedman’s
monetarists treated money as a veil when it suited them. For
example, in the inflationary 1970s, Friedman offered a
simple solution based on the crude quantity theory of money.
Whatever the causes of a bout of inflation, restricting the
growth of the quantity of money in circulation to say 5% per
annum would bring the inflation rate down to 2%, he argued.
Friedman was offering a counter-deflation, a cover-up rather
than a solution. Yet, in his simplistic narrative of the
1930s’ Great Depression, A
Monetary History of the United States, 1867–1960, he
claimed that the quantity of money was anything but a veil.
Money, for Friedman, became simultaneously everything and
Friedman, and Hayek too, favoured
‘quantitative tightening’ over the more overtly
interventionist jacking-up of interest
Neoliberalism – the ‘new right’, commonly
called ‘neoconservatism’ in the United States – was the
revival of 1920s’-style ‘economic liberalism’ under
post-Nixon conditions. Its stated mantras were
‘free-market’, ‘more-market’, ‘private-good public-bad’. The
neoliberal microeconomists readily joined forces with the
monetarist macroeconomists in the advocacy of authoritarian
mandates to suppress the market ‘signals’ that were interest
rates and inflation.
The opposite of the
economics of ‘freedom’ is the economics of ‘intervention’.
Yet neoliberalism in its various guises is very much the
politics of economic intervention; just certain types of
intervention, such as asset privatisation, monetary policy
with a high interest-rate bias, and the minimisation of
public goods’ provision.
‘Public choice’
became a name for ‘private preference’. And ‘rational
expectations’ became the underpinning of ‘credible’ – ie
unnuanced and unforgiving – monetary policy to override
allegedly irrational expectations; we had to believe
that the awful monetary medicine prescribed for us was good
for us, regardless of the evidence or the ethics. Rational
expectations were imposed because the mandated public
authorities were required to tell us what our expectations
should be and why they had to be ‘corrected’. ‘Economic
rationalism’ meant authoritarian dogmatism rather
than democratic pragmatism, especially in relation to
matters of money, inflation, interest rates, private
ownership; and, increasingly, in relation to public debt.
Economic rationalism was idealism
in the philosophical and utopian meaning of that
Just as the rules of the gold-standard game were
perverted – both because they were based on false
premises, and because they were corrupted by mercantilists
seeking perpetual trade surpluses – so the rules of the
floating exchange-rate game have been perverted. There are
two ways to manipulate the original trade-based rules. The
first manipulation is for countries to defend their exchange
rates by central banks using foreign reserves to buy
domestic currency when the market price of the domestic
currency is falling. This is called a ‘dirty float’, meaning
a nation’s authorities acting to prevent the depreciation
that was intended to be a central aspect of the mechanism.
This has been generally a biassed form of intervention; the
converse policy to inhibit an appreciation was used much
less often (though was used to great effect by the Bank of
England in 1932 after the pound was floated in
The more familiar intervention to pervert the
rules has been the use of jacked-up interest rates to
attract foreign money, thereby maintaining the living
standards of the monied classes through an overvalued
exchange rate (meaning cheaper imports and overseas travel).
This is the policy that has created massive private debt in
Aotearoa New Zealand, and some other countries; while also
containing the growth of government debt. Lots of spending
on imports by New Zealanders has increased GST revenue as
well as creating income tax revenue in, for example,
retailing and wholesaling. Such huge blowouts of private
debt are the flipside of what has been euphemistically
called ‘foreign investment’; money inflows not arising from
exports, many of which – known as the carry
trade – amounted to ‘speculation’ or ‘arbitrage’. The
interested authorities and commentators have effectively
covered-up these increases in national debt by relentlessly
focussing on government debt; indeed to the point of
labelling government debt as ‘national debt’.
kind of monetary policy intervention – a perversion of the
floating exchange-rate game – is tantamount to a Ponzi
scheme whereby new national debt is required to service
existing debt. The scheme has changed since 2023, with New
Zealand relying on non-trade money inflows other than the
‘carry trade’; an important example is that of money brought
in by immigrants.
While the likes of New Zealand
hijacked ‘the game’ by trying to maintain an overvalued
exchange rate, other countries – especially the modern
mercantilists like Germany, Netherlands, Sweden, China –
sought to maintain undervalued exchange rates. Sweden did it
in the 2010s by having zero and negative
interest rates. Germany and Netherlands play a game
within the rules of the Eurozone. And China moved from a low
fixed exchange rate against the US dollar to a dirty float
of the renminbi. These countries, less so China since the
global financial crisis, accumulate money hoards through
current account surpluses, just as France and the United
States ‘played’ their trade surplus game by undermining the
gold standard rules of the 1920s.
Important Change in
Understanding of Monetary Policy since the 1980s
the late 1980s, banking and other retail financial services
changed far more than is commonly realised. While this is
true worldwide, changes in New Zealand, well illustrate the
key points.
Back in the day – the early 1980s and
before – term loans, including mortgages, were contracted
at a certain interest rate for the life of the loan. When
the focus of monetary policy turned to interest rates and
away from quantitative policy levers, the understanding
was that higher interest rates would deter new debt; and
lower interest rates would increase new debt, including new
mortgage debt. The understated presumption was that lower
interest rates would increase the uptake of new loans in all
sectors, yet there was a second (also understated)
presumption that governments would not be responsive to
changes in monetary policy; thus, monetary policy was
perceived as only applying to the business and household
sectors. Yet a rational government should be at least as
price-sensitive when undertaking debt as a rational
Something else happened in the late 1980s.
As the big trading banks absorbed the various retail
non-banks (such as building societies, savings banks, and
then finance companies) mortgage finance underwent a
fundamental change. As well as the majority of mortgages now
being issued by the increasingly powerful bank oligopoly –
the one-stop shops – the interest rates would only be
contracted for short periods; time durations well short of
the maturity date of the loan. Long-term finance was now
being priced as if it was a series of short-term
An important but rarely stated implication of
this change was that the average interest rate of a 30-year
mortgage would be the average of the short-term interest
rates over those thirty years. So in a world of economic
cycles through which short term mortgage interest rates
fluctuate between say 3% and 7%, then the average interest
rate would be 5% regardless of what the interest rate is at
the time the loan is issued. On the basis of the ‘rational
expectations’ mode of thinking (which also took-off in the
mid-1980s) the interest rate should not have any impact on
the quantity of new mortgage lending, because the expected
average interest rate would be 5% regardless.
chatter in the media and academia as if high interest rates
do discourage new mortgage lending, and low interest rates
do encourage more. For example, there is a widespread
supposition that new mortgages issued in 2021 were
substantially facilitated by the low interest rates
prevalent then; and that, therefore, if interest rates had
been significantly higher in 2021 then the short-lived
housing bubble that year would not have happened. But this
does not survive the ‘rational expectations’ test; if the
critical factor in 2021 really was unusually low short-term
interest rates, then the bubble will have been caused by
irrational expectations of average interest rates over the
duration of the mortgage.
This century, the perception
of tight money policy as a deterrent to new lending has
gradually given way to the perception that mortgagors have
become the ‘meat in the monetary policy sandwich’; the
perception that monetary policy works through targeting the
discretionary day-to-day spending of this narrowing cluster
of middle class and upper-working-class
households.
Though less discussed in mainstream media,
there also remains the widespread perception that tight
monetary policy works through restricting the growth of
business lending, especially small-business lending; lending
which was always based on short term debt. One irony here is
that reduced small-business lending encourages more mortgage
lending by banks, especially given that under the one-stop
banking-shops the same institutions are now doing both types
of lending. We saw that particularly in the years 2004 to
2008, when increased mortgage lending stimulated a real
estate bubble despite a tightening
monetary policy implemented through the Reserve Bank
imposing higher interest rates. It is likely that something
similar happened in 2021; banks pushing new mortgages
(regardless of the interest rate at the time) because of the
huge risks then-associated with small business
New Zealand Exceptionalism
Zealand central bankers gloried in being at the vanguard of
these changes in global monetary policy intervention. In the
late 1980s, the monetarists – very much in control in New
Zealand as a result of the financial reforms of the
mid-1980s – pushed the ‘money-as-a-veil’ idea, that
CPI-inflation was a simple derivative of the increasing
quantity of money, that inflation could therefore be made
‘illegal’, and that the Reserve Bank would become the
monetary police. In the absence of evidence of its efficacy
– inflation in New Zealand was lower in the 1990s than in
the 1980s, though there was no evidence that the new
framework for monetary policy had caused inflation to be
lower (there was a general decline in global inflation in
the 1990s) – ‘direct inflation targeting’ became prevalent
practice internationally. New Zealand features in American
macroeconomics’ textbooks for that reason.
notion that underpinned New Zealand’s 1989 Reserve Bank Act
was precisely the naïve presumption that underpinned Hume’s
price-specie-flow mechanism in 1750, in the world of the
1980s the only way to implement such policy was through the
creation of an independent monetary police-force. And the
only way those police in most countries could (at that time)
contemplate performing their task was through the
interest-rate lever. The transition from free-market
monetary economics to manipulative monetary oversight was
now complete, undertaken by interventionists who claimed to
be free-market ideologues. (Alan
Greenspan, Federal Reserve Bank chairman in the United
States, was indeed a member of Ayn Rand’s ‘objectivist’
inner sanctum.)
My next article
looks at good monetary policy in the last 100 years,
especially New Zealand in the 1930s (NZ after 1933 and 1934
and 1935), Keynes’ monetary and fiscal balance, Social
Credit, reserve asset ratios, Japan’s recovery from crisis,
and Modern Monetary Theory. I will mention the recent
‘labour mercantilist’ idea of Roger Douglas and Robert
MacCulloch. And will mention that idea’s Australasian
precursors; and the associated problems with wealth funds,
especially Sovereign Wealth Funds. And I’ll mention
Ricardian equivalence, with its much-touted reason given by
economic liberals to justify fiscal conservatism, thereby
putting all their policy eggs into monetary
Keith Rankin (keith at rankin dot nz),
trained as an economic historian, is a retired lecturer in
Economics and Statistics. He lives in Auckland, New
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