Dollars and pounds: euros and yen

Dollars and pounds: euros and yen

Christopher FildesA talk given at the Economic Research Council on Thursday, 5 October 2000

Keywords Currency, Economics

Monopoly money

I wanted tonight, if it is not thought too politically prejudiced, to develop the ideas of a much under-rated political thinker long before his time, the much-mourned leader of the Monster Raving Loony Party, Screaming Lord Sutch. I am sure you all remember his cheerful, top-hatted figure moving from by-election to by-election to by-election, and I think it was plotted that there was such a swing over the years in his favour that he might easily have come to power but for his untimely demise. His thinking on economic matters was very far-seeing, in a sense, as I say, before his time. You will remember his attitude to competition policy, which was to ask: why should there only be one Monopolies Commission? Now I feel that, had he been spared, he would have developed this theory into the one of monetary economics, and the question he would be asking now is surely "Why should there only be one single currency?" Because put like that it is a very fair question. A currency is a service, the provision of a currency is something that a service industry does, its customers pay for it one way or another, whether they like it or not, and you would have thought that an attempt to establish a monopoly across the continent of Europe would perhaps catch the attention of Mr Mario Monti and the Competition Directorate. Indeed, come to think of it, why should there only be one Mario Monti? Yet, so far from this exercising his mind, all the argument is for extending this monopoly over a wide area. You may have seen that Professor Robert Mundell, Nobel Prize winner for his work on the optimal currency zone, so-called "father of the single currency", was saying, when the IMF met in Prague, that clearly the next step was to have a single currency for the entire world. This produces, I think, a wholly new sense of the word "optimal", as in the case of a currency zone it clearly means "big". Indeed it seems to me, on that argument, one might wonder why he stops with the world. What is wrong with the solar system?

However, there is a market in these things; there is resistance, if that is the word. At any rate we saw in Denmark that, if the Official Monster Raving Loony Party were to move its campaign to the welcoming shores of Denmark, it might easily get in. It successfully resisted what one might call a tendency long established in Denmark, the "Polonius tendency", implying, as it does, that elder statesmen know better, better certainly than the people whom they are addressing and administering. Unfortunately for them the "Polonius tendency" got a sharp knife through the arras. But the question which it seems to me this poses is: what is the attraction for its managers of this phenomenon? I think to put the question that way is almost to answer it. You will remember what Lord Mancroft long ago said about monopolies – he said "monopoly is like a baby – nobody really likes them until they've got one of their own".

A case study

Well, if you have got one of your own, it really is most attractive. I have here the accounts of a well-known trading monopoly in this area. I will not name it but its registered office is in Threadneedle Street, easily our most successful nationalised industry, and I pick up this large document to show you that the figures are tucked away on p. 85. These show that what they describe as the Issue Department, on a turnover of £1,383 million, made a profit of £1,317 million. The sort of margin that we would all of us I think in our business lives envy, and from the proprietors' point of view the only disadvantage of this wonderful banknote business is that owing to the Bank Charter Act of 1844 every penny of it has to be paid to the Treasury. The Bank of England is still trying to find ways of getting it back. I think that all I need add to that is that this profit – seigneurage, as I think it is technically called – rises when interest rates rise, when nominal interest rates rise, and therefore the higher the rate of inflation, the higher the profitability of running a banknote business – so long as your notes are still worth the paper they are printed on. There is a positive incentive to inflate the currency, but it is obvious why that should be so – the only limit is what you can get away with. It is also a great help in maintaining such a monopoly as that, if you can use either your powers in the marketplace or your powers of legislation to preserve it.

Competitive advantage

We can all remember the time when we could have been prosecuted for holding anybody else's currency but the Bank of England's issue. If we had held gold, gold bullion, gold coins even, if we had had the only monetary store of value that does not depend on anybody's promise to pay, if we had done that, we would have been put in prison. This was true for the greater part of my lifetime. You can see that central banks naturally wish to operate the market in a way to give their own branded product preference. There they sit, they are as we know the world's largest holders of gold, they sit there on their hoards like broody hens on addled eggs, and they attempt to reduce its value as best they can because they regard it as competitive to their own production. In just the same way the International Monetary Fund, whose hoard of gold is second only to the one in Fort Knox, has for 30 years been attempting to persuade us that its own brand currency, the Special Drawing Right, is not just as good as gold, but better. I still think it has some way to go.

Euro – "seriously drunk"

But I think you can go beyond that, and say that from our point of view as customers we have not been well dealt with by these monopoly suppliers, and certainly not in the last century and particularly not in the last half of it. It is not, I think, proper for me to chuckle about the table that you continue to see in the Financial Times called the "progress of the euro", except to say that I understand that Mr Lambert the editor is looking for some ironic type to set it in. But this store of value has not, shall we say, entirely lived up to its prospectus, agreeable as it is for me and for us all, to cross the Channel and enjoy the benefits of the ten-franc kir and the 3,000-lire negroni. These rates of exchange from the point of view of the travelling drinker are exceptionally favourable. There has been nothing like the lira rate in my lifetime. I was testing it in Siena earlier this year and it was clear that you could get seriously drunk and have change out of a tenner. Perhaps we should not recommend this.

Pound sterling – still promising

All the same, agreeable as it is to find the pound sterling actually useful and welcome, it does come as a surprise for people who have lived through what has happened to it. It is a hideous realisation that after a quarter of a millennium in which the currency held its value very well, very stably (except in three periods of war), its destruction has come in 50 years of peace. In those 50 years it has lost 98 percent of its value. Here we are: our banknotes are still "promises to pay" signed by the lovely Merlyn Lowther, worth it for that alone. "I promise to pay", she promises to pay me, but these are the promises that the witches gave Macbeth. As he said: "They keep the word of promise to our ear and break it to our hopes".

The road to competition

But I do not believe it has to be like that, and I am sure I can, in this company, call on a greater economic thinker than Professor Mundell, if such a thing were possible (F.A. Hayek), who argued, now 20 years or more ago, that what we needed were competitive currencies. He argued that there would be a sort of reverse Gresham's Law, that good money would drive out bad, that we would prefer the promises that would be kept, and kept in word and in deed. He went beyond the idea of national currencies to argue that, we might well prefer, as it might be, a "Rothschild's promise to pay" to a "Chancellor's promise to pay" or even (though not in this country) "a Governor and Company's promise to pay".

This has long been thought, apart from people who dismiss it as absurd or unthinkable or incorrect or not forward-looking or contrary to the tide of history, other non-arguments in this category – this has long been thought simply impractical, simply something that has not happened, could not happen. It is happening in front of our eyes. It is happening, for example, in southern China, it is happening in Guangzhun where I am told that a third of the note issue is now the issue of the note-issuing banks of Hong Kong – that is to say the promises to pay of three commercial banks: Hong Kong and Shanghai Bank, Standard Chartered, and of course the Bank of China. If you say that that is an unfair example of a private competitor in this market (because after all these notes have backing), let me draw your attention to the state of affairs which I believe to exist (again I am open to correction) in Nigeria. I am told that there are two currencies in Nigeria competing side-by-side, both as stores of value and as media of exchange – the classical functions of currencies.

One of these is the official currency of the Nigerian government, the nailu, and the other is the $20 bill. I hesitate to call it the US$20 bill, because what I mean is the forged US $20 bill of local manufacture. All experience shows that both as an acceptable medium of exchange, and as a reliable store of value, the forged $20 bill knocks the nailu into a cocked hat. Perhaps if I were to produce one more example even within our own sphere: thank goodness, now that exchange control is a thing of the past, we are free to pay our bills in this country in any currency that our supplier is prepared to accept.

If Rover wants to pay its bills in a currency other than sterling, that is entirely legal and a binding contract could be made. It could pay in sweet papers, if it could get anybody to take sweet papers!

The wisdom of Darwin

There is no need (to help Rover, or to help Nissan) to establish a new "monopoly currency" in this country. That is merely to burn down the house to roast the pig, and not a very good recipe for pig at that. So if, as I had hoped, the Official Monster Raving Loony Party were to take up this campaign, perhaps we could all sign at the door – the text I would produce for it is Darwin's from The Origin of Species, of course: "Owing to this struggle for life, variations, if they be in any degree profitable for the species, will tend to the preservation of the species. The more diversified the species becomes, the better will be its chance of success in the battle for life." It seems to me that that applies as much to economic life, monetary life, as it applies to the life of species or to the life of biology, of which Darwin wrote. So I urge the Official Monster Raving Loony Party and its allies to devote themselves to the course of monetary biodiversity, and to ally themselves against the "Polonius tendency" in Denmark and out of it – totally itself with what I think you can properly call the Hamlet tendency. Hamlet: a man of original thought, and certainly qualified as an early Official Monster Raving Loony, because that was what he told Polonius, but he went on to explain that he was only mad nor' nor' west, and so are we.