Central Bankism

Edward Luttwak

Communism is dead, socialism has been repudiated by the socialists themselves, fewer and fewer Europeans are believing Christians but it seems that a fanatical new religion – also practised in America – has replaced all of them: Central Bankism. Like all religions, it has both a supreme god – hard money – and a devil, inflation. Common sense suffices to oppose high inflation, and to fear hyper-inflation as the deadly disease of the currencies. But it takes the absolute faith of religion to refuse even very moderate inflation at the cost of immoderate unemployment and stagnation, as the Europeans have been doing, or to accept slow economic growth for years on end, as in the United States.

To be sure, the American version of central bankism is much more willing than its orthodox European counterpart to accommodate popular desires – the same is true of the other religions practised on both continents. Just as the Catholic Church is forced to allow more latitude in pragmatic America, where even devoted Jews drive on the Sabbath, the local version of central bankism has restraint imposed on it. The US Congress would legislate the Federal Reserve right out of existence rather than tolerate the horrendous levels of unemployment long prevalent in Europe. But the essential doctrine is identical. In the US, too, central bankism devalues labour rather than money, but instead of unemployment there are falling real wages – more than half of all jobs throughout the US economy pay less now than they did twenty years ago, in constant dollars. No wonder millions of new jobs keep being created, as Clinton keeps boasting: American labour is so cheap.

Like most religions, central bankism has its sanctuaries that inspire as much awe as any great cathedral: from the majestic Bank of England to the Greek temples of the US Federal Reserve, the massive modernity of the Bundesbank compound and the inevitable Umbertino of the Bank of Italy. The Nihon Ginko of Japan is housed in a solid but otherwise unremarkable office building on a side street, which is appropriate, given that until recently it was a servant of the powerful Okurasho, the ‘Treasury Ministry’, just as the Banque de France was a slave of the Ministry of Finance. As such, both were subject to the corrupting influence – dare one say it – of political decisions, though in truth both ministries are ultra-conservative élite strongholds, scarcely exposed to the vagaries of democracy.

Like many religions, central bankism has its high priests, constantly striving to assert their independence from secular parliaments, politicians and public opinion. Although, like any other public officials, they receive their salaries from the tax-payer, central bankers claim the right to ignore the public will by invoking their duty to a higher authority – the sacrosanctity of hard money. Central bankers in office – invariably for terms of Papal length, often prematurely renewed in fear of the fears of financial markets – are surrounded by an aura of sovereign power very properly denied to government ministers or even prime ministers and presidents, mere mortals voted in and out of office by the ignorant masses, or reshuffled at even shorter intervals. And when these high priests do at length retire, they are not uncommonly elevated to financial sainthood, their every fleeting opinion reverentially treasured, their candidacy for any position of special trust eagerly accepted, their very names talismanic, as with Paul Volcker in Wall Street and far beyond it, or Guido Carli in Italy, where the name of most past prime ministers evokes only opprobrium.

Because their own power derives largely from their supreme command of the crusade against the devil of inflation, central bankers naturally see His insidious presence everywhere. Very often, they detect ‘disturbing signs of incipient inflation’ or even ‘alarming warnings of mounting inflationary pressure’ in output, employment, and wage statistics that many respected economists view with equanimity, or find downright reassuring. Every time new statistical indicators are published, there are calls for slightly lower interest rates to achieve a bit more growth, but such outbreaks of heresy are easily squashed.

Simple, definitive proof of the doctrinal supremacy of central bankism can be found in the fact that any policy initiative that is branded as ‘inflationary’ is usually rejected out of hand. By contrast, the term ‘deflationary’ has no resonance at all. It is used as a purely technical expression, rather than a powerful condemnation of over-restrictive fiscal and monetary policies that strangle growth, and which in the Thirties brought about the Great Depression, political chaos, dictatorship and war. In the first instance it is the instrument of money that inflation hits, while deflation has an immediate impact on people, denying them the opportunity to work and earn, and to buy goods and services, which would allow others to work and earn.

It is perfectly true that real incomes and real wealth cannot be created by printing money, that inflation hurts the poor disproportionately as well as everyone who lives on a fixed income (‘the cruellest tax’) and wealthy rentiers who live on bond incomes. Inflation enriches all who are already rich enough to own real estate and other marketable assets, while disproportionately enriching smart speculators – but so does deflation. It is also true that, if unchecked, inflation naturally accelerates into hyper-inflation, which not only destroys currencies but also degrades economic efficiency – as people run to spend their suitcases of banknotes instead of working – and may even wreck the entire financial structure of a society. This being the worst manifestation of the devil, the ultimate Beelzebub, it is not surprising that in 1996, with inflation ultra-low at 1.5 per cent, the Bundesbank, when refusing to cut interest rates, still invokes the hyper-inflation of the early Twenties ‘that led to Hitler’ (it was followed by ten years of democracy, but never mind).

Inflation, then, is bad and hyper-inflation very bad indeed; but it is just as true that deflation is bad, and that hyper-deflation is disastrous. In economic theory deflation should have no consequences at all, because any upward movement in the value of money can be nullified by a compensating reduction in prices and wages. In practice, however, prices are downwardly sticky while very few employees anywhere at any time accept wage cuts without the most bitter resistance – even in the US with its mass immigration, increasingly unfavourable labour market and weak unions. Contrary to theory, deflation starves economies, even without taking into account the purely subjective mechanism that reduces real demand, and therefore real production and real employment, when people feel poorer just because the nominal value of their houses and other assets is falling. Inflation and deflation should therefore be viewed as equally objectionable by politicians and the public; they should resound in our ears as equivalent evils, like flood and drought, or theft and robbery. It is the greatest triumph of central bankism that only inflation is viewed as sinful.

Like all religions, finally, central bankism demands sacrifices from the faithful. Catholics, Jews and Muslims have it rather easy: central bankism resembles the Aztec faith in demanding human sacrifice. So far, we have yet to see Hans Tietmayer or any other European central banker climbing pyramids to cut out the palpitating hearts of young men and virgins with obsidian knives, but none of them hesitates to impose levels of unemployment that year after year after year deprive millions of young people of the opportunity even to start a career. Moreover, the central bankers have all the moral certitude of the Aztec priests. Gathered together last August with their host Alan Greenspan, chairman of the Federal Reserve, in Jackson, Wyoming (which instantly became the world’s premier resort), the central bankers congratulated themselves at length on their success in reducing inflation by keeping real interest rates high; they did not pause to deplore miserable growth rates, but engaged instead in a sort of reverse auction. As it is, the estimated 1996 growth rates for the G7 countries (US, Canada, Britain, France, Germany, Italy and Japan) average out at 1.8 per cent, which guarantees rising unemployment, simply because the labour force and labour productivity are conjointly increasing somewhat faster. Still, in Jackson the central bankers competed with each other in calling for even lower inflation rates.

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