The fantastical power of the printing press

Jamie Whyte
WHEN I was nine years old I learned that money is created by the central bank. This gave me a brilliant idea. Why not print up millions for everyone in the country and then we would all be rich.

My father put me straight. He explained that money is not in itself wealth. Printing more money would create no more food or cars or houses or anything else. It would merely increase the amount of money we would need to swap for anything we wanted.

If I am insulting your intelligence with this lesson, I am sorry. But people who ought to know better – people who are well over nine years old and supposed economic experts – appear to labour under my childish confounding of money and wealth.

The BBC’s business editor Robert Peston last Wednesday called for the European Central Bank (ECB) to lend money to governments that are unlikely to repay their debts. This is a good idea, he claimed, because the ECB is the only European institution “capable of creating unlimited resources”. On Sunday, Vince Cable, the business secretary, agreed with him. Cable claimed that the ECB “has to have unlimited powers to intervene to support economies”. Only Germany’s reluctance to unleash the ECB’s printing press prevents this unlimited power from being deployed. Peston and Cable are dangerously deluded.

Suppose the ECB took their advice and printed a trillion euros, bought most Italian government debt and told the Italians that they need not honour it – or at least not all of it, which is what would happen if the ECB took on Cable’s recommended role as “lender of last resort” to governments. This gift could be given at no cost to the ECB; “printing money” nowadays just means electronically crediting people’s bank accounts.

But the first lesson of economics is that there is no such thing as a free lunch. Someone must bear the cost of this gift to the Italian government and its creditors. In this case, the lunch is paid for by those holding euros. By issuing a trillion new euros, the ECB would dilute the value of the euros already in circulation.

Far from creating new resources when it creates money, the ECB merely transfers wealth from people with euros to people with debts denominated in euros. Bailing out over-indebted sovereigns with freshly printed euros is no different from bailing them out with funds raised by a tax on cash and bank deposits.

If Peston and Cable realised that when central banks create money they do not create wealth but merely tax those holding money, they could not think the power unlimited. Not only can you never raise more from taxation than already exists but the attempt to get anywhere near this absolute limit always has ruinous economic consequences. With this kind of tax on money, people become desperate to replace money with consumables and real assets, ultimately substituting the taxed currency with an alternative currency or with barter. At which point the central bank’s power to tax vanishes.

The Germans know this from bitter experience. We should be grateful for their influence on Eurozone policy. By contrast, the remedies proposed by Peston, Cable and all the other economic children who fantasise about unlimited powers to conjure up resources from central banks’ printing presses threaten Europe with economic calamity.

Jamie Whyte is a senior fellow of the Cobden Centre and author of Crimes Against Logic (McGraw Hill 2004).