I think that the hon. Gentleman should read my article on 4 May 1974 in Tribune which dealt with all the years when we had a gold standard and the relationship between stable money and a stable gold supply. My article showed up all the problems that arose. In discussing the value of monetarism, one can talk about its effect on inflation and on unemployment. That is critical to the Chancellor's Budget strategy. I shall return to the argument advanced by Professor Brown, Hendry and Erickson.
It has been said that monetarism implies that M3 causes inflation. The problem is that, unless the banks can charge different interest rates from those charged by other institutions, it is theoretically and practically impossible for M3 to cause inflation. It has been said also that the public sector borrowing requirement causes inflation or causes M3. That is a theoretical impossibility unless there are differenial interest rates.
Mr. Peter Jay, who used to write for The Times, said that inflation was caused by public sector expenditure, but that is nonsense and he was forced to retract that statement. The former editor of The Times, Sir William Rees-Mogg, said that there was something inherent in the scriptures of both Judaism and Christianity which suggested that countries needed stable money and that that could be achieved only through the gold standard. That was the reason why I wrote my article, which corrects the misapprehension of the hon. Member for Stratford-on-Avon (Mr. Howarth).
We do not need to go back to those ancient authorities and to people such as Mr. Peter Jay and Sir William Rees-Mogg, who might be considered as excessive Socialist sympathisers of yesteryear, to support our attack on the Chancellor's broad economic strategy in the Budget. We can examine "Origins of the Monetarist fallacy—The Legacy of Gold" by Roger Bootle. He is the chief economist of Capel-Cure Myers and not a radical Socialist. He said that the problem faced by the Chancellor and the House started in 1956 with a statement by Professor Milton Friedman, who said:
there is perhaps no other empirical relation in economics that has been observed to recur so uniformly under so wide a variety of circumstances as the relation between substantial changes over short periods in the stock of money and in prices; the one is invariably linked with the other and is in the same direction; this uniformity is, I suspect, of the same order as many of the uniformities that form the basis of the physical sciences.
There has been a great deal of statistical analysis since then. It shows that that statement is not just empirically false but it bears no relationship that has been observed to the physical science. It was a seminal statement that hit the Western world as much as Keynes's general theory and far more than anything that Karl Marx had said years before.
That seminal statement was quickly taken up by the academic world. It succumbed; and shortly after the
media, political parties, officials who worked for the Government, and then Governments, succumbed. Then came the 1973 oil crisis and terrified bankers, officials and Governments around the world stretched out for something on which to hang. The only thing that appeared to be present was monetarism. That is where we come to the sedentary intervention of the hon. Member for Stratford-on-Avon who correctly said that I had the date wrong. Of course, I had. In 1975, the then Labour Government started to produce the first of the monetarist Budgets. The important point about the analysis—I again questioned the Chancellor about it in the Select Committee on the Treasury and Civil Service — is that Roger Bootle observes that
no one is able satisfactorily to define the concept of 'the money supply' in theory, let alone identify it in practice.
Indeed, the basic concept of the money supply is meaningless.
Roger Bootle says that the problem comes from the fact that we have confused commodity money with credit money. Of course, the gold standard provided commodity money. Commodity money is liquid. In his document, which was presented at a lecture recently because it was thought to be important in relation to the impending Budget, he said:
(a) it represents immediately available purchasing power; ….(b) it carries no credit risk; (c) it pays no interest; (d) together, these characteristics make it capital certain.
Credit money is not the same kind of money. It is nonsense to start arguing on the basis of commodity money and credit money. He said that credit money may be illiquid.
(a) bank money may not represent readily available purchasing power … (b) it carries a credit risk (the risk of bank default); (c) it may pay interest; (d) because of the above, it may be capital-uncertain (as with certificates of deposit).
Roger Bootle goes on to argue from that, and I agree with him, that we should pay less attention to the monetary aggregates and more to price variables—the exchange rate, rates of interest and the structure of rates of interest.
I should argue—I believe it is one of the answers to the question that the hon. Member for Stratford-on-Avon raised — that over the long term, if one studies the relationship between the money supply and inflation, one finds that they can be stuck on graphs and be shown to be going in the same direction but they tell us nothing about cause and effect.
The fundamental problem that Professor Friedman has faced — even if his statistics were right, and in a moment I shall show that they were not—is that he never proved the cause and effect. That has bedevilled the argument for a long time.
If there are those who are wont to believe in the arithmetic of monetarism and the arithmetic that the Government have used, I would refer them to the document, "The Failure of Monetarism" by Christopher Johnson. He is not exactly a radical Socialist; he is the group economic adviser of Lloyds Bank. This document is dated December 1982. Christopher Johnson, who is, I believe, one of the advisers to the Treasury and Civil Committee, in one of his more important paragraphs writes—
enormous double figure rises in sterling M3 in the last four years, "—
given the date of the document, that was the period from 1978 to 1982—
followed by a dramatic fall in the inflation rate, should be enough to disprove the simple St. Louis model once and for all.
I hope that the Financial Secretary to the Treasury, when he replies, will accept that we have disproved the St. Louis model once and for all or, if he believes that we have not disproved it, will say on what basis the model can still stand.
Christopher Johnson goes on to say:
Failure in controlling money has been rewarded by success in bringing down inflation, and it seems unlikely that the two are connected. If anyone is tempted by this to switch the horse he is backing to monetary base or sterling M1, he should be reminded of how the rapid growth of these narrow aggregates in 1975–77"—
something I referred to in my document—
was also followed by a dramatic fall in the inflation rate in 1978.
He sets out the evidence in a table at the end.