34
vi
Note that the fact that the government and central bank together can always increase private
nominal net wealth and thus nominal demand, is a completely different question from the one
asked by Auernheimer in his famous 1974 article "The Honest Government’s Guide to the Revenue
from the Creation of Money” [Auernheimer 1974] Auernheimer was seeking to define a "revenue
maximising rule" i.e. what rate of money creation and thus inflation maximise the real resources
available to the government through (effectively) an inflation tax, and he illustrated important
potential limits to the government's ability to command real resources in this fashion. But such limits
have no implications for the separate question of whether a government and central bank together
can stimulate aggregate nominal demand, private and public combined.
vii
In fact there have been some cases in history were a government has sought to at least partially
reverse prior monetary finance. Thus for instance, the UK government paid for a significant part of
its First World War expenditures with monetary finance which produced a doubling of the money
supply [Ahamed 2009] but then pursued strongly deflationary policies in the 1920s in order to return
to the gold standard at the pre-war parity in 1926. But this subsequent reversal was certainly not
anticipated nor reflected in private agents’ behaviour, and during the First World War, the monetary
finance operation produced its inevitable consequence of significant nominal demand growth and
inflation.
viii
QE may also entail the disadvantage that, if the transmission mechanism is via higher asset prices,
it will tend to increase wealth inequalities, which in turn, may have had a role to play in the pre-crisis
expansion of private credit which has left us facing a debt overhang effect. The Bank of England
estimated in 2011 that as a result of its quantitative easing operations UK nominal GDP was about
1.5% higher than it would otherwise have been, with some positive effect on both prices and output
[Joyce,Tong and Woods 2011] This effect was in part achieved because QE, on the Bank’s
calculations, may have increased total household wealth by just over £600 billion.[Bank of England
2012] But since the top 10% of households own over 70% of all household financial assets, and a
higher proportion still of the government and bonds and equities whose value is increased by QE (as
against the bank deposits whose value remains unchanged) the distributional impact of the policy
was highly regressive. [See Turner 2015 p85 and note 23]
ix
This danger may be particularly severe because the vast majority of credit creation (potentially
stimulated by very low or negative interest rates) does not fund consumption or investment
activities which count as GDP transactions, but funds the purchase of existing assets and in
particular real estate. As a result, low interest rates can produce a huge build-up of private leverage,
creating subsequent debt overhang dangers, even if they produce only a moderate stimulus to
nominal demand, current prices and output. [See Turner 2015, chapters 4, 5,7, and 10]
x
What we do have is historical evidence of money finance either from the more distant past, or in
extreme conditions. This evidence supports the conclusion that the scale of the impact of monetary
finance on nominal demand depended crucially, to quote Adam Smith, on "the moderation with
which it was used". Moderate use of monetary finance had beneficial effects and did not produce
hyperinflation in for instance, the Pennsylvania Colony in the early 18th century, the Japanese
economy under finance minister Takahashi's policies in the early 1930s: and it was also used
effectively and without hyperinflation by US Union government in the Civil War, and the US
government in the Second World War. Excessive monetary finance led to hyperinflations in the US
Confederacy during the Civil War, Weimar Germany in the early 1920s, several Latin American
countries in the 1970s and 80s, and in Zimbabwe recently. The impact all depends on the quantity of
the monetary finance operation. [See Turner 2015, page 112- 113]