Briefings for Britain | Fri, Mar 26, 2021
by Paul Sheard
A lot of people are worrying that all the money governments and central banks are printing to deal with the Covid-induced recession is bound to lead to runaway inflation in the future. That would seem to be the lesson of much monetary and fiscal history. There is, however, a critical but highly dubious assumption underlying such dire predictions: that central banks will allow this to happen. As long as central banks remain independent, that is, insulated from political control, they won’t.
As Milton Friedman famously put it, “Inflation is caused by too much money chasing after too few goods”. There are two parts to that dictum – the money and the goods – and both appear to have played a major part in the notorious hyperinflations of the twentieth century. Sometimes governments ran the printing presses too hard and sometimes wars devastated the productive capacity of economies.
Society figured out how to solve the inflation problem in the second half of the twentieth century by assigning to central banks the task of controlling inflation and giving them the independence from political influence to be able to do so, to be able to “[remove the punchbowl] just when the party was really warming up”, as Federal Reserve Chairman William McChesney Martin famously put it way back in 1955.