Adair Turner is Chairman of the Financial Services Authority (FSA), "a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom." http://en.wikipedia.org/wiki/Financial_Services_Authority
The following represents Adair Turner's concluding remarks in a lecture he gave on February 6, 2013, at the Cass Business School, entitled, "Debt, Money and Mephistopheles: How Do We Get Out Of This Mess?"
MEPHISTOPHELES, MONEY AND DEBT
So finally then, what should we conclude about Mephistopheles, Money and Debt? For Jens Weidmann, the implication of Faust Part 2 is clear. After a pleasing but passing upswing of rising consumer demand and falling state debt "all this activity degenerates into inflation, destroying the monetary system because the money rapidly loses its value".
But Weidmann's stress on the negative consequence of Mephistopheles's monetary experiment has been challenged, and by someone who speaks with considerable authority. Professor Harold James of Princeton University is one of the world's preeminent economic historians and a leading expert on inter-war German economic history (James 1986). He is also a man steeped in knowledge of German history and literature. And in a short article entitled "Germany should re-read Goethe's Faust Part 2" (James 2012) his take on the consequences is a bit more positive (EXHIBIT 43).
"Everything in the empire improves as a consequence of the introduction of paper money. The generals are pleased because the soldiers are paid once more, the treasurer finds that he can pay off all the debts, tailors are busily making new clothes, ladies become more willing to embark on well paid romantic adventures".
So that while there are undoubtedly subsequent consequences which, in the wake of our own crisis, we would recognise as warning signs – "the property market booms and simpletons can buy big houses" – the potential benefits of paper money creation should not be ignored.
So who is right: Weidmann or James? Well in reality the differences in their interpretation are slighter than first appear: both refer to the beneficial effects of modest money creation, both to the dangers of inflation when money is created in excess. Leading us clearly to James's conclusion "a well managed paper currency could offer greater price stability than gold or silver based currencies", while also serving better the needs of a potentially expanding economy. Money – in its pure fiat irredeemable base money form - is a powerful economic medicine if used within tight constraints and a potential poison if used to excess.
As for debt contracts between private sector agents and in particular bank loans that create matching quantities of bank credit and bank money, they are not mentioned in Goethe's Faust. But as great economists of the 1930s such as Irving Fisher and Henry Simons correctly pointed out, uncontrolled creation of bank credit and money can be a major driver of financial instability and subsequent economic harm, even when the creation of irredeemable fiat money is tightly controlled, with fiscal deficits small or non-existent and inflation low.
This suggests two conclusions:
- First, that in the deflationary, deleveraging downswing of the economic cycle, we may need to be a little bit more relaxed about the creation, within disciplined limits, of additional irredeemable fiat base money.
- But second, that in the upswing of the cycle we should have been massively more worried than we were pre-crisis about the excessive creation of private debt and private money; and, that we should be wary of relying on a resurgence of private debt and leverage as our means of escape from the mess into which excessive debt creation landed us.