Double-digit interest rates and the shrinking value of our money were not forced on us by nature, says Dr Richard Grant. Understanding this is the first step towards protecting ourselves, our savings, and our assets from the ravages of future high interest charges and inflation.
Dr Grant is an economist and former professor of finance and economics at universities in several countries - and taught at the University of the Witwatersrand. For the benefit of the layman and economist alike, his story unfolds in simple and satisfying steps as he clarifies each issue and deals with common misconceptions:
We need supportable rules for a monetary policy.
Money, the medium of exchange, is the messenger which transmits the market knowledge we all need.
Price inflation is man-made and caused by over-issuing the currency.
Various non-causes (e.g. "overheating") and temptations (e.g. wage pressures) create political pressures, but these do not shift practical responsibility from the Reserve Bank, which alters the monetary base, M0, sometimes called high-powered money or the cash base.
Inflation ("cost-push") does not force the Reserve Bank to increase the money supply.
Inflation is an expensive and destructive form of taxation by stealth.
Market interest rates combine the three components of time preference, risk premium, and price inflation premium.
Interest rates are market phenomena which reflect the preferences and interests of savers and borrowers, and are not improvable by central bank tinkering
Central banks should not interfere with the market by exercising statutory control over foreign currency dealings, reacting to so-called balance-of-payment constraints, or trying to fix or restrain exchange rates.
Money itself is not the object of exchange, and central banks should not attempt to control money demand by manipulating interest rates, and by attempting to modify the spending behaviour of millions of individuals.
By their poor performance, central banks have failed to prove that their monopoly privilege is superior to free banking (unrestricted, unprivileged and competitive) with minimal state involvement.
We should seek stable or predictable value of the monetary unit under acceptable and constitutionally entrenched rules of general application.
Free banking, whereby private banks are allowed to issue their own notes and deposits based on any money (which means that the central bank would not have a government-granted monopoly in note issue) is an alternative that would be better than the present central bank monopoly with notes unredeemable in gold or other commodities.
Imposing rational constitutional rules on a central bank, thereby limiting its power, while constitutionally protecting the right to choose and supply private money alternatives. This would provide evidence of people’s preferences, and would be the lowest-cost means of ending inflation permanently and of bringing net benefits rapidly.
Dr Grant concludes by recommending specific rules for a monetary constitution.
Real Money was published in memory of the late Dr AD Wassenaar with the support of the Wassenaar family.
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Also by Richard J Grant
Gold, the euro, the dollar and the rand
Dr Grant, in his latest recommendations, takes management of the rand a step closer to integration with the international monetary system.
Monograph #29
The Real Reason for the Fall of the Rand
From July through November 2001, the monetary base (better known as M0), which is the quantity of real money actually produced by the Reserve Bank, increased from R40.3 billion to R45.9 billion. That is an increase of 13.8 percent over four months, which if continued for a year would result in an annual increase of close to 50 percent. Part of the increase in M0, R1.75 billion, was to accommodate an increased need by commercial banks for reserves due to a change in official reserve requirements. Allowing for this, the effective change in M0 from July through November was over 9.5 percent, which is over 31 percent in annualised terms.But it did not stop there. The figures for December showed a further one-month increase of 6.56 percent. Over the five-month period from July to December 2001, M0 increased by 21.3 percent – adjusted for required reserve changes, the effective rate is 16.5 percent. That corresponds to an annualised nominal growth rate of 59 percent, and an adjusted rate of 44 percent, which is a huge dose of cash for any economy to absorb. It should be no wonder that the rand has fallen in an almost mirror-like fashion.When M0 increases significantly, the general price level tends to go in the same direction. All prices, including exchange rates, are affected in the same way, and will tend to be higher than they would have been. That is why price indices, such as CPI and CPIX, tend to move in the same direction as the rand prices of foreign currencies. Exchange rates respond to changes in the monetary base, and usually do so more quickly than do other prices.
Nationalisation: how governments control you
We tend to think of nationalisation as taking control of material things, of the "means of production." But what it really means, argues Dr Grant in this readable and closely reasoned book, is taking control of people. The more property the government controls, the less economic freedom we have. And without economic liberty, political liberty is little more than a charade.
If we want to promote freedom and the higher standard of living that goes with it, concludes Dr Grant, we must not only stop nationalisation but reverse it. Denationalisation and deregulation will help bring about a peaceful and prosperous society.
Exchange controls must go
In this Monograph Dr Grant argues that the special problems of third world countries do not create a need for special government intervention. On the contrary, it is government intervention that creates the problems that give countries third-world status. He contends that some of the most basic solutions include reducing taxes, reducing inflation and eliminating regulations.
Monograph #6
The fallacy of national control
In this Monograph Dr Grant contends that prosperity can come only with economic liberty. And that without economic liberty, political freedom is a charade. He argues that a combination of privatisation and deregulation is the most powerful and reliable force for upliftment that there is.
Monograph #5
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