It is simply a matter of time before the Federal Reserve finds itself having to choose between inflation and federal insolvency.
We live in strange monetary times. In Europe and Japan, central banks have implemented negative interest-rates to stimulate sluggish economies, despite overwhelming evidence that such policies aren’t working. The European Central Bank has even restarted its four-year old quantitative-easing program to try and overcome anemic growth throughout the Eurozone. Across the Atlantic, the Federal Reserve is trying to calibrate interest-rates to help America avoid a recession, even though there’s no consensus among forecasters of an imminent recession. Calls for the Fed to head towards negative-interest rates grow louder.
These trends suggest an international monetary system in which some of the world’s leading central banks seem driven by political reaction to immediate events and unfocussed upon what a primary goal of any sound monetary system: the provision of a stable unit of account that facilitates the free economic choices of consumers, households, and businesses over the long-term. From this standpoint, a type of monetary disorder is growing throughout the global economy.
Addressing the problem in a comprehensive way surely requires consideration of what truly constitutes order in a monetary system. Few people thought more about this question than the French economist and civil servant Jacques Rueff (1896-1978).
Searching for Order
Perhaps the twentieth century’s foremost French economist, Jacques Rueff is primarily remembered for designing the economic reforms (Le plan Pinay-Rueff) imposed by Charles de Gaulle’s incoming government in December 1958 upon a France mired in economic crisis. These reforms—trade liberalization, spending-cuts, major tax and welfare changes, the termination of subsidies to many industries, and the franc’s devaluation—are widely acknowledged as having saved France from a perfect storm of currency instability, high inflation, uncompetitive industries, feeble capital markets, and low productivity. During the last fifteen years of his life Rueff moved from the French to the world stage, becoming a leading voice for restoring the classic gold standard as the Bretton-Woods system gradually collapsed.
Rueff was, however, also deeply interested in fundamental questions of political economy. He emerged as a public critic of John Maynard Keynes as early as the late-1920s. During the same period, Rueff became convinced that the market economy and the monetary system underpinning it constituted a fragile set of arrangements liable to corruption and decay. In his own lifetime, Rueff witnessed several severe breakdowns in the West’s monetary systems. He had little confidence that solutions would somehow spontaneously emerge from below.
Like the German ordo-liberals Walter Eucken and Wilhelm Röpke, Rueff insisted that certain ordering decisions were necessary to establish and protect certain institutions if market economies were to survive. For Rueff, liberty emerged out of order—not the other way around.
Many of Rueff’s reflections on these matters are found in his most important book L’Ordre Social (1945). Large portions of this text were written during Rueff’s period of enforced exile from prominent public service by Vichy France throughout World War II on account of his Jewish antecedents.
L’Ordre Social is a difficult work. It integrates highly technical economics into reflections on the nature of money, the dangers of deficits, inflation, the rise of Hitler, and the state to arrive at a general theory of (as the book’s title suggests) social order. The key sections concerning monetary order are in parts six and seven of the book.
According to Rueff, market economies are based on social relationships which are far more delicate than we realize. Such relationships are hard to revive once they corrode beyond a certain point. Hence, Rueff argued, the state must uphold certain rules that reinforce these underlying relationships.
While Rueff partly had in mind strict enforcement of property rights and rule of law, he was particularly concerned with monetary stability. Market relationships would quickly fall apart if the state subordinated monetary stability to realizing objectives like low unemployment. Absent monetary stability, Rueff insisted, governments would likely resort to drastic measures like price controls to maintain order. Such policies would, however, thoroughly compromise liberty and further undermine the effectiveness of market exchanges, thereby generating more demands for intervention.
Real Rights and False Rights
But what type of framework should guide the state’s bolstering of monetary stability? This brings us to one of the most innovative aspects of Rueff’s thought about monetary order: his distinction between true or real rights (vrais droits) and false rights (faux droits).
By “real rights,” Rueff had in mind rights such as rights to property. These establish a minimum of economic order by clarifying who owns what, thus enabling people’s natural propensity and liberty to possess, use, and exchange things. Such rights nevertheless need to be given form, structure, and content by government policy and legal decisions. The establishment of contract laws, for instance, allows individuals to coordinate their use of their property in mutually beneficial ways.
The legal recognition of these rights is effective because it accords with economic truths about humanity. Such rights are thus “real.” Conversely, law and policies which contradict certain economic facts—supply and demand, the workings of incentives, humans’ tendency to pursue their self-interest, etc.—end up, Rueff says, creating “false rights.”
A government may declare, for instance, that people have a right to healthcare. But if markets in healthcare are not allowed to work, such a right merely exists on paper: hence, its “falseness.” Moreover, the fact that the state has affirmed this to be a right but proved unable to realize it, encourages disrespect for the law as well as increased demands by citizens that the government actualize what it cannot. In democratic societies, Rueff believed, it was hard for politicians to resist such pressures. This produces policies which magnify the proliferation of false rights through the economy.
The Consequences for Money
How then does Rueff’s conception of real and false rights shape his understanding of monetary order and disorder?
In L’Ordre Social, Rueff provides the example of a government which wants to achieve new goals. Instead, however, of paying for the costs by raising taxes or reducing expenditures in other areas, the government engages in deficit-spending. To disguise the real costs of doing so, it requires central banks either to buy government debt at below-market prices or to simply monetize the debt outright. In this way, Rueff writes, governments and central banks “inject false rights into the assets of [their] creditors, in a continuous fashion and an appreciable quality.”
One result of such policies is inflation. False rights thus make their way into the monetary system, undermining its ability to provide a stable unit of account. But the problem cannot be confined to the monetary sphere. The more that legislators view monetary policy as a way to avoid making difficult tax and spending choices, the more they abandon basic political responsibilities—such as telling citizens the truth about what is really happening. Monetary disorder subsequently hides from the citizenry the full costs associated with the propagation of false rights while simultaneously undermining political morality.
A contemporary instance of how monetary policy can create false rights would be central banks trying to keep unemployment low or stimulate growth via negative interest-rates and quantitative easing. In themselves, economic growth and low unemployment are worthy goals. Yet negative interest-rates and quantitative-easing generates false rights. Examples might include zombie banks being kept afloat instead of being allowed to enter bankruptcy, or the building up of financial assets whose viability depends on the steady flow of easy money into the economy. Another consequence of these false rights is to make much of the population, the financial sector, and politicians resistant to proposals to get the economy off its easy money addiction.
One reason why Rueff was so committed to restoring the classic gold standard was his conviction that it would dramatically limit the opportunity for governments and central banks to inject false rights into the economy via monetary policy and consequently corrupt economic and political life. Rueff also pointed to the gold standard’s formidable success in maintaining price stability, thereby actualizing a crucial legal right needed for sustaining market relationships over the long-term.
The key to monetary order, Rueff teaches us, is to create institutions which help market relationships to function, rather than subverting them. Establishing and protecting such rules requires the inner conviction needed to resist temptations to short-termism, and a fortitude that seems beyond most legislators and many central bankers today. That, however, is all the more reason for us to listen to Jacques Rueff—someone notoriously unafraid to speak economic truth to politicians of all persuasions—and heed his insights in our own age of creeping monetary disorder.