Article in the Scotsman by John Blundell

LAST week saw obituaries of Aubrey Jones, the cool and analytic minister under Edward Heath who operated the futile “Prices and Incomes Policy” in the early 1970s. We must be courteous in death but we might be allowed a snigger at the wild fatuity of the Tory policy of the time.

Aubrey Jones, and the entire panoply of the state and its legal system, were busy fixing prices to stop inflation. In 1971 grown-ups were allowed to think the dissolving of the currency was the result of greedy trade unionists or more sinister Arab oil sheikhs. Businesses were also said to be putting up their prices contrary to the wishes of the defunct Mr Jones.

With its characteristic naïvety the CBI went along with the nonsense. Inspectors would raid greasy spoon restaurants and fine them for increasing the price of bacon butties. The Scotsman was admonished for raising its price even though the cost of paper had doubled. Petrol prices were a capitalist conspiracy.

The entire venture was pure folly. Prices go up not because of sinful traders or consumers but because the Central Bank is printing more money than is taken in tax receipts. Inflation is wholly and exclusively caused by governments. Double the notes in circulation and prices will double.

For more than a generation Maynard Keynes had mesmerised the policy makers. His bowdlerised thesis was that a little bit of inflation did you good – it dissolved debts and made government procurements cheaper. The idea that inflation was benign seemed true. The years after the Second World War had been ones of rising prosperity accompanied by inflation.

That landscape of assumptions has largely gone now. Only a few tyrants like Robert Mugabe pretend prices rise because of a deceitful citizenry. Several distinguished minds contributed to this counter revolution in economic thinking – endorsed by raw experience – but Milton Friedman has a strong claim to leading the new way of thinking.

Yet Friedman’s position has a deep anomaly within it. His entire cosmology is a belief in markets and a severe doubt that politicians can deliver any services with anything near the competence of entrepreneurs.

If the state is inept, even corrupt, he seems to have a blind spot about the state running money … and enjoying monopoly powers. This part of Friedman’s mental furniture has been adopted and extended by the European Commission to create a supra-national money monopoly – the euro.

All public discussion on the prospects of the UK surrendering the pound are conducted on the assumption that we can be in or out. Who ever asks if the authorities need to preserve their monetary monopoly? There is an alternative: let private banks issue their own notes. Scotland had a long history of private bank note issues and even of private coin issues.

Only coin collectors and economic historians believe the claim that the Scots banking note issue was only extinguished by Sir Robert Peel in the 1840s. We still see Scottish notes in our pockets but they are merely receipts for Bank of England notes.

Could we open up a new front on the policy horizon? Friedrich Hayek, argued in Denationalise Money that the politicians and their agents, the central banks, should forfeit their monopoly. His assertion is that honesty or reputation would be tested daily on the exchanges.

We can see in half the nations of the world the local state monopoly currencies are little more than cruel jokes. People prefer to trade US dollars or possibly gold coins. In some territories the US dollar has displaced the central bank.

Inflation in the UK – how I wish it was termed “dilution” – is bobbing along just beneath 3 per cent. Far better than Edward Heath’s 20 per cent but at our modest rate prices still double every 23 years. So, here is a huge disagreement in the centre of what we might call liberal thinking. Should the state have the power to coerce us and if so should it be forced to obey monetary rules? Gordon Brown’s innovation of giving the Bank of England autonomy and inflation targets is something of a mirage.

If he reduces or raises taxes sharply the Bank of England has no levers. Despite the fanfares the euro has been less than a triumph. The quiet success on the Continental monetary scene is the Swiss franc. Opt-outs are important. They are a truth test.

I like and admire Milton Friedman. I hold his scholarship in awe. Yet there is a great curiosity that the leading disciple of the capitalist ideal has built his main reputation in advocating a state monopoly – even if it is urged to be plain-dealing and open in its policies.

Hayek’s subversive arguments appear to me to be rather stronger. Professor Lawrence White of New York University and Professor Michael Fry of Brown University have published acute pieces of research which retrieve Scotland’s lost memory of how banks can succeed as issuers of notes and coins. I doubt if a single MSP has read these studies or could even articulate the arguments.

I used to imagine private money would emerge as a response to monetary chaos. Now policy makers have recovered their continence inflation has lost much of its bite. Yet can you imagine any of the respectable representatives of the capitalist cause proclaiming they could easily supply a more trustworthy currency than the state? The great intellectual defeat of the socialist ideal is nearly complete but they still hold a few fortresses where alternatives are crushed.

I’m not suggesting central banks be abolished, only that they have to surrender their power to compel. There is a scandal so familiar we no longer see it as a scandal – that the civil service and public sector employees enjoy “index-linked” pensions; that is to say they can opt out of the inflation imposed on the rest of us.

Now the appreciation that inflation is purely a monetary disease is almost universally agreed we might be bold and see companies creating their own monies.