|The European Central Bank's nearly trillion euro quantitative easing is expected to boost inflation in the eurozone to closer to two per cent. (REUTERS)|
The spreading alchemy of central bank money-printing
Money for nothing and recovery for free? U.S.'s economic turnaround pulls EU into the pool
By Neil Macdonald, CBC News Posted: Jan 28, 2015 5:00 AM ET Last Updated: Jan 28, 2015 5:01 AM ET
Senior Washington Correspondent
Two years ago, I sat in the hushed fortress of the Bank of England, listening to one of its secretive boffins, a languid fellow named Paul Fisher, explain the creation and meaning of money.
He reached into his wallet and fished out a 10-pound note.
This note is worth 10 pounds, he said, because you and I and all the people walking around on the streets out there believe it's worth 10 pounds.
That's it. That's the only reason it has any value beyond the intrinsic value of the paper and ink itself. It's all about trust and belief.
Forget any notion you might have about every pound, or every dollar, being backed up by that much capital out there in the economy.
The gold standard was a myth, too, by the time it was abandoned in the Seventies. There was never anywhere near enough gold to back up all the American dollars in circulation.
So, money is worth what it is only because we continue to trust it, explained Fisher, and any central bank can print more without debasing it as long as everyone keeps trusting and it's all managed carefully by wise people, to wit the central bankers, who are unelected and make their decisions in secret.
It was a dizzying, counterintuitive lesson.
Neil Macdonald: The secretive world of printing money
Central bankers move from shadows to spotlight
A few months earlier, the head of Germany's central bank, Jens Weidmann, took another view of money, one much closer to my Protestant sensibilities.
He began the same way Fisher did, asking rhetorically what money is, then answering his own question: "Money is that which serves as money."
|Bank of England Governor Mark Carney and |
Germany's Bundesbank President Jens
Weidmann attend a conference of central
bankers in November. (Reuters)
In part two of the fable, the emperor is whinging about his constant need for more gold, and Mephistopheles, the devil, advises him that all he really needs to do is sign some paper and call it money and everyone will accept it, and all his problems will be solved.
The venal emperor and his courtiers proceed to do just that, "drowning their desires with love and wine," a Goethe line Weidmann quoted directly.
Eventually, the devil disappears and they realize the currency is worthless. The devil's money, Weidmann told his audience, led to inflation.