Helicopter money from heaven
How to bolster stagnant economies
by Brian Reading in London
Fri 27 Jan 2017
Helicopter money is money from heaven. It is nobody’s liability and everybody’s claim. Costing little to print, it becomes a meaningless central bank book-keeping entry. It cannot be redeemed in gold, and is lent rather than spent. It is better than quantitative easing and asset price inflation for tackling inadequate demand, unless it generates product price inflation. At present, there is little danger of too much money chasing too few goods, particularly if increased demand creates supply and boosts productivity.
The concept of money for nothing is not new. The greatest forger of all time was the Portuguese Alves dos Reis. In prison for forgery, he devised a plan that would be better than just forging banknotes. Following his release, in 1924 he fooled Waterlow and Sons of London, the partly private Bank of Portugal’s banknote printer, into secretly printing genuine banknotes and handing them to him. He set up banks to launder the money and bought up shares in the Bank. He almost gained control until it was discovered that the serial numbers were duplicated. The duplicate notes could never be distinguished from the genuine ones and withdrawn. The increase in the money supply boosted the Portuguese economy.
In April 1930 John Maynard Keynes fell for a similar fraud. The full story can be found in volume 20 of Keynes’ collected writings, published by The Royal Economic Society. It was only discovered in 1979 in his Cambridge archives – in a previously unopened handwritten letter to Reginald McKenna, a former home secretary and chancellor of the exchequer, only to be delivered after Keynes’ death. McKenna died before him, so it was never delivered. The letter concerned a ‘new process’ by which gold could be cheaply refined from abundant volcano ash.
In 1914 a renowned German chemist, Charles Gladitz, was living with his English wife in England. He was interned on the Isle of Man during the first world war but allowed by McKenna to have a laboratory and continue his research. After the war Gladitz persuaded Keynes that he had, as Keynes wrote in the letter, ‘found a way to produce unlimited quantities [of gold] at a cost of 1 shilling an ounce’.
Keynes asked McKenna, who was then chairman of the Midland Bank, for the bank to finance a company venture to exploit the new process. The Bank of England, as agent for the Treasury, would secretly buy up the gold, making a huge profit for the company. Keynes and McKenna, and all others involved in the scheme, would get shares in the company. Not only would this make them rich, it would also release Britain from the shackles of the gold standard.
The Treasury and the Bank of England suspected a hoax. Taking scientists’ advice, they refused despite threats to sell the process to America. Nothing was known of this until the unopened letter was discovered. Had the claim been true and secretly exploited, it would have been money from the earth and perhaps saved Britain from leaving the gold standard in 1931. No doubt this was wishful thinking.
Helicopter money, while in one sense ‘money for nothing’, is a legitimate means of bolstering stagnant economies. It beats the alchemy of Keynes, and the forgeries of de Reis. The key is to give, rather than lend and leave a legacy of debt. Helicopter drops may not be the best way to hand out largess. But it is worth noticing that the 2016 Bank of England QE asset purchase plan was to print and lend £60bn. Since the UK population is around 65m, that is worth just under £1,000 per head. That seems good value for money.
Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.
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