Further thoughts on monetary policy

The art of central banking and the quantity theory of money that dominates it can be traced as far back to the brilliant astronomer and scientist Nicholas Copernicus(1473-1543) in the sixteenth century. (See, T.Guggenheim, Preclassical monetary theories,London:Pinter, 1989)

Copernicus is the discoverer of the heliocentric approach to the universe which scientifically demonstrates that the earth and the planets revolve around our sun as opposed to the Church sponsored doctrine that the earth was   the centre of the universe.

He was also interested in money stock issues and developed a crude quantity theory of money.He did so in his work Monete cudendae ratio published in 1526 and commissioned by King Sigismond I of Poland.Copernicus was a member of a delegation trying to negotiate the return of assets belonging to the Chapter of Warmie in East Prussia that had been seized by a Prussian duke Albert de Brandebourg who was in turn a vassal of the King of Poland.At a meeting to discuss the return of these assets he was asked by the King of Poland to investigate monetary matters. See Y.Le Branch, Ecrits notable sur la monnaie, Paris: Felix Alcan, 1934. cited in Guggernheim, p34 note 7 So in a fascinating way international politics, science and monetary policy swirled together long ago. Not that much is new in the world today.

The astronomical insights of Copernicus were further developed by Galileo and it is upon their brilliant work that Newton, Kepler and Einstein furthered our knowledge of the physical world in which we live.Stephen Hawking the brilliant Cambridge mathematician and physicist has written about these pioneers recently in a book which also publishes excerpts of their work, On the Shoulders of Giants(Philadelphia:Running Press,2002) .

The time is long overdue for a reconsideration of the quantity theory of money as the bedrock principle of modern central banking and a return to the wisdom of Keynes who in his day was considered a genius of high finance and monetary policy. Keynes began as a quantity of money theorist but when the reality of the depression of the 1930s made it clear that strict monetarism and the quantity theory were deeply flawed he altered his theoretical conception and invented   or discovered a very different approach which conformed to the reality of the international capitalist economy and its tendency to have periodic cyclical downturns. This tendency has not been banished and in fact is made stronger through globalization and the reversion to pre Keynesian thinking in our central banks and international monetary institutions which continue to believe that laissez-faire is best despite all the evidence to the contrary.Our newly elected Prime Minister Mr. Harper may well suffer from this similar sort of bias given the Hayekian roots of his training and earlier academic education. The fact that he has already met with David Dodge to discuss monetary policy is intriguing.We shall see if Mr. Dodge goes full speed ahead on his deflationary course or alters his path before more damage is done.