Politically, the monetary authority might be thought of as having grabbed (as Hayek described it) a “tiger by the tail.” While everyone agrees that a tiger ought never be grabbed by its tail in the first place, once someone does grab a tiger’s tail, that person is at risk of being bitten and clawed when he lets go. But by holding on to the tiger’s tail, he can delay facing the risk of being bitten and clawed. Holding on, though, only makes the tiger angrier, so that when it finally does break free—as it eventually will—the beast is even more likely to attack, and to attack with greater fury, the person who held its tail.
Understandably, at each moment in time, the person holding a tiger by the tail is tempted to hold on just a bit longer to delay the risk of being mauled by a big angry cat. Every moment of delay in letting go, however, only worsens the danger that will likely befall the person when he eventually does let go. And to make matters worse, at some point the tiger will become so furious that it will manage to break free on its own. The danger to the person who held on to the tiger’s tail for that long will be enormous.
The difficulty of stopping inflation is very much like the difficulty of letting go of a tiger’s tail. The mechanics of doing either task are incredibly easy: just stop printing money (to stop inflation) or relax the muscles in your hand (if you’re holding a tiger by the tail). Yet in light of the anticipated consequences of stopping inflation or of releasing a tiger’s tail, the task in either case is indeed challenging. In both cases performing the task requires not only the wisdom to see that continuing the current course will only make matters worse, but requires also the courage to confront the danger as soon as possible instead of delaying that confrontation.
Unfortunately—and here the analogy with holding a tiger by the tail breaks down—by continuing the growth of the money supply, many people in political power today can themselves personally escape any resulting political dangers. The bad effects of more inflation today won’t materialize until sometime in the future, when many of today’s officials will be out of office. So officials in office today can, by keeping the money supply growing, make the economy appear to be healthier than it really is, while the costs of creating this illusion will be borne only in the future by mostly different officials.
This political bias in favour of inflation is the chief reason justifying arrangements that strictly regulate changes in the supply of money. Returning to the gold standard is one option. Alternatively, the economist Milton Friedman (1912-2006) famously proposed a “monetary rule” that would prohibit central banks from expanding the money supply beyond some very small amount (say, by no more than three percent annually). Hayek himself came to favour denationalization of money—that is, getting government completely out of the business of issuing money and controlling the money supply. Competitive market forces would instead be responsible for supplying sound money. (Friedman himself, just before he died, became so skeptical of central banks that he argued that government be stripped of any power and responsibility to regulate the supply of money.)
Whatever the particular method used to eliminate political discretion over the money supply, eliminating such discretion should be among the highest priorities for those who seek an economy geared to solid, sustainable, and widespread economic growth.
Just as recovering alcoholics are wisely advised to avoid alcohol completely—and just as thrill seekers are wisely advised never to grab the tails of tigers—a people are wisely advised never to allow their government to exercise discretion over the supply of money. Following such a rule is the only sure way to avoid inflation and the many ills that it inflicts on an economy.