A favourite bogeyman of much economic commentary in the last two years has been "quantitative easing" (QE). Controversy has been sharpened by the early November decision of the US Federal Reserve to buy $600 billion of long-dated Treasury bonds and a subsequent statement from Ben Bernanke, the Fed's chairman, that it will increase the purchases if necessary. These operations have been dubbed "QE2" by financial markets because they follow a previous spate of Fed asset purchases in late 2008 and early 2009.
QE2 has provoked outrage among a large section of the commentariat. The standard characterisation is that it constitutes "the printing of money" and so is necessarily inflationary. In his influential Interest Rate Observer, the American pundit James Grant lamented that QE2 was "the start of a new adventure in money printing". Like many monetary conservatives of the backwoods persuasion, he praised gold for its ability to retain its real value despite the printing presses and other iniquities of the modern world. In Britain, Liam Halligan of Prosperity Capital Management has expressed similar views in the Sunday Telegraph, although his wrath goes back to the Bank of England's embrace of QE in March 2009. In his words, quantitative easing is "a polite, yet intellectually dishonest name for ‘money printing'".
Of course, the phrase "printing money" is pejorative. The underlying thought — or should one say the implicit prejudice — is that money un-backed by tangible assets is inflationary, irresponsible and bad. Our great-grandparents believed that the convertibility of paper money into a precious metal helped to define civilisation. But modern monetary conservatives — such as Keynes and Friedman — understood that the gold standard left too much to chance. They saw that under the gold standard or indeed any precious metal standard the quantity of money depended too much on the accidents of mining technology and geological discovery. They argued that the best arrangement was for the state to manage the quantity of money.