At the end of April 2017, May told Juncker over dinner in Downing Street that UK migration law would apply after Brexit to EU nationals already residing in the UK, which implied a considerable decrease in rights compared to EU law. Social benefits, access to healthcare and family reunion rights were more generous under EU free movement than UK migration law, which in turn is stricter than EU law on deportations. Once negotiations started, the UK team led by the Home Office altered that position radically and accepted EU law as the starting point of the work. The decision to replicate EU law concepts in the Withdrawal Agreement avoided a discussion from scratch on each right, which would have taken time and most probably become acrimonious.

On the money, in contrast, the UK argued for the first three months of the talks that Brexit cancelled all its debts. The chapter on citizens’ rights advanced much faster therefore in the first weeks than the chapter on money, which worried Barnier. It would be hard to defend that the EU was holding out on citizens’ rights because of unresolved budget claims. Activists on citizens’ rights criticized the package approach and advocated a stand-alone agreement. They underestimated how much the EU needed the upper hand that came with sequencing, given where the UK was politically on taking back border control, reducing free movement of EU nationals and rejecting the role of EU judges after Brexit. Whereas the EU imposed sequencing of talks primarily to make sure the UK paid all its financial obligations, sequencing became equally important for a good deal on citizens’ rights since it gave Barnier's team levers to push through more effective enforcement mechanisms and overcome the UK's resistance to joint enforcement as an intrusion of its sovereignty.

Earlier in 2016, Nick Timothy, May's chief of staff, tried to convince national governments to sort out citizens’ rights before notification with a vague proposal that hinted at the protection of a few rights only and unclear enforcement tools. It opened the door to discretionary behaviour by the Home Office

We should always be pro et sympa, Barnier told his team a few hours before the negotiations started on 2 March 2020, a French shortcut for “professional and nice”, but also, he added, “strict and firm, this will not be an easy negotiation”, particularly on the new economic relationship. Around ten metres separated the two chief negotiators in the Berlaymont meeting room, but the chasm on the meaning of the talks was much bigger. Frost's main goal was to assert the UK's newly gained sovereignty and avoid legally binding commitments with the EU. In contrast, Barnier wanted to make sure the UK committed to legally binding obligations as a precondition for a new trade and security partnership, in particular on the level playing field, as requested by his mandate.

This would not be the easiest in the history of trade negotiations, as David Davis once suggested, but it would have to be one of the quickest. In January, Johnson told Ursula von der Leyen in London that he excluded an extension of the legal and economic status quo of the transition period beyond 2020. Barnier did not see political space for Johnson to ask for an extension. He had just won the elections on the claim that he would get Brexit done and could hardly tell public opinion that he needed more time to sort it out. This left negotiations with two scenarios: a deal or no deal to exit the transition period on 31 December 2020. A new cliff-edge loomed and a new clock started ticking. There was no time to waste, as the amount of technical matters to solve, in particular on trade, was enormous. Member states adopted a negotiation mandate on 25 February 2020, which was 22 days after the Commission made a proposal.

The future is not withdrawal

The opening round in March showed visibly how different negotiations on the future were from withdrawal. Rather than a few negotiators convening in a small meeting room, EU and UK delegations spread out in large rooms for parallel sessions. The Commission rented extra space in a conference centre. More than one hundred civil servants participated in the kick-off round, a number that grew to almost two hundred on the EU side alone as talks unfolded.

Brexit was a UK choice that raised existential challenges for the Irish government. The 1998 Good Friday (Belfast) Agreement created a North–South Ministerial Council to facilitate and intensify cooperation across the land border between Ireland and Northern Ireland. These provisions formed part of a larger compromise that accompanied the peace process and led to a normalization of life in the communities on both sides of the border. The peace accord in combination with EU membership of the UK and Ireland made the border increasingly invisible. Brexit was the proverbial bull in a china shop. It destroyed a fragile political equilibrium.

The UK was about to take back control of its borders. Its decision to leave the single market and customs union risked putting Ireland in an impossible position, as it had to make sure all goods imported from the UK respected EU rules. Because of Brexit, this logically implied controlling the 499 km land border that meanders across the island, a scenario that raised horrific technical and regulatory challenges. Ireland would have to administer entry and exit declarations of all goods crossing that border, possibly charge tariffs and police VAT fraud. It would have to make sure no prohibited or counterfeited goods entered the EU's territory via the land border. Customs issues were just one aspect. Irish authorities would also become responsible for ensuring all goods, food products and live animals entering Ireland complied with EU health and safety standards.

The principle that each national customs authority must play by collective EU rules enables the clearance of goods and their free circulation in the EU. Some pro-Brexit commentators blamed EU bureaucracy for obstinacy and claimed Ireland should dispense with all of this, omitting to add that every sovereign jurisdiction in the world applies similar rules to protect the integrity of its national territory and state revenues. If Ireland could not guarantee the fulfilment of its responsibility as an EU member at the external border, its place in the single market and customs union would be endangered, which could ultimately threaten the survival of that single market in case continental countries started imposing intra-EU border checks on goods coming from Ireland.

A major issue arising out of the Vietnam War is the relationship between inflation and unemployment. This is known as the debate over the “Phillips curve”. It has divided Keynesian and neoclassical economists since the 1960s.

New Keynesian models still build in a permanent positive relation between inflation and economic growth. They do this by assuming rigid prices, and monopoly price increases that lead to a relative price increase that they count as higher inflation. Because of the assumed price rigidity mechanism, the price increase is set so that it can raise output while inflation increases. In contrast, neoclassical work finds a negative relation between an inflation increase and economic growth.

The debate surrounds Phillips's (1958) findings for UK data showing episodes in which higher inflation was linked to lower unemployment, in sequential periods over time. Samuelson and Solow (1960) then applied this empirical finding to a policy suggestion. They argue that if, the Fed raised the inflation rate, the unemployment rate would fall, so we could choose a policy of allowing higher inflation to lower unemployment.

The new Keynesian school of economics has since assumed a permanent negative relationship between inflation and unemployment, although commonly with the substitution of economic growth for employment. Neoclassical economists instead argue that the inflation– unemployment negative relation is temporary, found only under certain conditions and with no foundation for conducting monetary policy based on it. Sorting out what has occurred between inflation and unemployment is important for deciding monetary policy going forward.

If there were a permanent negative relation, then a positive inflation rate might be warranted to push unemployment levels down. If there is no permanent relationship, then there would be no basis for trying to lower unemployment by increasing the inflation rate. Rather, it would be worthwhile to understand when exactly the temporary episodes have arisen, so that we can seek to explain them as they occurred historically.

Inflation does rise episodically at times, especially during wars and crises. Based on Phillips curve episodes, Keynesians argue that some inflation is good, and this bleeds into the debate on what the target rate of inflation should be.

The science of contemporary monetary theory arose to solve the problem of how the central bank should conduct monetary and banking policy under a fiat monetary regime. An important result was to provide an optimal amount of inflation tax revenue through inflation tax targeting. The inflation rate to target was found to be very low, such as that consistent with natural seigniorage.

Nonetheless, the Fed became typical of international central banks by financing significant US Treasury spending, especially during wars and crises. It also decided to try to maintain the growth of the global financial system. Although the conduct of the Fed's banking insurance role has become murkier, its inflation tax collection policy was clear up until 2008.

From Bailey (1956) to recent news headlines, economists have recognized the inflation tax as equivalent to a fiscal tax, enacted by the monetary authority through discretionary action to finance Treasury expenditure. Recently, Leeper and Zhou (2021) find that 50 per cent of new marginal fiscal expenditure in developed economies is financed by increasing the inflation tax. In its 13 October 2021 editorial “The inflation tax rises”, The Wall Street Journal (2021) anticipates the high inflation tax episode that was experienced in 2022.

The Fed is unbound by the usual process for raising taxes. Article 1, section 7, of the US Constitution explicitly states: “All Bills for raising Revenue shall originate in the House of Representatives. The Senate may propose or concur with Amendments as on other Bills”. The House tax bills must arise in the Ways and Means Committee, which is the “oldest committee of the United States Congress, and the chief tax-writing committee in the House of Representatives”, according to the Committee's website, which was “[f] irst established as a select committee on July 24, 1789 … and was formally listed as a standing committee in the House Rules on January 7, 1802”.

The US tradition of a tax-raising committee is modelled on that of the United Kingdom. UK Parliament web pages state that “Ways and Means is a traditional term for taxes or other charges levied on the public in order to fund Government spending”. The United Kingdom had a formal Ways and Means Committee from 1641 to 1967 that originated proposals for taxes.

The Fed's money and banking policy of fixing interest rates below the inflation rate risks the global financial system's continued resilience. The system of efficiently allocating capital is called capitalism. Capitalism, with globalization, emerged through the international financial system, from Renaissance Italy to nineteenth-century Britain and into the modern era.

Global capitalism is a vital part of free trade. Adam Smith's Wealth of Nations (1904 [1776]) advocated free trade in goods and in capital. The British colony that was the precursor to the United States was well aware of the limits to trade through taxation of the markets engaged in trade. The 1776 Declaration of Independence coincides with Smith's 1776 statement of efficient allocation through free trade.

The US Constitution sufficiently innovated on England's Magna Carta to enshrine free trade in social, economic and political spheres, making the United States the centre of world democracy, freedom and capitalism. Milton Friedman's Capitalism and Freedom stresses these interconnections, with “economic freedom as a means to political freedom” (Friedman 1962: 8), whereas “capitalism is a necessary condition for political freedom” (1962: 10).

Adam Smith, as a student and then professor at the University of Glasgow in Scotland, essentially invented modern economics. A professor of moral philosophy at Glasgow, starting in 1752, Smith wrote a triad of treatises on free culture, law and economics, respectively.

The first book, published in 1759, followed the theme of his chair, The Theory of Moral Sentiments (Smith 1853 [1759]). This landmark achievement sets out how an equilibrium culture of norms arises through free social interaction and exchange. The treatise takes as given the legal and economic environment in which social norms flourish.

Smith next published, in 1763, his Lectures on Justice, Police, Revenue and Arms (Smith 1896 [1763]). This second treatise describes how the social and economic setting induces a demand and supply for law that results in legal equilibrium, provides the enforcement of property rights and creates the foundations for free social and economic exchange.

Smith's last treatise, published in 1776, was An Inquiry into the Nature and Causes of the Wealth of Nations (Smith 1904 [1776]), commonly known simply as The Wealth of Nations.

After having an inflation rate averaging near to zero during the gold standard, and dating back to the inception of the United States, the march towards a statutory zero-inflation-rate target in the country began with the march into Vietnam. This war arose from the tensions stemming from the First and Second World Wars. In the Korean War the United States had continued its long rivalry by fighting directly against China, and then it confronted the Soviet Union in the decades-long Cold War. The Vietnam War perpetuated these conflicts, with the United States fighting both Chinese and Soviet military assets across southeast Asia.

Inflation was high during both the First and Second World Wars. It rose again during the Korean War. It comes as no surprise that the subsequent Vietnam War once more involved high inflation for the United States. How do wars cause inflation?

The answer is short and simple: the government finances the war by printing money. To understand how the printing of money covers government budget deficits during wartime, we need to investigate the “monetary regime” that exists at the time of war. US history provides ample opportunity to demonstrate the effect of war on inflation, and the effect of the US involvement in the Vietnam War precipitated an inflection point in the world's monetary regime history.

The first US war-induced inflation took place even before the Constitution was enacted. The American Revolutionary War and the Articles of Confederation led to money printing to finance that war, because the US federal government had no power to raise taxes. The Continental currency became worthless, the monetary regime collapsed and the United States was forced to default on its debt. As Peter Bernholz (2016: 55) writes: “During the American War of Independence against Britain the war efforts of the emerging United States were to a large degree financed by issuing a new paper money, the Continental Currency.”

Bernholz attributes this to the inability of the confederated states to raise taxes or offer such financial help. Bernholz plots (2016: 56, fig. 4.4) a price index that has been computed for that period, along with the stock of Continental currency and the currency price of gold.

My namesake ancestor emigrated to New York to become a US citizen in 1900. His Austrian heritage stimulated my interest in the academic life of his birthplace, from where modern economics arose. He was born in Austria prior to the First World War a decade before Carl Menger became a professor of economics at the University of Vienna in 1873. Menger founded the Austrian School of Economics. His German-language Principles of Economics (1871) showed how people's utility went down for each additional good that they received. With this decreasing (“marginal utility”) value per additional good, he laid the basis for why the price we would pay, per unit of the good, would be lower in markets as the quantity demanded of the good was higher. Menger thereby gave us a downward-sloping demand curve – revolutionary at the time.

This first foundation of the downward-sloping demand curve appeared in the same year in English with William Stanley Jevons's Theory of Political Economy (1871), and then again, in French, with Léon Walras's Elements of Pure Economics (1874). Suddenly, demand was conceived as opposing supply and providing an equilibrium that yielded the basis of value theory, or “price theory”. This theory is still the foundation today of how markets determine equilibrium at the “market-clearing” price, which equates the quantity supplied to the quantity demanded. It laid the first microfoundations of macroeconomics. I learned about this evolution of macroeconomics through independent study of the history of economic thought with Professor Daniel Fusfeld at the University of Michigan, and with Professor George Stigler (Nobel laureate 1982) in graduate school, focusing on Adam Smith's work.

Austrian economics thereby began as an innovation in economics, which had focused till then on determining price only through the firm's cost of production – the “labour theory of value”, in Marxian economics – to a balancing of price from firms and consumers alike. Austrian professors provided the concept of deriving market prices by considering scarcity as it affects both the cost of production by firms on the supply side and the demand for the good from the household “consumer” side.

The inflation tax is caused by central banks financing government deficit spending. Inflation rose in the United States at such an increased pace during the Vietnam War that it broke the gold standard and caused a trend inflation rate above the zero trend of historic metallic regimes. The higher inflation trend of the fiat era put in place fluctuations in positive inflation instead of the more volatile price level changes of the metallic standards, with inflation during war and deflation after war.

The bank panics of the nineteenth century and the Great Depression brought about the establishment of the Fed and the FDIC. Today the inflation rate is tied closely by Fed policy to the threat of bank panics for those outside the FDIC. As the Fed buys Treasury debt and mortgage-backed securities, pays Treasury seigniorage to the private banking sector, prohibits positive real interest in money markets, suppresses inflation by keeping the newly printed money as reserves and attempts to provide sufficient liquidity for an ever more sprawling financial system, discerning the link between money and inflation is a challenge.

Although it has been said that inflation is no longer tied to the money supply, in fact the conflation of money and banking policy by the Fed simply makes the connection harder to uncover. The problem is not with the quantity theory of money. It has long shown the common sense of how the aggregate price level rises in tandem with the money supply.

There are important nuances. The price level rises more rapidly than the money supply because higher inflation rates normally increase interest rates and lower real money demand. And increases in economic growth can lower inflation, as more money supply is demanded for growth.

But the 2021 inflation increase had been declared by Ip (2021) as a “bout of inflation that defies old models”. Supposedly this inflation episode cannot be explained by the centuries-old quantity theory. “Modern monetary theory” declares the quantity theory of money to be dead. Nonetheless, it omits, or does not seek to understand, that the increase in money by the Fed was sterilized by the Fed's surge in excess reserves after 2008, which was enabled by its paying interest on excess reserves

As either coinage or paper, the history of metallic-based monetary regimes shows that such money remains convertible to its respective metal until it is debased too far. The issuance of paper money can herald the beginning of debasement. Money lives on as a means of exchange when its value is stable or declining at an acceptable rate. Its second life occurs when people begin to stop using the money and seek alternative means of exchange at a rapid rate. Substituting a nation's unstable currency for another nation's more stable currency can lead to increasingly high inflation, or even hyperinflation. This second phase bodes the end of the life of the currency, when its practical use for exchange diminishes.

Once people anticipate that a monetary regime is nearing collapse, its money becomes increasingly worthless. This hastens the end of the regime and increases the speed at which the system collapses. The only positive action becomes ending the monetary regime and establishing a new one that citizens respect and accept as a means of exchange.

During this life cycle of money, monetary regimes continue to evolve. The common thread is that, whenever the government supplies a stable form of money, it yields revenue for the government Treasury as long as the economy grows. A stable money with a growing economy in turn means a growing demand for the stable money, and an economy grows more readily when the price level is stable. To achieve a stable price level with a growing demand for the money, a government debases the money at the rate of growth of the economy and reaps the revenue from the debasement. This is the original meaning of natural seigniorage.

When a government begins to debase the money at a faster rate than the economy is growing, the price level in terms of the money begins rising, causing inflation. People tolerate moderate inflation, albeit with a decreased demand for the money in real terms. Deflating the money by dividing the stock of money by the price level gives the real money stock. This real money falls as the price of holding money rises. The inflation rate, plus the real return on capital, constitute the price of holding money instead of investing it.