There is no other area of economic activity where the principles of private property and free enterprise have been ignored so much and for so long than in the area of money and credit. Government monopolies and private bank cartels together control the creation of money and the provision of credit all over the world. With different degree of success the authorities of The Bank of England with English private banks, the authorities of the Federal Reserve with US private banks or the authorities of The Reserve Bank of Zimbabwe with Zimbabwean private banks collude in detriment of their respective fellow citizens. This unholy alliance allows privileged access to money and credit for the state and big borrowers alike.
Government has the means to expand its activities beyond what tax payers would allow and big borrowers have access to scarce credit at lower rates which allows them to invest in projects that private investors would not finance. Bankers, in turn, obtained the privilege of cartelization through legislation creating barriers to entry and special franchises for existing institutions.
The original sin was the practice of fractional reserve banking by deposit banks. This constituted a break from traditional deposit law which, in turn, evolved from the principles of Roman law and its roots in natural law. However, under competition, fractional reserve banking had a limit: the credibility of the issuing bank and the risk of a depositors’ run. To help overcome this limitation, private banks promoted central banks in an attempt at cartelization. The Bank of England, founded in 1694, may be considered the pioneering central bank in a monetary and credit world dominated by these institutions.
In truth, the gold standard is already a barbarous relic. John M. Keynes – Monetary Reform 1924.
Paraphrasing John M. Keynes, these institutional arrangements for money and credit are the barbarous relic of the mercantilist era. Liberalism deserves better in this area of human activity in order to fulfill its promise to the common man. A society of free enterprise can not be built and can not progress on the weak foundations of present monetary and credit institutions.
Let us pause and reflect on what we know now about human progress:
- Man in isolation can aspire to very little progress.
- Specialization and trade allows Man to increase productivity and therefore sustain higher standards of living for an increasing population.
- Liberalism succeeded in releasing the energies for progress of the common man in those societies which adopted its program for reform.
- Enormous increases in international trade and investment led to similar increases in human population and standards of living.
- Although different cultures have different paces, when the institutional arrangements of liberalism are adopted, progress occurs.
What I think modern thinkers have ignored or underestimated:
- The institutions of Money and Credit deserve a much bigger weighting when assessing the quality of institutional arrangements. They are the foundation of exchange, saving, investment and capital formation.
- By adopting a mainstream view of Money and Credit we ignore the true nature of capital, the importance of interest rates and the cause of modern economic cycles and their consequences for the common worker.
- Inflationism, the view that underestimates the importance of monetary and credit institutions, leads to a view by the masses of capitalism as inherently unfair when the unfairness is provoked by the state not allowing free enterprise to provide money and credit under competition.
- Inflationism leads to lower rates of capital formation by the masses and promotes riskier projects by big borrowers financed by easy money many of which result in failure and bailouts financed by taxpayers. This reaffirms the view of capitalism as inherently unfair.
- Inflationism discourages savers and promotes consumption and dependence on government programs to care for the unpredictable and risky future.
In summary, present institutions of money and credit have failed miserably those who need them most, the poor, to the benefit of bankers, their big debtor clients and government elites, always among the richest in society.
Capital formation by individuals, which is the only way to improve the standard of living of the masses, is made more difficult by unsound money. Also capital is misallocated during the central bank induced booms and partially destroyed during the inevitable recessions that follow.
The economics profession has failed to transmit the importance of sound money for the process of wealth creation and conservation and this allows populists of all parties to hide their private interests behind false calls for more government regulation and control over the institutions of Money and Credit when, if they had the interest of the common citizen in mind, they should be advocating for Sound Money as the main reform of any government program in this area. I know of only one or two politicians who are not guilty of this crime against humanity.
Through the works of great thinkers of the past and present we now know how wealth is created and how people progress. Capital formation, accumulation and conservation are the key. The higher the stock of capital in a society the more productive labor is and therefore the higher labor’s income.
We also know that this process of capital formation occurs even under the worst conceivable institutional arrangements. We know what the interacting parts of the ideal institutional arrangement are, but we have not been able to underline the importance of each of them.
The economics profession is in debt with society. We should help explain the importance of Money and Credit for economic progress and how a free market in Money and Credit would much better serve as the foundations for that progress.
The Atlas Economic Research Foundation, Sound Money Project