Socialism through the back door

First Published: 2016-04-24

The creation of the Federal Reserve Banking System during the Progressive Era represents the breach of the wall in the fortress of capitalism. By substituting a group of elite bureaucrats for the free market in the business of money production, central planning and outright socialism are entering through the back-door.

Money is a core institution of capitalism and it developed through many centuries by pure voluntary cooperation, in the same way that language developed, albeit over a longer period of time.

Sound money is essential in the process of economic progress, without sound money it is hard to trade; if it is hard to trade it is hard to specialize; without specialization there are no productivity gains; without productivity gains there are no savings and without savings and investment no economic progress is possible.

Sound money also keeps bankers honest, debtors judicious and government officials subject to the taxpayers willingness to be taxed and the view of the market when they offer government securities.

Can you imagine language being regulated and interfered with by government? It is already happening in universities in the developed world. Social conversation will soon become very hard and awkward. Similarly, regulation and interference with money by governments is making social cooperation very difficult in economic matters. Money that is continually produced at no cost by the central banks creates a “noise” in economic transactions: it makes contractual promises uncertain, it generates millions of jobs with no actual need from consumers to satisfy, it makes saving many times more difficult than under sound money, generates a bias against savers in favor of debtors and eliminates the useful constraint on government officials who can now finance spending without needing to pass new tax laws or going to the market to offer debt securities.

Central banks and sovereign funds are now also  buying shares and becoming owners of the means of production. In this sense, at least partially, socialism has entered through the back-door. Government officials will be not only taxing and regulating companies, but also electing the directors and effectively running them.

This has not been as blunt as Stalin’s suggestion, but equally effective. As citizens, we need to heed to Mises’ advice: “All reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty.”

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