Expansion of the money supply through spurious paper currency is always attended by a loss to the laboring classes."
-- Andrew Jackson
"Government is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless."
-- Ludwig Von Mises
"There is no subtler nor surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."At lunch once some colleagues and I were discussing the financial crisis and one asked the question why the government doesnt just print more money to cover what everyone needs -- print money backed by government reassurances and give it to people for example. Ive heard this remark in other variations and from people Ive talked with from all walks of life, from the college graduate to the tambay, and Ive been struck by the ignorance most people have about how the economy works. Im no expert -- far from it -- but my economics class in third year high school taught me that if supply exceeds demand, the prices of commodities fall, so increasing the supply of money would result in the fall in its value, raising the price of goods and services. I also have a keen bullshit detector, and reading the pronouncements by the leading economic experts of the day has made my bullshit detector go berserk. In that particular lunchtime kwentuhan I was talking about, the question was asked by a graduate of one of our better universities. Such has been our training I suppose that when the economy is in trouble, the government should step in and do something. That's the way it's always been done, the fact that it hasnt worked, that booms and busts still occur, hardly figures in the assessment. The government has to do something. In fact, the present economic crisis is being blamed on the free market. Nothing could be further from the truth. In the present economic paradigm used by governments, the free market is a myth, so in effect, the blame is placed in some mythical creature that doesnt exist. That's because governments want more control of our lives and by blaming the market and not itself, they can have more reason to seize control while the people cheer them on.
-- John Maynard Keynes
In the Keynesian economic paradigm in vogue right now among government planners and academia, government has an active role in the economy. The economy is looked at as some kind of wild, bucking bronco that the government must tame: Inflation is caused by excessive spending, so the government steps in and imposes measures for people to spend less, such as higher taxes; economic depressions occur because people dont want to spend so they impose measures for people to spend more, or take on the act of spending itself. There is something inherently Marxist in the approach to the economy, especially how it views the business cycle and the solution. ("Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly," Marx urged.) Marx, observing that the business cycle emerged only after the Industrial Revolution, concluded that the cycles of booms and busts were inherent in the free market economy, never mind that classical economic theories from David Ricardo and David Hume identified the cause of the boom-bust cycle on the artificial expansion of bank credit. Keynesians like Paul Krugman admit that booms and busts happen but they dont have a theory as to why. They just happen. Lack of consumer spending? Sure, but why?
In a free economy, some kind of natural selection takes place. Entrepreneurs that can forecast future demand and meet them survive, while entrepreneurs who arent good at it fail. This is normal. But what happens during a bust is that businessmen seem to be making errors in projection at the same time, and even the most astute entrepreneurs arent immune. What gives?
Booms are caused when the government, through its central bank, expands credit by increasing the money supply. This lowers the interest rates, since more money available for credit will tend to lower the cost of money. Ideally, in a market free from government intervention, the source of credit is people preferring to save money, hold them as cash balance, or lend money out as investment, that is, people preferring to spend their money on goods in the future rather than now. Cheaper credit will for instance make investment in production of capital goods more attractive to the businessmen, so investment in factories building capital goods will expand. This is the boom phase. People have jobs and can spend on consumer goods and businesses selling these goods flourish. However, the increase in the money supply was artificial. The money available for credit didnt come from people saving money or preferring to keep them to use them at some future time. This skews the business forecasts of entrepreneurs. They base their business decisions on their ability to forecast future demand, and an increase in the supply of credit makes them think that people have money to spend in the future, but this money doesnt exist. Plus the increase in the money supply has greatly reduced the value of the money people hold. The artifically created credit made businesses invest in factories that would create goods for their perceived increase in demand, but this demand doesnt exist in the particular price that the businessmen are willing to sell them for to make a profit. The bust has begun. If the market were truly free, it will correct itself. Wasteful malinvestment will be liquidated and the money put to better use, however government interferes to keep inflating the bubble, injecting more money and credit into the economy, allowing more malinvestment to take place while at the same time destroying the value of their paper money, setting the economy up for a major crash that just needs a trigger to set off. In short, an artificial increase in the money supply fosters disproportionate malinvestment in one sector or another, whether in new factories or new houses.
University-trained economic 'experts' Ive encountered online are an exasperating lot probably trained in the Keynesian model in which government has to step in to pick up the slack in spending if the consumers won't. In fact I wonder whether other economic paradigms are taught in Philippine universities such as Milton Friedman's Monetarist school or Ludwig Von Mises's and Friedrich Hayek's Austrian school. One of the online 'experts' Ive encountered in fact accepts fractional reserve banking as a matter of course, even thinking it is a boon, instead of calling it the government-backed fraud that it is. (For Keynesians, savers and lenders are entirely different people: Savings “leak” money out of the consumption-spending stream while investments come in from some other phase of spending. The task of government in a depression is to stimulate investments and discourage savings, so that total spendings increase. Classical economists on the other hand treat savings and investments as closely-linked if not practically the same thing. Investment can come from no other source but from savings aside of course from the fraudulent and dangerous government expansion of credit out of nothing.) For this expert, the banks have an absolute right to the money deposited with them to do with as they please because they pay the depositors interest. He could not seem to conceive of banking without the fraudulent fractional reserve system. Such are the people universities are churning out.
The solution to prevent the boom-bust cycle is simple, and not so simple: stop inflating. It's not so simple because the government wants to inflate. It doesnt produce anything so to get funds, it seizes private property in the form of taxes, or it inflates. Raising taxes has political repercussions so it would rather inflate while promoting the myth that inflations just happen. Inflation in fact is just a subtler and more insidious form of taxation where the value of our property is systematically reduced through the creation of central bank issued counterfeit money, where wealth and property from the poor and the middle class goes to the government and its cabal of oligarchs. Therefore to prevent government from inflating, we have to get rid of central banking. Government invented central banking so that it could centralize inflation, that is, it orchestrates the banks in such a way that they inflate at the same time, and this is facilitated by the government edict that only central bank notes are allowed to circulate as money. Without central banking, banks would check each other and prevent the widespread circulation of inflated currency. It goes like this: suppose Bank A decides to issue paper not backed by anything, sooner or later, this inflated currency is going to end up in other banks who will then redeem these papers. If Bank A can't cover the papers, it will trigger a bank run, and without the government and central bank to cover its ass, it'll go down into liquidation. Whatever artificial boom Bank A created will be limited in scope and will be easily corrected.
Another thing to do to prevent the boom-bust cycle is to return to a gold standard, an actual physical standard to which the value of money is to be based. For example, we could peg the peso to 1/10,000th a gram of gold. That of course means that the banks will have to build up its gold reserves from the mines in Masbate and Davao and elsewhere, as well as purchase gold or gold certificates or as a last resort hold reserves in foreign currency tied to the gold standard. In short, we must actually have the stuff before we can mint coins or issue paper notes backed by the stuff. Gold is the ideal stuff because it has been chosen by the free market as the medium of exchange. Citizens should be able to redeem notes they hold for the real stuff from the banks that issued the notes.
These ideas shouldnt be radical. This was the way civilized societies traded before central banks and government-sponsored counterfeiting were invented. It's just that we are in the position Thomas Jefferson was in when he contemplated slavery. He knew it was wrong, but the economy was based in no small part on slave labor so he couldnt imagine giving it up even though he was wracked by guilt about it. Our economy now is based on a similar slavery but this time we are the slaves. It's time we got rid of that slavery as well and be truly free.
Murray N. Rothbard, America's Great Depression, first published 1963
Murray N. Rothbard, What has Government Done with our Money? 1991.
Both are downloadable from the net. Google is your friend. If youre a Keynesian or a Paul Krugman fan, the books represent a paradigm-shift in your view of things, so try to relax while reading them and dont throw a fit.
Update 18 March: In the comment section, I mentioned to R.O. , "Keynes dreamed of a worldwide central bank with one currency and that is closer now than ever before." Guess what?
The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.
Let's hope that this is just a trial balloon to gauge public reaction as this has disaster written all over it. As the linked article points out:
However, economists warned that the scheme could cause a major swell of inflation around the world as the newly-created money filters through the system.