Thomas E. Woods, Jr., is the New York Times bestselling author of 11 books, including The Politically Incorrect Guide to American History and Meltdown (on the financial crisis.) A senior fellow of the Ludwig von Mises Institute, Woods has appeared on MSNBC, CNBC, FOX News, FOX Business, C-SPAN, Bloomberg Television, and hundreds of radio programs... (Read More)
So I’m minding my own business on Twitter — where you can follow me @ThomasEWoods, by the way — and some guy starts suggesting that the Austrian School economists are just shills and apologists for the bankers.
I restrained myself from asking which Austrian books and authors he had read, since I’m not inclined to pose questions to which I already know the answers. I noted to him that no one was more opposed to the bailouts than the Austrian economists, and that this failure to support rescues of financial institutions seems like odd behavior for shills and apologists for those same financial institutions.
I asked him if he thought the present banking system, one of the most regulated and controlled industries in the country, was a free-market one. He replied, “How is existing banking system diff than a gold backed currency issued by private banks? Isn’t that Austrian monetary utopia?” (He then said he favored the nationalization of the Fed — the Fed’s problem evidently being that it isn’t socialistic enough — and the issuance of money by the federal government directly.)
Well, for one thing, the Austrians simply describe the phenomena of money and banking, and leave it to individuals to draw out the implications of the analysis.
Money emerges on the market as the most highly marketable commodity. This is how society moves from barter to a money economy. People value the most saleable good not just for its use value but increasingly for its exchange value. In other words, gold — or whatever — is valued not just for its ornamental and industrial uses, but also because it can fetch you the goods you want. People want it, so if you can get it, you can acquire the things you want from them.
Irredeemable paper money could not possibly have emerged this way. It is not a saleable good. No one values pieces of paper with politicians’ faces on them, so they would not be the most marketable commodity in society.
Moreover, no one can engage in economic calculation using a paper money introduced ex nihilo by the state. With gold (or whatever the spontaneously chosen money commodity happens to be), people can recall the exchange ratios that existed under the latest stage of barter — one gold unit for ten hats, three dozen oranges, or 100 pencils. But with pieces of paper printed by the state and simply imposed on people, how can anyone know how many of them ought to fetch a hat, an orange, or a tomato? Another reason no one would spontaneously adopt this system.
The system my critic wishes to impose must be imposed via the police. It could never emerge voluntarily. He doesn’t see this as an indication that something might be wrong with it.
The position on money that seems to make the most sense in light of Austrian analysis is not a gold-coin standard — though that would be a vast improvement on what we have now — but the production of money on the market according to the normal laws of commerce and contract. Professor Jeff Herbener describes this system here. Guido Hulsmann defends it in The Ethics of Money Production, which makes both a moral and an economic case for it. No fiat-paper advocate has refuted Hulsmann.
Under such a system, there would be no monopolistic legal-tender laws, no monopoly of the mint, no special privileges of any kind.
The tendency under such a system, nevertheless, would be toward a single commodity money in use throughout society and indeed around the world. Money emerges in order to lift society out of barter conditions. A situation of multiple monies is a case of partial barter, and thus undermines the very purpose of money. Hence it would gradually give way – as people apprehended the facility with which they could consummate their transactions by using the most marketable commodity as money – to a single, universally accepted money.
The situation that exists now, by contrast, involves
(1) a coercively imposed monopoly on the production of money;
(2) monopolistic legal tender laws, which artificially privilege the money issued by the government-established central bank;
(3) a central bank with the monopoly power to create legal-tender money out of thin air, a power granted to it by the government, and with a mandate to manipulate the money supply in the purported service of maximizing output and minimizing unemployment and price inflation;
(4) interest rates influenced by a monopoly monetary authority instead of by the free market;
(5) implicit and explicit bailout guarantees for large financial institutions;
(6) artificially low borrowing costs for large institutions, since the public knows these institutions will be bailed out;
(7) artificial protection of the banks, in the form of government deposit insurance and various Federal Reserve mechanisms, thereby keeping afloat a fractional-reserve system that would be radically different under a free market; under the existing system the banks will therefore create more money out of thin air than they otherwise would.
This is just off the top of my head. A free-market banking system would have no central bank and no “monetary policy.” It would not rely on politicians to print up “interest-free money.” It would not require any guns or badges. It would preserve the purchasing power of people’s money, as it did even under the classical gold standard. It would make entrepreneurial profit-and-loss calculation far easier, without the white noise introduced by the monetary manipulations of the government or its privileged central bank.
That’s kind of different from the system we have now, isn’t it?
But this critic thinks we Austrians, of all people, defend the present system! It is he who defends it. Oh, sure, he is against the Fed, but for trivial reasons. He thinks there is a net social benefit to producing money out of thin air. He just thinks the banks today are doing a bad job of it.
Which of us has the more fundamental critique of the present system? This is an exercise for the student.