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Monetary Central Planning and the State, Part 40: Towards a System of Monetary and Banking Freedom


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The great tragedy of the 20th century was the arrogant and futile belief that man can master, control, and plan society. Man has found it difficult to accept that his mind is too finite to know enough to organize and direct his overall social surroundings according to an overarching design. The nature of this problem was neatly explained by Walter Lippmann in his 1937 book, An Inquiry into the Principles of the Good Society:

“The thinker, as he sits in his study drawing his plans for the direction of society, will do no thinking if his breakfast has not been produced for him by a social process which is beyond his detailed comprehension. He knows that his breakfast depends upon workers on the coffee plantations of Brazil, the citrus groves of Florida, the sugar fields of Cuba, the wheat farms of the Dakotas, the dairies of New York; that it has been assembled by ships, railroads, and trucks, has been cooked with coal from Pennsylvania in utensils made of aluminum, china, steel, and glass. But the intricacy of one breakfast, if every process that brought it to the table had deliberately to be planned, would be beyond the understanding of any mind. Only because he can count upon an infinitely complex system of working routines can a man eat his breakfast and then think about a new social order. The things he can think about are few compared with those which he must presuppose…. Of the little he has learned, he can, moreover, at any one time comprehend only a part, and of that part he can attend only to a fragment. The essential limitation, therefore, of all policy, of all government, is that the human mind must take a partial and simplified view of existence. The ocean of experience cannot be poured into the bottles of his intelligence…. Men deceive themselves when they imagine that they can take charge of the social order. They can never do more than break in at some point and cause a diversion.”

Money is one of those institutions that owes its origin and early development to social processes beyond what individual minds could have fully anticipated or comprehended. But money’s evolution has been constantly “diverted” from what would have been its market-determined course by governments and political authorities that saw in its control an ability to plunder the wealth of entire populations.

Inflation and history

Debasement and depreciation of media of exchange through monetary manipulation has been the hallmark of recorded history. In the middle of the 19th century, British classical economist John R. McCulloch pointed out,

The history of this and all other countries, shows that the power of making unrestricted issues of paper money has never been entrusted to any man, or set of men, without being abused; that is, without its being issued in inordinate quantities.

And in the 1880s, American economist Francis A. Walker warned:

“The danger of overissue is one which never ceases to threaten an Inconvertible Paper Money. The path winds even along the verge of the precipice. Vigilance must never be relaxed. The prudence and self-restraint of years count for nothing, or count for very little, against any new onset of popular passion, or in the face of a sudden exigency of the government. From this danger a people receiving into circulation an Inconvertible Paper Money can never escape. A single weak or reckless administration, one day of commercial panic, a mere rumor of invasion, may hurl trade and production down the abyss…. Not only does the danger of overissue never cease to menace a community having such [paper] money in circulation, but the moment an overissue in fact occurs the impulse to excess acquires violence by indulgence.”

The gold standard

To prevent such abuses and their deleterious effects, advocates of freedom supported the gold standard to impose an external check on monetary expansion. Paper money was to be “convertible,” redeemable on demand to bank-note and checking-account holders at a fixed ratio of redemption. “The distinctive quality of good paper money is that it can be converted into gold or silver at any time,” said American economist J. Laurence Laughlin, also in the 1880s. “No paper money is good unless the promise to pay means what it says, and unless the convertibility is constantly tested.”

But even this limit on government-managed money was eliminated in the 20th century by the hubris of the central-planning mentality, under which money, too, was to be completely under the control of the monetary central planners as part of the vision of designing and directing the economic affairs of society.

Said John Maynard Keynes, “The gold standard, with its dependence on pure chance, its faith in ‘automatic adjustments,’ and its general regardlessness of social detail” was just “part of the apparatus of conservatism.” It was better to set it aside so wise and intelligent experts such as he could use government to guide an economy to prosperity and full employment.

Monetary rules for the Fed

In the wake of Keynesianism’s failures and contradictions, the proposals were then made, for example by Milton Friedman, for implementing monetary “rules” for the management of the central monetary system. However, as Canadian economist David Laidler observed, such monetary rules are a figment of the economic theorist’s imagination:

Devices that seem satisfactory in the artificial safety of an economic model will not withstand the onslaught of politics in the real world. Monetary policy is an inherently political matter, and we will have a better chance of getting it right if we recognize that from the outset.

Laidler’s assumption is that money as a political tool should be accepted, and the opponent of monetary abuse should, as he puts it, “get back into the trenches” to use government avenues to nudge monetary policy in the direction he prefers.

But as Kevin Dowd points out in reply,

“The key point … is the free bankers’ claim that the only solution to the monetary policy problem is to abolish monetary policy entirely. This would eliminate the current need to appeal to the state to get monetary policy right.

The failure of central planning

Monetary central planning is one of the last vestiges of generally accepted out-and-out socialist central planning in the world. The fact is that even if monetary policy could somehow be shielded from the pressures and pulls of ideological and special-interest politics, there is no way to successfully centrally manage the monetary system.

Government can no more correctly plan for the “optimal” quantity of money or the properly “stabilized” general scale of prices than it can properly plan for the optimal supply and pricing of shoes, cigars, soap, or scissors.

The best monetary policy, therefore, is no monetary policy at all. The advocate of the free market believes that the need for foreign trade policies would be eliminated by ending all trade restrictions or barriers and permitting free trade.

He also believes that the need for domestic regulatory policies would be eliminated by abolishing the regulatory agencies and repealing the antitrust laws and simply permitting market-guided competition and exchange.

Logically the need for monetary policy would be eliminated by abolishing government monopoly control and regulation over the monetary and banking system.

As Austrian economist Hans Sennholz once concisely expressed it,

We seek no reform law, no restoration law, no conversion or parity, no government cooperation: merely freedom…. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.

Toward monetary freedom

What should these steps be? At a minimum, they should include the following:

1. The repeal of the Federal Reserve Act of 1913, and all complementary and related legislation giving the federal government authority and control over the monetary and banking system.

2. The repeal of legal-tender laws, that give government power to specify the medium through which all debts and other financial obligations, public and private, may be settled.

As Lord Farrer pointed out in his Studies in Currency (1898), “The ordinary law of contract does all that is necessary without any law giving special functions to particular forms of currency.”

Individuals, in their domestic and foreign transactions, would determine through contract the form of payment they mutually found most satisfactory for fulfilling all financial obligations and responsibilities into which they entered.

3. Repeal all restrictions and regulations on the free entry into the banking business and in the practice of interstate banking.

4. Repeal all restrictions on the right of private banks to issue their own bank notes and to open accounts denominated in foreign currencies or in weights of gold and silver.

5. Repeal of all federal and state government rules, laws, and regulations concerning bank-reserve requirements, interest rates, and capital requirements.

6. Abolish the Federal Deposit Insurance Corporation. Any deposit insurance arrangements and agreements between banks and their customers and between associations of banks would be private, voluntary, and market-based.

In the 1920s, free-market economist Thomas Nixon Carver once observed,

In the absence of force, peace and liberty simply exist; they do not have to be created or supported. Capitalism has its beginning in a condition under which no man can be dispossessed of what he has produced or discovered except with his own consent. In the absence of force, capitalism automatically exists in the same sense that peace and liberty automatically exist.

Money and the spontaneous order

In the absence of government regulation and monopoly control, a free monetary and banking system would exist; it would not have to be created, designed, or supported. A market-based system would naturally emerge, take form, and develop out of the prior system of monetary central planning.

What would be its shape and structure over time? What innovations and variety of services would a network of free, private banks offer to the public over time? What set of market-determined commodities might be selected as the most convenient and useful media of exchange? What types of money substitutes would be supplied and demanded in a free-market world of commerce and finance? Would many or most banks operate on the basis of fractional or 100% reserves?

There are no definite answers to these questions, nor can there be. It is deceptive to believe, as Walter Lippmann explained, that we can comprehend and anticipate all the outcomes that will arise from all the market interactions and discovered opportunities that the complex processes of the free society would generate. It is why liberty is so important. It allows for the possibilities that can only emerge if freedom prevails. It’s why monetary freedom, too, must be on the agenda for economic liberty in the 21st century.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7 | Part 8 | Part 9 | Part 10 | Part 11 | Part 12 | Part 13 | Part 14 | Part 15 | Part 16 | Part 17 | Part 18 | Part 19 | Part 20 | Part 21 | Part 22 | Part 23 | Part 24 | Part 25 | Part 26 | Part 27 | Part 28 | Part 29 | Part 30 | Part 31 | Part 32 | Part 33 | Part 34 | Part 35 | Part 36 | Part 37 | Part 38 | Part 39 | Part 40 | Table of Contents

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).