• I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.                                                                            - Thomas Jefferson

Choose Gold, and Abolish the Reserve Bank

By Sebastian Younan  
Mon, 16/08/2010 - 11:08am
Mon, 16/08/2010 - 11:08am

The financial crisis has illuminated structural flaws in the global economic system. Sceptics have begun beating their chests calling for further economic regulation. Many commentators argue that this is a prime example of the destruction capitalism causes when left unfettered. Yet the premise of this argument rests upon the false notion that our current economic system is capitalism. These commentators fail to recognise that capitalism cherishes liberty - and with it comes a sound currency.

The greatest coercive monopoly of this era is that over our money supply. Rather than allowing free-market forces to determine the money supply and with it the rate of interest, bureaucrats manipulate this vital market. This manipulation rejects the fundamental principles of a free-market and it can only be concluded that capitalism cannot exist with the presence of a central bank such as the Reserve Bank of Australia.

Through the expansion of the money supply - via quantitative easing and fractional reserve banking - the RBA creates inflation. As the money supply increases, the dollar denominated price of the economy's tangible assets appreciate. For those on fixed, middle and lower incomes this is quite an insidious process as it affects them the most. The purchasing power of every dollar in circulation depreciates as it now takes an increased quantity of dollars to buy the same amount of goods.

So why does the RBA have the authority to debase our currency and erode every dollar's purchasing power? There is no answer to this question which is favourable to the RBA. Those who support the notion that the RBA is wise and can steer the economy into prosperity imply the implausible about economics: that socialism, or any other form of collectivism, works. Socialism will always fail for one reason which is indisputable, central planning is incapable of determining an accurate price mechanism. It is this inability which will ensure perpetual business cycles (caused by injections of artificial credit) as opposed to economic stability.

The rate of interest is, in short, the price or value of money. Since the RBA determines the rate of interest, in essence it is determining the value of money. This is price fixing, the equivalent of Soviet style communism.

The severity of the business cycle is often perceived as an inevitable outcome of the “free market”. Yet the cycle’s severity is a consequence of central planning. As central banks lower the rate of interest, consumers and businesses alike have increased access to credit. Under a true free market, low interest rates should reflect an increased level of savings within an economy. But since our currency is structured upon government fiat, lower interest rates do not reflect any level of savings. This "lowering" sends out a false signal to consumers and entrepreneurs. Perceiving a heightened level of savings, the economy begins to experience a “boom” as borrowing increases to finance consumption or capital expenditure since credit is artificially cheap.

The rapidly increasing money supply causes prices to rise. Asset classes such as property, commodities and stocks appreciate first as they are the most sensitive to credit expansion. Debt fuelled “growth” leads to further debt fuelled growth. When the economy is experiencing a bubble, many feel “wealthy” as their asset class appreciates. Yet, like intoxicated teens at a party, eventually the beverages must stop flowing. Fearing dangerously high inflationary pressures, the central banks must eventually increase the rate of interest to avoid high if not hyperinflation. The hangover now begins.

As the rate of interest begins to appreciate to curb inflation, many borrowers begin to feel the squeeze. Some of these borrowers eventually go bankrupt as they no longer have the means to service their growing loan repayments. Many assets begin to depreciate as the free market recognises the misallocation of resources. The economy begins to experience a downturn or “bust”.

If the rate of interest reflected supply and demand, as more people borrowed money, the rate of interest would begin to appreciate to reflect a natural reduction in liquidity. The less money available, the greater the interest rate as only those who present rational economic proposals would be granted loans.

Suppose the RBA were abolished. What would determine the money supply and interest rates? The answer is simple: free-market forces, under the gold standard. The gold standard has been at the centre of statists’ antagonism for centuries. Whether it is socialists or fascists, the gold standard has been one of their greatest adversaries. This is because it acts as a check on out-of-control deficit spending. In the absence of a gold standard, the government robs the people of their purchasing power by printing money out of thin air to pay for its welfare programs.

But in an economy operating with a gold standard, the level of credit is determined by the level of tangible assets. This is because every unit of credit is merely a claim on some tangible asset (gold). Under such a system, the ever-growing welfare state could not exist.

What, then, is the link between liberty, gold and capitalism? The gold standard furthers capitalism and liberty as it protects the individual from servitude to the state. It enables us to protect the value of our money from the hidden inflation tax. The gold standard, capitalism and liberty are inseparable.

Gold Standard Good for Socialism

"false notion that our current economic system is capitalism"
It is mostly capitalism. Gov't spending is only about a third of GDP in Aus.

"capitalism cannot exist with the presence of a central bank"
It already does, with it.

"middle and lower incomes"
I'm on low income and it's not really a problem since my pay increases. One could argue it taxes the rich more, since they hold more dollars.

"RBA creates inflation"
Inflation targeting is better than what the FED does.

"no answer to this question which is favourable"
Orthodox economics (whether sound or not) gives a favourable answer.

"Socialism will always fail"
Russia moved forward under the Soviet Union. Socialism just isn't as good as capitalism, but it does achieve success.

"price fixing, the equivalent of Soviet style communism"
The RBA doesn't starve millions of people to death.

"But since our currency is structured upon government fiat, lower interest rates do not reflect any level of savings."
Two errors here:
a) Lower interest rates do reflect some increased level of forced savings.
b) Government fiat could just as easily imply deflation. They're different issues.

"robs the people"
Not necessarily. The gov't could print the money and hand it out as welfare payments, or just cut taxes. A welfare state based on printing money would actually be more just than our current system, in which banks profit on the money printing.

"level of credit is determined by the level of tangible assets"
It doesn't really makes sense to say that gold is any more tangible than gov't fiat. The main difference is that gold can't be printed (yet, eventually physicists will work out how).

"welfare state could not exist"
No. Australia's welfare state subsists on taxes alone; monetary policy has nothing to do with it.

"protects the individual from servitude to the state"
I honestly can't see how. One could argue a 100% socialist state should have a gold standard, too. It would ensure the politicians don't get carried away. It could actually be a selling point for a socialist gov't (in contrast to the "capitalist pig bankers' profits").

Nice poster, though! I agree that the gold standard would be better. As a science student, I'd prefer to see more data, though.

  It is mostly capitalism.

 

It is mostly capitalism. Gov't spending is only about a third of GDP in Aus - I guess that equates to some one being mostly pregnant.  

I'm on low income and it's not really a problem since my pay increases. One could argue it taxes the rich more, since they hold more dollars - The Cantillon effect of inflation would suggest otherwise.

Inflation targeting is better than what the FED does - The RBA targets between 1 and 3%. These are merely CPI which is a hedonistic approach to measurement.

Russia moved forward under the Soviet Union. Socialism just isn't as good as capitalism, but it does achieve success - Im struggling to reply to such a statement. I guess "moved forward" must exclude the hundred or so million deaths. I guess i should really fear Gillard when she uses the indefinable phrase "moving forward".

The RBA doesn't starve millions of people to death - I was referring to the economic perspective of a price mechanism.

Two errors here:
a) Lower interest rates do reflect some increased level of forced savings.
b) Government fiat could just as easily imply deflation. They're different issues -
Without running into an economic argument, in short, if the free market determined the rate it would reflect the true state of affairs not a fictional world which many have us believe.

 

Not necessarily. The gov't could print the money and hand it out as welfare payments, or just cut taxes. A welfare state based on printing money would actually be more just than our current system, in which banks profit on the money printing - Hardly. Though im not defending the current economic system, the notion of what is "just" cannot be defined. If we're all starving to death in Australia, is the system "just"?

It doesn't really makes sense to say that gold is any more tangible than gov't fiat. The main difference is that gold can't be printed (yet, eventually physicists will work out how). - Understand the properties of money then you shall realise that Gold is money not T-Bills and the like.
 

No. Australia's welfare state subsists on taxes alone; monetary policy has nothing to do with it - And when the nation is running a deficit, where does the money come from? Where does the treasury get it from? Who finances the T-Bills?

 

Good try though :)

 

 

 

 

 

"Australia's welfare state

"Australia's welfare state subsists on taxes alone"

Who's buying the government securities then? The structure of the socialised banking system also results in increased tax revenues. When wealth is forcibly stolen through inflation (where it otherwise wouldn't be), and transacted through the economy, there is an increase in income tax, sales tax and other revenues.

"I agree that the gold standard would be better. As a science student, I'd prefer to see more data, though."

It's not necessarily about the gold standard. Hayek wanted competing currencies, whether a gold standard is the result, is a matter for people acting in the marketplace. Historically though, gold has come out on top, although in these modern times, that may no longer be the case. We'd never know unless we allowed a market economy to actually function.

"Inflation targeting is better than what the FED does."

Inflation IS the phenomenon of creating your own deposits and injecting them into the banking system. Will this necessarily result in price increases? Assuming all other factors are equal, yes. But if there is an increase in productivity and technology and prices remain the same, then that is still a tax, because the monetary inflation is PREVENTING THE DECREASE which is the result of the increase in productivity. So the evil is the initial MONETARY phase of inflation.

Also, the act of creating your own deposit, as the RBA does, and injecting it into the banking system, also wrecks the STRUCTURE OF PRODUCTION, and results in boom and bust i.e. an institutionalised discombobulation between consumer preference and capital projects.

Great article.  Concisely

Great article.  Concisely put.

idea

Really the gold standard as a aim? At the moment how much gold would Australia need to have and every other country to support their coin?

 

There has to be a better way.

 

 

 

 

 

 

 

 

 

Mostly debate

It is also about the role governments plays in free markets not just their taxation and spending.

The aim is Liberty. I have

The aim is Liberty. I have no appeal to Gold other than that the free-market has selected it over the years and will most likely continue to do so.

 

In relation to the quantity of Gold, that is immaterial. Theoretically one ounce is enough. It is all about the backing of ones currency and the market will determine the appropriate rate. Im not a central planner so i will not try.

As a side note, it should be recognised that the Gold Standard will deliver stable interest rates NOT prices.