A claim for equality of material position can be met only by a government with totalitarian powers. - Friedrich A. Hayek
Choose Gold, and Abolish the Reserve Bank
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.