Conservatives
and the Elephant in the Living Room
by Thomas E. Woods, Jr.
Recently
by Thomas E. Woods, Jr.: We
Austrians Are Shills for the Bankers, Says Critic
One of my pet
peeves is the conservative who lectures us on the “limits”
of markets and looks with a self-satisfied and condescending shake
of the head upon the stupid rubes he must endure who persist in
supporting the market all the same. Why, haven’t these dopes
read Wilhelm Roepke, whose views are to be considered definitive?
In this
unfortunate post, we get the usual laments about what “capitalism”
has done to the public. If only banking had stayed local we wouldn’t
have had all these problems, etc.
Absent as always
from these critiques is any discussion of the Federal Reserve, the
elephant in the living room, which is a friend neither of localism
nor the free market. Likewise absent is any acknowledgment that
to call the banking system of today a “free market” is
at best an expression of one’s sense of humor. As I’ve
noted elsewhere,
the current system is rather far from the Misesian ideal; it includes:
(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.
Second, the
idea that if only “capitalism” hadn’t created mortgage-backed
securities, we wouldn’t have had this problem, amounts to an
especially defiant refusal to consider the role of the Fed. Consider
this description of events (trust me: it’s worth reading the
whole thing):
Rising prices
affected both banks and their customers with an optimism which
swept aside the conservative standards of experience and promoted
extravagance and speculation. Whatever the customers purchased,
whether merchandise or land, they were able to sell at an extraordinary
profit; whatever was produced on their farms brought unusual returns.
Some few persons, uncertain of what disposition should be made
of the unexpected harvest, began reducing their fixed indebtedness.
It was not long, however, until the continuously rising prices,
the encouragement of the bankers, and the methods used by the
government in selling war securities, had convinced the majority
that debt was a blessing in disguise, as it became progressively
easier to liquidate and offered a means of extending profit-making
activities. Under the urge of these influences, industry expanded
and thrived, promoters of all types came into their own, and thrift
gave way to extravagance. Bankers found their accustomed standards
of credit analysis growing obsolete, for values increased automatically
with the passage of time. Hence it was that, as the speculative
fever gained a foothold and grew and the demands for bank funds
enlarged, credit was extended to all manner of persons on –
or without – all kinds of security, excess lines became commonplace,
customers’ notes given to promoters of questionable and fraudulent
enterprises were discounted for rich rewards, and large sums were
advanced to land speculators. Borrowing for the purpose of relending
became an established practice. Time and time again the banks
were saved from the effects of their ill-advised acts by the continued
growth of deposits.
This must be
a commentary on the recent economic boom that came to an end in
2007-08, right? Actually, this passage appeared in the Journal
of Land & Public Utility Economics in 1926, and it’s
a description of how the credit expansion of 1914 to 1920 affected
Iowa.
Finally, surely
there ought to be some admission that any “limits” on
the market necessarily strengthen the political class. This is usually
not acknowledged. I see no reason to consider it self-evidently
desirable, especially for a conservative.
(For more on
the elephant in the living room, see the free
chapter of Meltdown,
my 2009 book on the subject. Note also that I love The American
Conservative, where I am a contributing editor, but all friends
disagree from time to time.)
Reprinted
with permission from TomWoods.com.
July
28, 2012
Thomas
E. Woods, Jr. [send him
mail; visit his
website], a senior fellow of the Ludwig von Mises Institute,
is the creator of Tom
Woods’s Liberty Classroom, a libertarian educational
resource. He is the author of eleven books, including the New
York Times bestsellers Meltdown
(on the financial crisis; read Ron Paul’s foreword)
and The
Politically Incorrect Guide to American History, and most
recently Nullification
and Rollback.
Copyright
© 2012 Thomas
Woods
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