Let’s say you go to the doctor with a pain in your gut, and the doctor very astutely discovers that you have been poisoned. He knows how and when it happened. He knows the precise kind of poison that victimized you. Then he gives your prescription: more poison in higher doses.
You would be at once grateful and alarmed.
This is roughly how I feel about the “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority,” a document just issued by the Vatican’s Pontifical Council for Justice and Peace.
Reading from the top down gave me a real charge. Some people at the Vatican have gotten the message about the dangers of the fiat money system that generates unlimited amount of credit, and even traced it all to the monetary reforms of 40 years ago.
In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system.
Exactly. The dollar was once based in gold, which provides a physical limit to the expansion of credit. All bills had to be paid. The government was limited. The banking system was a real business, not a socialist enterprise that experienced unlimited bailouts. Credit went to the creditworthy. Those who issued fake money paid a price.
Under a gold standard, there can be no creation of money that is not redeemable in something real. This automatically provides a check on both banks and governments — and therefore producers and consumers as well. An over-expansion leads to gold outflows and a restriction on credit expansion at home, as inevitably as night follows day. Therefore you have to live within your means. The bills have to be paid by real stuff.
Then President Nixon decided one day that we weren’t sending our gold anywhere. With that move, he ended the basis of the monetary system that had ruled the governments and banking systems since the ancient world. Every problem we’ve had since — inflation, bubbles, credit addiction, bank racketeering – can be traced to this one act. (This is not to say that Bretton Woods was perfect; what we really need is a system of full, domestic convertibility on demand and in real coins.)
That the Vatican gets this, or seems to, is a very good sign.
What’s more, credit is as addictive as any drug:
After World War II, national economies made progress, albeit with enormous sacrifices for millions, indeed billions of people who, as producers and entrepreneurs on the one hand and as savers and consumers on the other, had put their confidence in a regular and progressive expansion of money supply and investment in line with opportunities for real growth of the economy.
Everyone is addicted to paper. Consumers love it. Producers live on it. Competition drives everyone to partake. The real world fades and the make-believe world of paper profits rules the day. This is a false hope. It is like a house built on sand.
Since the 1990s, we have seen that money and credit instruments worldwide have grown more rapidly than revenue, even adjusting for current prices. From this came the formation of pockets of excessive liquidity and speculative bubbles which later turned into a series of solvency and confidence crises that have spread and followed one another over the years.
So very true. The new money doesn’t enter the economy in a neutral way. It creates pockets and bubbles and benefits some at the expense of others. But it can’t last. Reality strikes back.
A first crisis took place in the 1970s until the early 1980s and was related to the sudden sharp rises in oil prices. Subsequently, there was a series of crises in the developing world, for example, the first crisis in Mexico in the 1980s and those in Brazil, Russia and Korea, and then again in Mexico in the 1990s as well as in Thailand and Argentina. The speculative bubble in real estate and the recent financial crisis have the very same origin in the excessive amount of money and the plethora of financial instruments globally.
Again, a short and cogent history of the finance of the last 40 years. It’s been one disaster after another ever since Nixon closed the gold window. The magic of paper was supposed to fix all things. The reverse happened. It sent the world economy into endless cycles of boom and bust.
And with the dollar as the world reserve currency, bad policy in the U.S. has had a contagion effect. Now every country suffers when the U.S. engages in a profligate expansion. It’s true in Europe too. The loose-money countries wreck the economies of tight-money economies, leading to terrible conflicts and tensions.
It is on this basis that the document first begins its attack on “liberalist policies.” Now, hold on a minute here. There is nothing in old-fashioned liberalism (i.e., the free market) that endorses the “freedom” to issue paper forever and call it money. On the contrary, the free market is heavily regulated by a sound money regime. The only freedom banks have here is to operate as normal businesses. Those who expand without limit are going to die and those who maintain sound finance will thrive.
Nonetheless, the document’s identification of loose credit with market liberty is the beginning of the end of the good sense here. From this point, we plunge straight away into a full endorsement of a world central bank, a world political authority, taxes on financial trading, and heavy regulations. The document doesn’t actually call for an end to the free market. On the contrary, it imagines that enlightened world planners will protect, guard, and even “create” what it calls “free and stable markets.”
This is beyond naive. It seems to illustrate a near total absence of clear thinking. Centralization of money and credit caused this problem. Centralization of political authority caused this problem. Why would anyone imagine that more centralization is therefore the answer? This approach takes a terrible situation and makes it much worse.
Probably this document had many authors, one of whom gets the Austrian theory of the business cycle. He prevailed in the first section. Another author seems to know nothing about politics and power or the history of the problems of centralized states and central banking. He prevailed in the second section. Tragically, this document is music to the ears of the very institutions that are responsible for our current plight. The document might as well announce to the world: “Give the power and financial elites more power!”
What is the alternative? Sound money needs to be restored. Business and finance need to be subject to profit and loss. The bailouts must stop. The liquidations must be allowed to take place. Governments must be disciplined and controlled, and devolved to the smallest, local units. In other words, we need real free markets and subsidiarity. This is the only path to a responsibly regulated world. Otherwise, we are going to end up creating even more problems down the line.
The Vatican seems to be growing in intellectual sophistication over worldly affairs. Now it gets economic matters half right. Sadly, being half right on something this important can lead to permanent calamity. To return to the original metaphor, the patient should thank the doctor for discovering the illness, but flee the poisonous “cure.”
Another view on this Vatican document, by Sean Dailey, editor of Gilbert Magazine, will appear tomorrow.