The Austrian economists worked out the theory of booms and busts in a fiat money system. From Jeffrey Tucker at dailyreckoning.com:
Our times of boom to bust are the perfect illustration of the credit cycle first presented in its fullness in the 1920s. Why then? Because this was the first decade after most countries created central banks. They caused some very odd behavior that made 19th-century-style economics seem to have less explanatory power.
That was when a few economists working in Vienna put together a model for understanding how business cycles work in a modern economy. Their names were Friedrich von Hayek and Ludwig von Mises. They drew on their theoretical knowledge based on the following inputs:
Richard Cantillon (1680–1734) observed that when governments inflate the money supply, the effects are unevenly distributed among economic sectors, affecting some more than others and in different ways.
Adam Smith (1723–1790) explained that a critical element of rising wealth is embedded in the division of labor, in which individuals specialize in tasks and cooperate across firms and those firms cooperate with each other.
Carl Menger (1840–1921) saw money as an organic market creation, not an invention of the state, which implies that it should be produced like any other good or service.
Knut Wicksell (1851–1926) demonstrated that interest rates function as a price mechanism to allocate investment decisions over time, which is why the yield curve exists. Manipulation of the interest rate disturbs the natural allocation of resources.
Is eliminating limited liability for banks and other dealers of credit the key to a better banking system? From Alasdair Macleod at goldmoney.com:
This article anticipates the rapidly approaching time when we might be engulfed in a combined currency, asset, and banking crisis. It is becoming clear that such an event can no longer be ruled out.
Economists of the Austrian school have argued that sound money would have prevented a crisis of this sort, and without it the crisis becomes inevitable. The argument for sound money, in other words, a credible gold coin exchange system for banknotes, has already been made. But the question remains over how bank credit, whose fluctuations for a long time have been behind the boom and bust of the business cycle, should be addressed.
Some Austrians argue in favour of a dual banking system, split into separate functions of custodians of deposits and arrangers of finance. They say this arrangement would banish bank credit expansion and the destructive business cycle with it.
But credit creation is not restricted to banks and is common in all economic activities. Banning banks from dealing in credit cuts across established law over credit which has evolved since Roman times. By doing so, banks of deposit would probably fail as a permanent solution and could turn out to be impractical as well.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Governments, History, Law
Tagged Austrian economics, Banking, Limited liability
Hans Hoppe is an interesting thinker. From Hoppe and Deist at mises.org:
[This interview with Jeff Deist and Hans Hoppe will appear in the upcoming issue of The Austrian (March–April 2020).]
JEFF DEIST: Your recent talk in Vienna mentioned growing up happy but poor, the son of East German parents who had been driven west during the Cold War by the Soviets. Can you elaborate on the lasting impact their experience had on you, in terms of how you view state power and its attendant evils? Are you in some ways still influenced by their “eastern” roots?
HANS-HERMANN HOPPE: The fact that my parents were both refugees, ending up in the West by the accident of WWII, driven away and separated from their original homes in Soviet-occupied East Germany, played a huge role in our family life. In particular the expropriation of my mother’s family and its expulsion from house and home by the Soviets, in 1946, as so-called East Elbean Junkers, was a constantly recurring topic at home and assumed even more importance after the collapse, in 1989, of East Germany and the following German “reunification.” My mother, as many other victims of communist expropriations, then sought and hoped for the restitution of her property—in which case I would have been set for life. However, as I already knew and correctly predicted by then, this was not going to happen. There was to be no justice. But my parents were shocked and outraged.
The numerous trips we took to visit various relatives in East Germany confirmed my parents’ judgment of the Soviet system. Shortages, waiting lines, empty stores, inferior products, and lousy services. All around controls, spies, and informants. Everywhere grey ugliness and decay. A prison wall built around the whole country to prevent anyone from escaping. And commie-proles droning on endlessly about the great successes achieved under their leadership.
Yet as a little boy and a teenager I did not understand the reason for all this mischief and misery. Indeed, the East German experience did little if anything to shake my own leftist convictions at the time. East Germany, I thought, was just the wrong type of socialism, with the wrong people at the helm.
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From James E. Miller, Mises Canada:
Back in the early 1960s, financial journalist Henry Hazlitt warned against efforts to create an international system to help facilitate the smooth transfer of currencies. Representatives from the world’s leading governments were attempting to increase liquidity in global markets. They wanted to make sure the banking system and sovereign governments would never had a lack of funds. Hazlitt was not fooled. “In plain English” he wrote, “they are pushing for more world inflation.” His words, though accurate, went unheeded. The International Monetary Fund, which was established decades earlier, was to play a role in facilitating endless inflation.
Half a century later, the IMF has overseen a tumultuous business cycle that came to a screeching halt in 2008. Big, overleveraged banks were on the verge of collapsing; millions of people lost their jobs and their homes; governments spent billions of dollars to maintain their welfare safety nets. The end result, which is still ongoing, is stagnant economic growth with dim prospects for recovery.
The IMF not only failed to stop the financial crisis from occurring, it encouraged the coordinated credit expansion that allowed housing bubbles in various industrialized countries. But now, the global financing giant appears to be having a “repent thy sinner” moment. In the Fund’s recent bi-annual report, the organization warns that the ultra-low interest policies of central banks is setting the stage for a new bust. According to the Guardian, the IMF says that “more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.”
Does this sound familiar?
Austrian-minded economic observers have been issuing the same warning for years. In the lead-up to the collapse of Lehman Brothers, mainstream commentators were aglow at the new prosperity. They thought the good times were here to last. Investment expert Peter Schiff was famously mocked on national television for saying that U.S. housing prices were unsustainable. Few economists sensed that anything was amiss, even as the Dow Jones Industrial Average hit historic highs. They were all doing their best Irving Fisher impressions; convinced that the market would never plummet but only keep rising.