Friday, October 10, 2008

Mark Thornton's Answers to Journalist's Questions

Q&A from Austrian economist Mark Thornton:

Here are my answers just returned to a journalist asking questions:

1) In which way do the central banks contribute to the problems we see now?

The central bank created the problem in the first place. Low interest rates and a defacto guarantee to bailout everyone (the Greenspan and now Bernanke PUT) caused the housing bubble which in turn led to such things as reduced lending standards, mortgage-backed securities and financial corruption.

2) Can or should the government or central banks do anything to prevent a collapse of the banking system, at this point? Why not?

No, they should do nothing except unwind the existing bailout measures and return their policies to normal. They should be put out of business.

3) What will be the consequences of the continued attempts by the authorities to prevent more bank failures and the seizing up of the credit markets?

Bailout policies are what turn normal recessions into depressions. Look at the US in the 1930s and 1970s and Japan in the 1990s. In each case government undertook aggressive bailout policies designed to keep incumbent shareholders and managers in place by propping them up with credit and policies to keep prices high. The result was decade long periods of higher unemployment and stagnation.

4) Is a world without central banks possible or desirable? Please explain.

Central banks are unnecessary and harmful. It is both possible and desirable to eliminate them. Some of their functions could be handled by the market institutions such as the clearing house function. Setting interest rates could and should be done by the market. Persistent and erratic inflation of the money supply is not desirable so that the function would be eliminated and control of the money supply would be returned to the market in the form of gold and silver mining production which is very consistent and difficult to manipulated because it takes "real money" to mine precious metals.

5) How does the lack of a gold standard contribute to the problem?

A gold standard is the most important part of the solution because it ties government's hands from deficit spending and inflation. However, fractional reserve banking is also a big contributor to the problem of monetary instability, inflation and the business cycle. We need to abolish fractional reserve banking on demand deposits and return to laws pertaining to deposits and warehousing that existed prior to central banking and indeed continue to exist today in all other warehousing contracts. This would mean that every dollar deposited into a demand deposit account would have to be maintained on reserve by the bank. There would be no reserve requirements for bond proceeds, CDs or other time deposits. This would take the leverage and instability out of the monetary system.

6) How would one prevent that the gold standard is abandoned at the first sight of serious problems, as has been the case in the past - and also when countries have attempted to peg their currencies to the US dollar?

The Treasury and the Fed should not be permitted to issue paper dollars, only gold and silver coins, and private mints should also be able to issue gold and silver coins so that the money supply is market determined (and that the ratio of precious metals in monetary use and other uses would be in harmony). We should have a coin-based system, not a gold-exchange system that allows the Treasure to "fudge" with the money supply. The dollar should be fixed in a weight of silver because that is what emerged on the market (true gold was used as money in large transactions, but we only went on a gold standard because the British made bad monetary decisions when they were on a fixed ratio of gold to silver and Gresham's Law went into effect). There should be no fixed ratio of gold to silver, but people should be free to use both as money. Checks and debit cards would still exist and indeed debit cards could automatically translate gold demand deposits into silver-denominated purchases. These basic tenents should be written into all Constitutions to block the actions of government, but not to forestall innovations of the market.


DC said...


Interesting stuff here. I myself want to look much deeper into monetary systems and how we got to the place we are at, and where can we go from here to make an economically sound system? I feel as though now is the time to educate the masses about true economic implications of our government interventionism.


Minnesota Chris said...

You're right, David, this is a time we have to really spread the message and teach others why peace and personal liberty are in all of our best interests. The best place to start is the Mises Institute.