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End the Central Bank

Mises Daily: Monday, November 10, 2008 by

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[This talk was delivered at the Mises Institute's Supporters Summit, November 1, 2008, Auburn, Alabama. An MP3 audio version of this talk is available for download.]

I originally conceived of this talk — a case for abolishing the central bank — as an applied update to my 1995 lecture at the Heritage Foundation on "Why Austrian Economics Matters." That's because so many of the policy ideas suggested within the Austrian framework can be subsumed under the need to abolish the central bank.

The Austrian school has been battling the central bank since 1913 and before. Right now, the writings of our tradition are more prominent than ever before, thanks to our great predecessors, our faculty, our students, our donors, our publishing programs, our electronic media, and the desperate search on the part of people all over the world for an explanation of the current crisis, and a new way out.

Never have the ideas of the Austrian tradition reached such heights as in recent weeks. I'm pleased to report that the Mises Institute, after 26 years of preparation, was ready in every way. We have economists, historians, philosophers, and many others working at the university level all over the country and the world who have been trained in our programs, such as the Mises University, the Rothbard Graduate Seminar, and the Summer Graduate Fellowships. They were ready to provide answers in a classroom setting and for the media.

The Quarterly Journal of Austrian Economics and the Journal of Libertarian Studies have helped build the foundation, as has our Austrian Scholars Conference. Books such as Rothbard's America's Great Depression and The Panic of 1819, Hayek's Prices and Production, and Mises's Causes of the Economic Crisis, among 300 other titles, have been flying out of our warehouse. We've issued new books on this topic, including de Soto's Money, Bank Credit, and Economic Cycles. Hülsmann's Ethics of Money Production couldn't have come out at a better time. Nor could our new edition of Rothbard's Mystery of Banking.

Our online bookstore has been the world's source for information for scholars and citizens, just as our website as been the source for news, data, and analysis, with thousands of hours of video and audio that address the topic at hand. Our offices have stayed constantly busy. I would say that we have all been taxed as never before, but I think we should reserve that word for involuntary labor, not work we glory in. And the world press has taken notice as never before. Today's events are similar to the crash of 1929, but there is a difference this time: the ideas of our tradition are in circulation.

The Mises Institute has been consistently pushing this message since our founding in 1982. Our first conference in 1983 was on the gold standard. A book on the topic soon followed. It has not been a fashionable subject, and we endured many years of criticism and even attacks because we kept focusing on the dangers of the Fed and fiat money. Even as far back as the late 1980s, we have been editorializing against the federal priority of giving all living things a home to own. There is an economic and moral difference between legitimate ownership that comes from deferred consumption, and premature ownership that is subsidized by the monetary system.

I report on this not so that we can say "We told you so," but rather to underscore the need to stick to principle, depart from the crowd, avoid the fashion, and adhere to the truth no matter what. This is what Mises taught us, and if he had done nothing more than be his era's most tough-minded resister to collectivism of all types, it would have been enough to earn him an institute founded in his name.

In some ways, it's tragic that it takes a crisis on this scale to cause this level of focus on our work. We all wish that that the drive for truth alone would turn attention to what we do. But the scarcity of time dictates that people tend to learn on a need-to-know basis. For that reason, Google Trends records a massive increase in searches for Austrian economics, with the leading city for most such searches being Washington, DC, but extending to all areas of the world. The Google news archives on searches for Mises show more mentions this year than any year since records have been kept.

Of course, the Austrian school has so much more to offer than a theory of the boom-bust cycle. It has value theory, property theory, price theory, a compelling logic for understanding the entire microeconomic foundation of the science, a methodological case to make for deductive theory, production and capital theory, a case for the origin and function of interest, as well as contributions to trade theory, industrial organization and antitrust, a vast historiography that turns the mainstream on its head, a huge and innovative critique of war and of interventionist and socialistic states — as well as a passion for liberty as the foundation of social development.

As I said in the earlier speech on why Austrian economic matters, we are not merely talking about a school that has contributed one or two ideas, but an entirely different way of thinking about the meaning and applications of economics and a wholly different conception of the social order. Had progress in economic thought not been interrupted by Keynesian theory and the rise of positivism in the social sciences, we would not even be speaking of the Austrian school. Misesian theory would be economics proper.

For this reason, we can hope that if people get interested in the Austrian theory of the business cycle, this will eventually turn to deeper study and intellectual transformation. What starts as a narrow interest changes to a broad interest. We know that this happens often, and it is the stuff of which intellectual revolutions are made.

For now, what interests people is the Austrian account of the bust. And the Austrian account is the only compelling one in circulation. In fact, as compared with the past, parts of the Misesian-Rothbardian view of the cycle have fully entered the mainstream, with just about everyone agreeing that the current bust originated in a bubble fueled by easy money. That is a message that our forbearers never entirely made stick.

In the 1930s, they struggled for a hearing in ways that we do not. I'm almost in a shock to say it, but these days, the idea that the Fed should be abolished is no longer greeted with catcalls. No longer is the Fed seen as the savior of mankind.

Indeed, we can sum up the case for abolishing the central bank rather quickly.

Abolishing the Fed would put a huge brake on the planning state. Without the ability to expand the money supply at will, the federal government would become about as threatening as state or local government. That is to say, the federal government would still be an intolerable imposition on life, liberty, and property; but we wouldn't be worrying about hyperinflation, large-scale bubbles in specific sectors, crazy business cycles, trillion-dollar bailouts, controls that reach into every nook and cranny of our lives, a cradle-to-grave welfare state, or a global empire that invades any and every country at will, and makes America the enemy to whole regions of the world.

That's only the beginning of what the end of the Fed would mean. It would dramatically change the political culture in this country. Bureaucracies would tumble. Trade would stabilize. The investment-risk calculus would accord with the free market. The Left could no longer live out its pipe dreams of socialist utopia at our expense. The Right would have to give up its wacky notion of a world police state. The power ambitions of whole sectors of society would be scaled back.

The state is always and everywhere a danger, even when it has no monopoly on money and no printing press that can create money tickets at will. But a state with the ability to make its own money is a grave and relentless threat to prosperity and freedom. It leaves the future entirely to the discretion of the money managers. Every day we live under the threat that the United States could be the next Weimar Republic or even another Zimbabwe. All that stands between us and that day is the wisdom and prudence of the Fed.

And we've seen in recent days just how much those character traits matter when the crisis hits. We've learned that nothing counts to these people but the short-term well-being of themselves and their friends. They will gladly give up our future for their immediate satisfaction.

We've learned that Congress — with the sole and heroic exception of Ron Paul — is no help. It too was bought off by newly printed money — just as if the local counterfeiter agreed to cut the city council in on the deal. Many of us have wondered whether or not the government and its central bank were capable of repeating such historic calamities as wage and price controls or total monetary destruction. But now we see that there are no institutionalized limits to the level of depredations they are willing to commit.

But what is lacking today as versus the past is a theoretical rationale. Time was when the inflationists could rely on the promises of Keynesianism to turn stones into bread. Few today believe that is possible.

You can detect the absence of sound theory in the terms used to debate the policy response. On the one hand, everyone seems to agree that reckless lending is the source of the problem. On the other hand, they are proposing more reckless lending as the solution to the problem. It is as Hayek said: proposing to cure a poisoning with more poison.

Does anyone really believe that bailing out the system is the answer? Perhaps a few weeks ago, there were still some policymakers who believed that. But when the billions and trillions have failed to do anything but prop up zombie companies, it becomes clear that these bailouts will not have and cannot have any positive macroeconomic effects.

Governments can pretend to be effective in a host of ways. They can ban products for "our own good." They can march around overseas and claim to be killing bad guys. They can say they are protecting you from poverty at both ends of life. But one thing that government cannot do, and very obviously cannot do, is stop prices that want to fall from falling, all else remaining equal.

A government that wages war on the price system is a government itching to lose a fight.

Stabilization policy is a war on human volition. Think of the recent efforts to inflate the money supply. The Fed is building up reserves as never before. They are making these available to banks at unprecedented levels. Meanwhile, the banks are playing it safe and waiting to see what is and is not profitable. This is roughly what happened in 1930 as well. The central bank tried to inflate through the credit markets, but ultimately it bumped up against the unwillingness of people to undertake the risk.

So it is today. The critical mechanism that makes it possible for the Fed to do what it wants to do is missing. Short of actually putting everyone in a FEMA camp and forcing them to borrow, lend, and spend, there is very little that the Fed can do to overcome this problem.

When you speak to people about this issue, it is best to use a simple analogy. Choose any good you can think of. Let's say it is the price of milk that takes a sudden tumble and milk producers don't like this state of affairs. Government swears that it will raise the price of milk and does so by fiat. Milk is declared to cost $6 per gallon. What will happen? It will sit on the shelves as consumers move to substitutes.

Then the stores themselves will have surpluses and might even demand compensation. They certainly won't buy any more from producers. Then the producers will complain. At this point government can bail out the producers, or buy the milk themselves. Perhaps they will ultimately require everyone to buy milk and drink it. But ultimately, short of turning all citizens into tin soldiers, there is nothing that government can do to change the underlying reality. A war on prices is a war on human choice and, ultimately, a war on unchangeable aspects of reality.

To confront this truth is to come face to face with economic law. Economic law is something that surrounds us constantly as a fact of life and a driving force of the material world. To deny economic law is akin to denying gravity or the change of seasons. But its principles remain abstract enough to require careful thought in order to discern them and comprehend their meaning.

Bad times are good times for introducing economic ideas to people who otherwise would be content to be blissfully unaware. More absurdly, the ignorant and the propagandists will continue to claim that the economic meltdown is a result of laissez-faire or too little regulation or a lack of much-needed nationalization and socialization. A small introduction to the reality of economic law can change everything.

But let us return now to the realities of the present situation. There is indeed a risk of further meltdown, depending on how far government is willing to go in its war on reality. On the other hand, there are ways to prevent calamity. We will soon hear reports of much higher unemployment. There is an urgent need to cut employment taxes, to end the minimum wage, to reduce mandates on business, to repeal union privileges, to cut FICA, to scrap employment discrimination law — to restore a free market in labor.

There is also a chance for dramatic monetary reform. A gold-coin standard would be ideal. Absent that solution, a repeal on the restrictions on private money production and banking would be a huge and important step. We still have time to disable the power of central banking, ruining it before it ruins us.

A government that wages war on the price system is a government itching to lose a fight.

And here we get to the positive theory of money and banking from an Austrian perspective. You understand nearly all of it if you absorb the following insight: Money is a commodity like any other commodity. It should be produced and managed under competitive market conditions, the same as shoes, eggs, or computers. Banking too is a market service that should be managed by the market order, with no government involvement, and so subjected to the discipline of market forces, including the restrictions against fraud.

Establishing a market system of money and banking requires nothing other than having the government step entirely away. This might seem unlikely, but so did the unraveling of the Soviet Union in 1989. Socialist ideology was bankrupt in the same way that Russia was bankrupt. So it is in our time. Major players in the banking system are bankrupt in the same way that stabilization policy is intellectually bankrupt. We cannot rule out the impact of intellectual bankruptcy on real economic history.

There is a certain poetic justice that alarm at the central bank would be the driving force behind the new interest in the Austrian school. Austrian economics was born with Carl Menger's reflections and innovations on the nature and function of money. It matured under Mises's own contributions and warnings about the dangers of central banking. Hayek joined Mises in the 1920s and 1930s to focus on the business cycle and the dangers of using the money and banking system as a stabilization tool. This led to further reflections on macroeconomic principles.

Mises and Hayek lived in a world that had fallen for Keynesianism, so their advice was rejected on grounds that it was outmoded. Today, that belief is gone and people are looking for new answers.

It is time that the world return to the one school of economic thought that predicted this current crisis, explains its origins and source, and offers the only plausible way out. It doesn't matter that some of their writings date back more than 100 years, or, in the case of our predecessors, even up to 800 years. Economic science teaches timeless truths. Sound money is an immutable need always and everywhere.

I'm pleased to say that I'm under no burden today to explain to you why Austrian economics matters. We know that it does. We know that it is the one theoretical apparatus that fully accounts for the seeming chaos that surrounds us today. But the Austrian school does more than merely explain why we find ourselves in the worst monetary meltdown in generations. It shows the way out, providing an achievable vision of Mises's free and prosperous commonwealth.

I am also pleased to tell you that, just as for the last 26 years, you can always count on the Mises Institute to show the way.