Monetary Theory

Instead of the archetypal Austrian Business Cycle, writes Sean Corrigan, we currently have the bizarre modern phenomenon of the further discoordination caused by the wild orgy of debt-financed consumption. It has been officially promoted to keep aggregate spending and arbitrary price levels unconscionably high throughout the recession. To expect it to work is analogous to expecting that wrapping a corpse in an electric blanket to delay rigor mortis and bring about a resurrection.

Before the Fed blessed this country with unlimited liquidity, American history saw two previous attempts at creating a centralized institution of money and credit: the First and Second Banks of the United States. Both generated financial havoc, and were rightly opposed by the champions of freedom and sound money. Historian Scott Trask explains.

The answer is no, says Joseph Salerno. The Fed's performance has been astoundingly bad throughout Greenspan's tenure as Chairman. Perhaps worse, Greenspan has been a relentless purveyor of economic fallacies designed to obscure and justify this egregious performance. However, his departure from the stage might not be cause for unalloyed joy among proponents of sound money—Ben Bernanke could be lurking in the wings.

It was Mises, before Hardin, who identified the problem of overutilization wrought by public property. The problem is not limited to land ownership, however. In banking, writes Philipp Bagus, common deposit ownership leads to credit expansion and finally the drive to centralized control of money and banking in the form of a central bank.

Britain is similar to America in that it is suffering from the same political and economic maladies that have befallen its transatlantic cousin. Indeed, faced with a burgeoning fiscal deficit, fiat money-precipitated economic imbalances and renewed imperialism, albeit at Washington's behest, the U.K.'s own variant of "War, Prosperity and Depression," underscores the sources of America's woes. Grant Nülle explains.

It's easy to be depressed when you look around and see the state of monetary affairs, writes Christopher Mayer. But as many  historical vignettes show, we have one great force in our favor. The inability of governments to maintain fixed exchange rates in the face of opposing market forces is proof of the impotency government managers.

Since the early 17th century, American governments (colonial, state, and federal) have tried and failed to restart business expansions by reflation, writes Scott Trask. But new money in the system is no substitute for genuine production. It is too early to see the long-run consequences of the Bush-Greenspan reflation, but if the past is any guide we can expect the next decade to more resemble the 1970s than the 1990s.

Hans Sennholz writes: No central bank on earth, not even the Federal Reserve System, can continually inflate its currency and defy market rates of interest without harming both its currency and the economy. Inflation tends to accelerate and ultimately destroy the currency and cripple the economy. And no government whatsoever can suffer budget deficits of half a trillion dollars annually without impairing its standing with its creditors.

Balance of payments numbers such as those the US currently has would have broken many other currencies and would have triggered severe financial crises in other countries much earlier. But the US is different. It holds a privileged position within the international monetary system and its path to ruin may be longer and smoother than that for other nations. Nevertheless, there is a limit.

The importance of the Austrian school of economics is nowhere better demonstrated than in the area of monetary theory. It is in this realm that the simplifying assumptions of mainstream economic theory wreak the most havoc. In contrast, the commonsensical, "verbal logic" of the Austrians is entirely adequate to understand the nature of money and its valuation by human actors.