It’s a pity Max Rangeley’s recent interview with Lord Turner couldn’t have run on a little longer. His last question, to my mind, closed in on the true nub of the matter and Turner’s response begged for a follow-up.
Mr Rangeley asked if the Austrian approach, with interest rates set by the market rather than central banks, would have prevented the sort of serial bubbles we’ve experienced in recent decades. In response, before digressing into how a Chicago Plan environment might work in practice, Turner offered the following brief comment:
“The difficulty with that argument is that it doesn’t sit well with the insight, which is also a Hayekian insight, that the banks can create credit and money ex-nihilo.”
Post-digression, he continued:
“But if you have fractional reserve banks and a credit money and creation process, you are inevitably drawn into a role for central banks which goes beyond that von Mises, von Böhm Bawerk, Hayekian version.”
Remarkable, non?
After all, Mises deals at length with the inherent ability of a non-regulated, specie-based free banking system to automatically restrain the creation of credit and money:
“Free banking is the only method available for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular – one is tempted to say normal – feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.”
“Looking backward upon the history of the last two centuries, one cannot help realizing that the blunders committed by liberalism in handling the problems of banking were a deadly blow to the market economy. There was no reason whatever to abandon the principle of free enterprise in the field of banking. The majority of liberal politicians simply surrendered to the popular hostility against money-lending and interest taking.” 1
Lord yes. The roots of many, perhaps most, of our contemporary economic evils lie precisely here. I’ve always had a high regard for Adair Turner, and still do, but his quick dismissal of this most profound monetary and banking question, seemingly without properly grasping its importance, was a disappointment. I understand, of course, that today’s byzantine banking and financial structure is a long way from that of Mises’ day, and that the leap of faith required to consider true free banking is unthinkable to almost everyone. Indeed, Mises recognised the problem even back then:
“Economists may be right in asserting that the present state of banking makes government interference with banking problems advisable. But this present state of banking is not the outcome of the operation of the unhampered market economy. It is a product of the various governments’ attempts to bring about the conditions required for large-scale credit expansion.” 2
Without correctly analysing the fundamentals of banking, and of money and credit creation, it’s impossible to figure out how best to reconfigure our current unhappy and ineffective system. Mises does a better job of clearly laying out many of these underlying schematics, if you will, than anyone else I’ve encountered and his writings have lost none of their relevance. One may of course still choose to disagree with his policy conclusions, but it would have been lovely to see Max Rangeley and Lord Turner debate these structural issues at length.
* * *
- Ludwig Von Mises, Human Action, Fox & Wilkes, San Francisco, 1996, pp 443-4.
- ibid., pp 447-8.
Note: Human Action is freely available on the net, for example at the Mises Institute. Both of the above quotes are from Chapter XVII (12).
It amazes me that just because central banks are capable of creating money out of thin air, nobody seems to question whether they should be allowed to do so.
The ability of central banks to create money out of thin air, and the equally dubious ability of commercial banks to lend out money that they haven’t got, must be morally and economically questionable.
Yet we don’t seem to question it!
To Chris,
Please. Which central banks can create ‘money’ out of thin air?
It is the private Member Banks of the FRBS that have created every plug nickel of money (bank-credit) throughout every bubble in history that I am aware of.
If that ain’t ‘free banking’, I don’t know what is.
It is “thus”, that Turner says:
“”“But if you have fractional reserve banks and a credit money and creation process, you are inevitably drawn into a role for central banks which goes beyond that von Mises, von Böhm Bawerk, Hayekian version.”
If you really want the free markets to set interest rates (money costs), then you need to have the public function of determining (and issuing) the money supply.
If you want to have the private function of money creation, then you need to have someone (the CB???) set the cost of that money.
It is far preferable and accountable for the Guv to determine the adequate supply of money, and the market to determine its cost.
Thanks.