James Turk, 9 December 2024
This excellent book does much more than analyse historic and current market bubbles caused by excessive debt. Essays by several authors – with extensive references – offer a deep dive into the damage central banks are doing to economic activity with consequences that hinder progress toward humanity’s quest for ever higher standards of living.
The scourges of persistent inflation, income inequality, financial instability, and fiscal unsustainability have become all too obvious. These outcomes are not normal, and they are just some of the manifest degradations to the global monetary system that central banks have wrought.
The damage to economic activity occurs because central banks manipulate interest rates, accommodate reckless spending by governments, and foist other interventions on the market process that result in growing levels of debt. Together these lead to false price signals in markets that in turn create economic distortions to capitalism, the liberal economic and political system that allows individuals to create wealth. Our era of debased money – and the ongoing erosion of its purchasing power from inflation – is really an era of underpriced capital, which is perhaps the salient economic distortion causing the greatest harm.
One result is ever greater credit expansion that inevitably leads to bubbles, a destructive force of human activity because experience, pragmatism, and common sense disappear in the emotion-driven environment that bubbles create. As an example, recall the conventional wisdom routinely touted during the infamous Internet Bubble claiming that “website views were more important than profits”.
Some background information is necessary to put The Age of Debt Bubbles into perspective for those just beginning their enquiry into central banking. It began with the formation of the Bank of England in 1694, after which the collaborative structure of bank and government became institutionalised as other countries adopted a similar model. They sought to replicate the commercial success Britain achieved as its Empire circled the globe.
The “Bank” – as it became known because of its pre-eminent position – had one task. It was set by Sir Isaac Newton when in 1697 as Warden of the Royal Mint he moved the pound sterling from a silver standard to one of gold. The gold Guinea and then in 1817 the gold Sovereign – which today is still the Coin of the Realm – emerged as the world standard to measure prices.
Newton’s directive to the Bank was straightforward. It needed to manage its banknotes so that they always maintained the unchanging purchasing power of gold. Despite some hiccups along the way, the Bank did manage this feat, enabling the Georgians and particularly the Victorians to create an economic environment that raised living standards throughout the world, but as the Empire faded, so did reliance on Newton’s wisdom. In the twentieth century, central banking began controlling economic activity, rather than championing free markets and embracing the prudent and necessary discipline imposed by gold.
Central banking has evolved, which highlights the importance of this book. It provides basic facts revealing how central banks operate today and what they have done. It offers an eye-opening analysis of their track record and explains the fundamental structure of our modern monetary world.
Institutions orchestrate and put into effect an agenda; that is their raison d’être. But today’s central banking agenda has zero resemblance to that of the Bank’s original purpose and aims.
Linking central banks to bubbles and exposing their destructive acts that undermine the market process is perhaps this book’s most valuable insight of the many it offers. Another key insight observes: “No longer the feral beasts of an untamed market, big corporations have become pets of the state. Not wild wolves, but obedient lap dogs.” This euphemistic description of fascism makes clear the world we live in today. It is a world that threatens everyone’s liberty, and central banking as it has come to be practiced is very much an integral part of this ‘brave new world’.
Building on the practical and valuable knowledge of Mises, Hayek, and other luminaries and applying it to present day circumstances, The Age of Debt Bubbles provides the information one needs to re-think central banking as it has come to be practiced, which leads to the essential question. Do people want economic activity to be controlled, or do they want to be free to choose in unfettered markets?
Even a cursory reading of history proves it is the latter, but events can unfold the right way or the wrong way. The authors guide us the right way.
“The right choice is to restore market prices, hard budget constraints, honest money, and economic liberalism.” The destruction of currency and resulting economic collapse – an all too frequent twentieth century event – is the result of making the wrong choice, which we are doing by continuing the present path of bank and government collaboration.
The knowledge within this book can meaningfully contribute to a much needed debate to reveal whether central banks are useful and fit for purpose.
