Panel on Alternative Economic and Monetary Systems
On July 23rd I participated in the Panel “Alternative Economic and Monetary Systems.” The event was part of the Summer School organized by OEaD in Vienna. It was a great opportunity to talk to more than fifty students from all over the world.
My opening statement focused on the Austrian alternatives to current monetary policy. Central banks are doing a bad job and there’s much room for improvement.
In 1971, the global economy started perhaps the greatest monetary experiment. In one of his visits to Vienna, John Charalambakis –a regular speaker at the Free Market Road Show– detailed what has been going on since the Gold Standard was abandoned:
· Two oil crises in the 70s
· The so-called “lost decade” in Latin America during the 80s
· The Louvre and the Plaza Accords –both due to currency crises–
· A stock market crash in 1987
· A savings and loans crisis in the US in 1989
· Mexico’s 1995 bankruptcy –causing the “Tequila effect” in Latin America–
· The Russian bankruptcy in 1998 and Brazil had huge problems that same year
· Argentina’s default on its sovereign debt and the government nationalized bank savings in 2001
· The boom of the “dotcoms” in the beginning of our century
· A boom in the real estate sector in the US which created a big bubble and produced an apocalyptic bust in 2008
· [and I would personally add to John’s list] 2009 — ? The era of Quantitative Easing
Money today is a monopoly… and a very special kind of monopoly — a state monopoly. We tend not to like or want monopolies. We wouldn’t like a state monopoly to provide us internet or cellphones, but we just have to deal with a state monopoly on money.
What’s more, the two main tasks of any central bank are questionable. Central banks are “lenders of last resort” for the banking system and also set the interest rate. The interest rate is the price of money. Prices are important because they send signals to the economy. If, for instance, the price of money is artificially too low, this wrong may very well cause malinvestments. For instance, an artificially low interest rate can lead entrepreneurs to invest in sectors which would not be profitable with a market interest rate. Thus, a bubble is pumped up by the easy money and when the correction finally comes it bursts.
The “lender of last resort” feature is also very problematic. As a first point, no other sector or business in the economy has such an institution to help them when they mess up. Moreover, this “safety net” the banks have is likely to trigger a behavior labelled as “moral hazard.” This happens when you don’t have to be accountable for your own actions.
Even if central banks were run properly –which is probably impossible– there’s always the additional problem that the political class will be tempted to use them to their own advantage. Which baby-kissing politician wouldn’t like to have their hands over the money-making machine?
When these politicians are relatively sophisticated, they could run a scheme such as Quantitate Easing (QE). So, they would pump money into the economy which will end up in the stock market to create an asset bubble and a fake wealth feeling. If they’re not so sophisticated, they would use and abuse the central bank for funding and will cause huge rates of inflation and even hyperinflation.
So, if the central banks are so bad and dangerous… what can we do? In the very short run, I believe, “legal tender” laws should be abolished. This would be a very good way for citizens to choose among different currencies and protect themselves from irresponsible central bankers.
Bitcoin and crypto-currencies in general play an interesting role. They’re indeed denationalized money. Let people experiment.
Another idea could be to allow private individuals and institutions to issue their own money. Why not let other money circulate and see what happens?
Ideally, we should try to abolish the central banks altogether. The market for money should be like any other market: as competitive and open as possible. Austrian economists call this “Free Banking” or “competing currency supply without lender of last resort.” Lawrence White, in particular, has written extensively on this subject. George Selgin, too. And, of course, Friedrich Hayek.
During the Q&A session I was asked several questions.
The first one came from a Nepalese gentleman who wanted to know about the Argentine experience with currency peg during the 90s (Nepal has a currency peg with the Indian rupee).
Argentina ended applying the so-called “Convertibility Regime” because after five decades of crescendo inflation the country suffered hyperinflation in 1989 and 1990. I remember what was like that supermarket prices were changing from the moment you entered until the moment you left. I remember the shortages and the lootings. It was a complete disaster due, in part, to a history of monetary mismanagement.
When convertibility was introduced the phrase everybody in the government used was: “We closed the door and threw away the key.” After decades of insane money printing they had to apply such a strict system to defeat inflation. And they did.
In principle I sympathize with monetary regimes such as the currency peg. I like the idea that money printing is taken out of the hands of politician and central bankers. However, such a tight regime needs to be accompanied by a set of measures that restrict spending and balance the budget. Like addicts deprived of their primary drug, the Argentinean authorities looked for an alternative substance. When they could not print money they found that they could borrow money from abroad.
In 2001 everything finally collapsed.
Then a couple of questions regarding “degrowth” and environmentalism came.
The “degrowth” agenda doesn’t seem very interesting for most of the world, I believe. I come from Argentina and we desperately need economic growth. Moreover, in the past three decades or so economic growth has lifted an immense amount of people from poverty. China is the obvious example, but not the only one.
The environment is certainly an important issue. But I refuse to fall for the eco-pessimism. Karl Popper used to say that we live in the best world that has ever existed. Popper, of course, acknowledged that there were problems. But he also acknowledged that our lives have dramatically changed for the better in the past century. I believe Popper is still right. And I believe that private initiative is the best answer for the environmental challenges we face. Take for instance Elon Musk’s super battery. It is entrepreneurship what will save us.
I had the privilege to tour Europe with Deirdre McCloskey for the eighth edition of the Free Market Road Show. She has written a lot about “bourgeois virtues” and the importance of entrepreneurship. I finished my remarks at the panel paraphrasing her: The deal that the entrepreneurs offer us is: “Set me free and I will make you rich, healthy, you’ll live longer, and your children will be better than you.” I think that’s a very good deal.
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