The Crash: A Libertarian Solution

In our last blog entry, we discussed the fact that our masters in Washington and in the establishment press want range-of-the-moment “solutions” to the current financial crisis–without reference to what actually caused it.

There is method to their madness. Once you understand the causes of booms, bubbles, and crashes, the long-term solution automatically presents itself. Those in power have a strong, vested interest in keeping us misinformed.

The cause of boom and bust cycles is the artificial creation of money and credit by the government. An increase in the supply of money and credit gives false signals to businesses that they should build inventories to meet the new, higher demand caused by cheap money. The influx of cash causes prices to be bid upwards, which causes demand to crash. Thus, we get a boom and bust cycle.

The natural inclination of the government (in league with banks and other financial institutions) is not to let the market crash, readjust, and start building again. The natural inclination is to delay the bust as long as possible, for political reasons. Thus, the Federal Reserve will tend to keep pumping in more money and credit, inflating the bubble, to the point where a huge, disastrous crash is unavoidable. This is where we find ourselves today.

As you can see, the cause of the boom and bust cycle is fundamental dishonesty in our monetary system. Inflation and cheap credit is really just a way of stealing from the people without having to admit it. Inflation, as Ayn Rand once commented, is a crime on so gigantic a scale that its sheer size masks itself.

One of the supposed purposes of having a Federal Reserve, believe it or not, is to “maintain stability of the currency.” We gather that the Fed has failed in this mission, as the dollar has lost well over ninety-five percent of its value since the Fed was created almost a hundred years ago.

I submit that no human being or group of human beings can be given the arbitrary power to create money out of thin air, and not abuse the power. The very fact that anyone is given this arbitrary power shows that the abuse is not only expected, but demanded by those who run the system. The power to create money at whim, if it were done by you or me, would be called counterfeiting. When the government does it, it is called “monetary policy.” Call it what you will; at root, it is fundamentally dishonest.

The solution, then, is to move to a system of honest money–a one hundred percent gold and silver money system. Gold and silver–the natural money that evolved over time–is very difficult to counterfeit. Politicians cannot just create gold out of thin air. In a precious metals monetary system, the tendency of prices over time is to gradually go down, as more and more goods are produced against a money supply that increases slowly. Because of this, people have a power incentive to save.

A corollary to honest money is outlaw the inherently fraudulent practice of “fractional reserve banking”–yet another fancy term for counterfeiting. Fractional Reserve Banking means a bank can lend money on deposits the customers can demand at any time. This is one of the way the Federal Reserve increases the supply of money and credit.

In a market economy, where gold and silver coins are the medium of exchange, and where banks cannot lend out money without a depositor’s explicit agreement, the supply of money and credit are not subject to wild fluctuations. In other words, honesty in money results in financial stability, which results in steady, strong economic growth.

The establishment will, by the way, automatically denounce any proposal to move to honest money. Gold coins, they will say, are a “barbarous relic.” The sheer chutzpah of such a statement is mind-boggling. In their Bizarro World, stable, honest money is “barbaric,” while depreciating pieces of paper are (I suppose) “civilized.” Seeing that establishment financial institutions and the government profit handsomely by the manipulation of money and credit, it is in their interest to keep the current, dishonest system unchanged.

Is there any hope of moving to an honest money system? Nope–at least, not in the short term. But in the long term, a complete collapse of the dishonest money system is inevitable. The only question is what will replace it. The more people learn about the crimes that support the current system, the more likely a peaceful revolution will someday take place.