An Introduction to Austrian Economics
Part 4 – by Aaron Koenig
In part 3 of this series, we have presented the ‘Austrian’ understanding of interested rates.
In the current monetary system, this natural balance of interest rates is malfunctioning. Loans are not given by people who have gained a surplus and want to invest it, but by banks that have the privilege to create money out of thin air. The interest rate is defined by a central bank, so it does not have any connection to the saving rate and the “natural” interest rate that a free market would produce. This results in misleading incentives for investors. Due to artificially low-interest rates, they invest their money into projects that under normal circumstances, would not be economically viable. Cheap money can cause a short-termed economic boom, but it is only a straw fire. In the long run, uneconomic investments will fail and the boom will turn into a recession.
Ludwig von Mises’ theory of business cycles does not only deliver a logical proof of this, he also correctly predicted the economic crisis of 1929. According to his theory, the boom of the “Roaring Twenties” was caused by cheap loans issued through the US Federal Reserve System, which was founded in 1913. When investors discovered that this boom did not correspond to real value being created, it collapsed.
Also the financial crisis of 2007 – 2008, which hit many “economic experts” by surprise, was correctly predicted by Austrian economists. The combination of the Federal Reserve’s low interest rate policy with the political demand to grant loans to people who do not have the conditions to afford them resulted in the burst of the real estate bubble. Many complicated financial products that were “secured” only by subprime credit became worthless.
From an Austrian perspective, the only money that is saved by abstaining from short-term consumption can lead to a sustainable buildup of capital. The current monetary system, which is based on debt and loans created from thin air, does not deserve the name “capitalism”, as it does not lead to an accumulation of capital and has nothing to do with a free market economy.
Austrian economists reject a monetary system that is based on a state monopoly. They observe many harmful effects that are the results of governments and central banks acting. The Austrian School has logically proven why a central authority should not fix prices. However, a central institution fixes the price for the most important good of an economy, which is money. That’s why the libertarian author Roland Baader calls our current system “money socialism.”(3)
If you like this article, you will be glad to read, “The History of Money” by Census Open Finance
Gold standard or Competition?
Inside the Austrian School, there are different opinions on which is the best alternative to a state monopoly on money. Ludwig von Mises was in favor of a currency backed entirely by gold, which would theoretically prevent government manipulation. Friedrich August von Hayek believed that governments would never allow such a strict gold standard; he, therefore, favored a free competition of currencies.
In his book The Denationalization of Money, he suggested that state-issued money should compete with money issued by private companies. In such a free monetary system, he predicted, better currencies would prevail. But why is a state monopoly on money so bad? In order to understand this, we need to explore the nature of money.
Now that we have accomplished an overview of the important attributes of a Free-Market society, we would be pleased to guide you to absorb a broader perspective on what money really means to us as humans, especially in the branches of our society.
In the next series, we will reveal to you the real nature of money, and in what sense it truly becomes a true store of value with this article entitled “Let there be Money” by Aaron Koenig.
This is an excerpt of Aaron’s book A Beginner’s Guide to Bitcoin and Austrian Economics
Aaron Koenig is a contributor to the Census Blog. He is an entrepreneur, consultant, writer and film producer, specialized in Bitcoin and Blockchain technology. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution