Let There be Money – Part 3

Why The Money Monopoly is Evil

Read: Part 1 | Part 2 | Part 4

Keynes and the “New Deal”

New Deal
New Deal

According to Ludwig von Mises, the boom of the “Roaring Twenties” was the result of the US Federal Reserve Bank and its policy of easy credit. When it became obvious that the economic boom was built on sand, the economy crumbled. Unfortunately, the view of the Austrian School – which identified centralized intervention as the root of the crisis – did not prevail at the time. Instead, the theory of British economist John Maynard Keynes guided popular opinion and governmental response. According to Keynes, increased government intervention is necessary during times of economic crisis. He claimed that governments should fund economic stimulus plans by creating debts.

Politicians embraced Keynes’ theory as it gave them scientific justification to increase governmental power. Throughout the 1930s, state intervention in the economy became the rule. This was especially damaging in the Soviet Union and in National Socialist Germany, but even in the USA economic freedom was severely reduced. 

Owning gold was made illegal for US citizens in 1933. President Franklin D. Roosevelt’s policy of state intervention stood in stark contrast to the free-market policies of former US administrations. In accordance with Keynes’ theory, he spent huge amounts of money to “stimulate the economy.” These measures gained him short-term popularity among voters, but it expanded the state apparatus to a size that became harmful to individual liberty. In fact, Roosevelt’s so-called New Deal did not end the crisis, but prolonged it, as Austrian economist Murray N. Rothbard demonstrated in his book America’s Great Depression.

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Bretton Woods and the End of the Gold Standard

Gold Bars
Gold Bars

At the Bretton Woods conference in July 1944, the USA and its war allies created the post-war financial order. The US dollar became the anchor currency for the world, with the US government guaranteed other central banks that they could sell their US dollar reserves for gold at a fixed rate. Thus, the Bretton Woods system established an indirect worldwide gold standard

This system worked well for a while, but when the US started to print more and more dollars to fund the Vietnam war, its weakness became obvious. The USA did not have enough gold to redeem for all the dollars circulating in the world. When several governments, especially the French, exchanged increasing amounts of their dollars for gold, the US gold reserves began to shrink to alarmingly low levels. On August 15th, 1971, President Nixon abolished the gold backing of the dollar. That was the beginning of the end for the Bretton Woods system, which was formally canceled in 1973.

Since then, currencies are no longer backed by anything. Unbacked currencies are called Fiat, which has nothing to do with the Italian car brand, but is derived from the Latin expression for “let there be”. Fiat currencies only exist because the state proclaims them to be “legal tender.” Without a government forcing people to accept it, no one would work for a piece of paper.

Fiat currencies have been the worldwide norm since 1971. In a Fiat money system, money can be created in two ways. It can be issued by a central bank, which has the exclusive right to print banknotes and mint coins. The central bank then lends money to commercial banks for an interest rate it defines itself. Money can also be created by commercial banks. The state has granted them the privilege to generate new money each time they issue credit.

Loans from Nowhere

Jumbled Words in Finance
Jumbled Words in Finance

In the age of gold- and silver-backed money, a loan could only be given if someone had saved enough money to issue one. The lendee would ask a bank to act as a middleman in a transaction between him and someone else in return for interest. Today, a loan can be given without being backed by anyone’s savings. When a bank lends money to someone, it is newly created money. The bank only has to deposit a small fraction of each loan (in the US it is around 3%) as security at the central bank.
This system is so absurd that most people would not believe it: while a borrower needs to work hard to pay back his loan and the interests on it, a bank can create new money out of thin air by the push of a button. A borrower may lose the house he has bought for a mortgage if he defaults. A bank can simply write a bad loan off. If it runs into financial problems, it is usually bailed out with taxpayers’ money. When new money comes into the world, new debt arises with it, which has to be paid back with an interest. This vicious circle leads to ever-growing piles of debt. Only the wealthy and the banks benefit from this system. For everybody else, saving money or accumulating a fortune becomes increasingly difficult.

The Austrian Way Cover Page
The Austrian Way Cover Page

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

Let There Be Money

Read: Part 1 | Part 2 | Part 4

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