Central Banks Are Destroying What Was Left of Free Markets
President Reagan memorably said that the nine words you don’t want to hear are “I’m from the government, and I’m here to help.” Governments in all the major jurisdictions are now making good on that unwanted promise and are taking responsibility for everything from our shoulders.
Those receiving subsidies and loan guarantees are no doubt grateful, though they probably see it as the government’s duty and their right. But someone has to pay for it. In the past, the redistribution of wealth through taxes meant that the haves were taxed to give financial support to the have-nots, at least that was the story. Today, through monetary debasement nearly everyone benefits from monetary redistribution.
This is not a costless exercise. Governments are no longer robbing Peter to pay Paul. They are robbing Peter to pay Peter as well. You would think this is widely understood, but the Peters are so distracted by the apparent benefits they might or might not get that they don’t see the cost. They fail to appreciate that printing money is not just the marginal source of financing for excess government spending, but that it has now become mainstream.
There is almost a total absence in the established media of any commentary on the consequences of monetary inflation, and in a cry for more we even have financial experts warning us of a deflationary collapse and the need for the Fed to introduce negative interest rates to stave off deflation. Yes, there are deflationary forces, because banks wish to reduce their loan exposure at a time of increasing risk. But we can be sure that central banks and their political masters will do everything they can to counter the trend of contracting bank credit by increasing base money. There can only be one outcome: the debasement and eventual destruction of fiat currencies.
There is an aspect of the destruction brought about by monetary policy which is almost never considered by policymakers, and that is how it distorts the allocation of capital and leads to its misallocation. In free markets, capital is scarce and must be used to greatest effect if the consumer is to be properly served and the entrepreneur is to maximize his profits.
Capital comes in several forms and encompasses every aspect of production: principally an establishment, machinery, labor, semimanufactured goods and commodities to be processed, and money. An establishment, such as a factory or offices, and the availability of labor are relatively fixed in their capacity. Depending on their deployment and capacity they produce a limited amount of goods. It is just one form of capital, money and credit, which central banks and the banking system now provide, and which in its unbacked form is infinitely flexible. Consequently, attempts to stimulate production by monetary means still run into the capacity constraints of the other forms of capital.
Monetary policy has been increasingly used to manipulate capital allocation since the early days of the Great Depression. The effect has varied, but it has generally come up against the constraints of the other forms of capital. Where there is excess labour, it takes time to retrain it with the specialized skills required, a process hampered by trade unions ostensibly protecting their members but in reality resisting the reallocation of labor resources. Government control over planning and increasingly stifling regulations, again putting a brake on change, mean that changes and additions to the use of establishments have lengthened the time before entrepreneurial investment is rewarded with profits. Government intervention has also discouraged the withdrawal of monetary capital from unprofitable deployment, or malinvestments, lengthening recessions needlessly.
When the advanced nations had strong industrial cores, the periodic expansions of credit and their subsequent sudden contractions led to observable booms and busts in the classical sense, since production of labor-intensive consumer goods dominated production overall.
There have been two further developments. The first was the abandonment of the Br
Article from Mises Wire