IMF headquarters

Headquarters of the IMF

“So what do you think should be done?”

I often get this question after I presented my case against our fiat money system, and I sense there is a trace of frustration in it, a bit along the lines of, you are telling us that we are in quite a mess but you offer no policy prescriptions. That is a fair point, I guess. Most writers who lament the economic ills of our time usually have a bag of policy advice on offer. Indeed, whispering new policy ideas into the ears of those in power is what most of these writers aspire to. I reckon what separates them from me is that they believe in government and I don’t.

The mess we are in is the result of policy, of the very idea – the silly idea – that the field of money and finance would work better if it were supervised, managed, guided and controlled by the state; that if we had clever, powerful and astute policymakers, consulted by economist philosopher kings, we could enjoy a smoother, better functioning economy. And if ever things were not running so smoothly, we would change the policy. So what is your policy, Mr. Schlichter?

Could you not be a bit more –

constructive?

My conclusion is straightforward. There should be no policy. The existence of policy is already the problem. What we need is proper capitalism in money and finance. We do not have that now. What we have is limitless state fiat money, quantitative easing, systematic market manipulation, bailouts, regulations, the IMF, the World Bank, the FSA, FDIC, TARP and LTRO. We need proper markets, not more policy, not more manipulation, and not more bureaucracy. And not more fiat money. We need the state to exit the field of money and banking. Completely.

The main problem with monetary policy is that there is such a thing as monetary policy.

The state is the problem. It will not be part of the solution.

Before I tell you what I think should be done, let me give you another reason why I have been so reluctant to offer policy advice. The aim of my book Paper Money Collapse was to expose widespread fallacies and debunk erroneous common wisdom concerning money. It was not to provide a program for reform. The book is meant to be an eye-opener. Almost the entire discussion on money and banking today is based on deeply flawed theories. This is true of the financial markets industry where I worked for 19 years. It is equally true of most of the discussion in the media and, as far as I can see, academia.

My intention was to challenge the present consensus and the established orthodoxy. I think this is what needs to happen before we can even talk about the drastic changes that our system requires. Any policy debate of the type you read in The Economist or The Financial Times occurs within the boundaries of the established consensus. Questions of a more fundamental nature cannot be addressed in the context of policy debates.

But I am not going to evade the question about policy. So let me talk a bit about policy and reform.

The first piece of advice is this one, naturally:

Don’t start here.

The big mistake has already been made. The gold standard was abandoned, in a step-by-step process that began around the time of World War I and that culminated in Nixon’s closing of the gold window in August 1971. For more than 40 years, gold has played no official role in global monetary affairs. State paper money ruled. Everywhere.

This was the era of the central banker, the monetary bureaucrat, of artificially cheap credit, of stimulus, of big equity rallies, of bigger real estate bubbles, of constant debasement, of the quick buck and the big bonus, of growing banks and of ever more sovereign debt. The global financial system got unhinged. After four decades of persistent inflationism we have an overstretched finance industry gravely addicted to the constant drip-feed of cheap money and an out-of-control public sector constantly issuing debt that will never get repaid. Capital misallocations and asset mispricing are gargantuan. The establishment prescribes itself ever more easy money to keep the show on the road.

So the first conclusion is, there is no painless exit. The cleansing crisis is inevitable. Simply being honest about the mess we are in would not be a bad starting point for policymakers.

And to acknowledge that this can’t go on forever.

It certainly won’t go on forever.

Okay, but what next? If you could design policy, what would it be? What is the number one thing that we need to change to restore financial sanity?

Fiat-money-critics have floated a whole range of policy proposals. There is the return to some form of gold standard. Also, there is the rather fiercely contested debate about whether fractional-reserve banking should be banned or at least restricted. Recently, colleagues of mine at the Cobden Centre in London have introduced a bill to Parliament that would make board members of banks personally liable for bank losses, which is supposed to reduce or eliminate moral hazard. Thus we are already faced with a range of policy proposals. What is my position on them?

I think we can have it much easier. My proposal is more effective and more easily communicated: Let us separate state and money completely. That is, I believe, the one thing that needs to change. Capitalism is the only economic system that works in the real world. But what we have today is monetary socialism, albeit a socialism predominantly to the benefit of the rich and well-connected.

We need to get the state out of the economy completely. To achieve this we must get the state out of ALL monetary affairs. The monetary sphere of society should be a no-go area for politicians and bureaucrats. State involvement in finance is the problem. Let us get the state out. Period. That is the one goal we should have. That is the one policy I recommend.

My enthusiasm for any other policy proposal varies considerably and is dependent on how much state intervention the policy still allows or in some cases even requires.

As an opponent of fiat money I am naturally positively inclined to a return to a gold standard. I believe that Mises was right when he wrote:

“If in the coming years or decades our civilization is not to collapse completely the gold standard will be restored.”

But what type of gold standard should be implemented? Would there still be central banks that would ‘administer’ that gold standard? Under any form of gold standard, the central bank would most certainly be more confined in its monetary operations than central banks are today but there could still be considerable room for manipulation. The US Fed was founded in 1913 under what was officially still the Classical Gold Standard but that didn’t stop it from funding the US government’s military spending in World War I and from initiating credit bubbles and business cycles. By 1933, the dislocations introduced by cheap money were so big that their dissolution – mandatory and normally automatic under a gold standard and indeed inconceivable under a proper gold standard – had become politically unacceptable. The Fed’s mission was accomplished and the gold standard was abandoned. The rest is history as they say.

An official, government-directed return to a gold standard also raises a lot of questions about implementation that would invite lobbying and horse-trading by various pressure groups. How much of the existing money stock – obscenely inflated after decades of money printing and fiat money debasement – should be backed by gold, or to put the same question in a different way, what should the new exchange rate between the money in circulation and gold be? How much should the existing money stock be devalued? Should banks be allowed to create deposits that are not backed by gold? Should fractional-reserve banking be permitted?

Questions over questions, and the room for political maneuvering and for political abuse are massive. Do we really want politicians, central bankers, bureaucrats, and their economic advisors make all these decisions? I don’t think so.

I know somebody who is best equipped to make all these decisions.

Mr. Market.

We may not all agree on the merits or demerits of fractional-reserve banking but as capitalists we should agree on the benefits, indeed the necessity, of free competition.

So how do we get from A to B? How do we get from the present system of finance socialism, of interest rates fixed by the central bank and asset prices manipulated by the central bank, of nominally private banks operating with the protection of a lender-of-last resort, to a system that again deserves the label capitalist?

Step 1: Privatize the central bank.

Do not even introduce a gold standard. Just transfer ownership of the central bank officially to the banks that have an account with the central bank. This is the first step for the state to exit the sphere of money. The central bank is no longer a public institution run by bureaucrats and politicians but an entirely private undertaking. It is owned and operated by the banks.

The central bank administers bank reserves and provides certain clearing functions. The banks need this, for now at least. Shutting the central bank down is not that easy. But its most pernicious aspect is that it is a policy tool. This would end abruptly with its privatization.

Step 2: The state revokes with immediate effect ALL laws and policies that relate specifically to banking and money.

From this moment on, banks are capitalist enterprises just like any other normal business. There is no lender of last resort (at least not one run by the state), there is no inflation target or other official monetary policy for which the banks function as conduits, which under the present system puts them in the strange position of being profit-seeking enterprises and policy-transmission mechanisms simultaneously. But equally, there is no backstop for the banks from the state any longer. No guarantees, no deposit insurance or taxpayer bailouts. If a deposit insurance institution exists, it is handed over to the banks, similar to the central bank. Again, the state has exited the business of regulating, supervising, licensing, subsidizing and backstopping the banking industry.

Entry into the field of banking is now free. You do not need a license. You do not need an account with the now privately owned central bank (although without such an account clearing with other banks might be difficult). There are no legal tender laws anymore, so if anybody has any bright new ideas about money (Liberty Dollars, bitcoin) they are most welcome to try them. The consumer alone will decide over success and failure.

Monetary policy has ended. Bernanke testimonies on TV will be replaced with reruns of old Simpson episodes. Senators and congressmen will have to find new soapboxes from which to propound their personal economic theories.

Step 3: The state’s gold hoard is handed over to the banks.

What? A gift to the bankers? – I do not consider this a gift to the banks but more a return of property to the bank depositors. The bank depositors are the ones that should benefit from this transfer most.

The present monetary system could only have come about because it was once based on gold. Deposit banking spread at a time when banks still promised to repay deposits or banknotes in specie, and when all banks were thus required to hold (some) gold reserves – reserves that no political entity could create at will. Only slowly and gradually was the gold backing removed and replaced with various implicit or explicit state guarantees, all of which are now practically failing.

Of course, just like investment genius Warren Buffett, the bankers may not know what to do with a pile of gold and may thus be tempted to simply put it on a big heap. I suspect, however, that the bankers will have a very good use for the gold. Their customers – the holders of bank deposits – may be very unsettled by the exit of the state and thus the taxpayer from the business of underwriting the banking industry. Most people only consider their bank deposits safe because they believe the state would not allow Bank XYZ to default, not because they have any confidence that Bank XYZ is run prudently. Now that the state has exited the field of money and banking, the banks are likely to use the gold as additional backing for their balance sheets. They will use the gold as it has been used for thousands of years – to gain trust. And to avoid bank runs.

Will the gold hoard be sufficient?

I don’t know.

Presently, the US government sits on 260 million ounces of gold. At the present gold price of $1,655 per ounce, we are talking $430 billion. The monetary base is presently $2,673 billion; M1 is $2,220 billion and M2 minus money market funds is $9,163 billion. The gold hoard is thus only 16%, 19%, and 5% of these money stocks, respectively. Hardly a proper gold standard but it could be a start. Through proper balance sheet deleveraging and through additional gold purchases the private banks are obviously free to improve these ratios. (Again it is not for bureaucrats or economists to decide what is appropriate. This is the role of the banking entrepreneur.)

But now that the private banks own the central bank, would they not put the printing press into overdrive and create inflation?

I don’t think so. Through quantitative easing the central bank accumulates assets from the banking sector and expands the money supply. The central bank leverages its own balance sheet in the process. The Fed is already levered more than 50 to one, which is more than Lehman and Bear Stearns were when they collapsed. But now the banks own the capital of the Fed. They foot the bill, not the taxpayer. The banks can no longer dump unwanted assets on the central bank. They own the central bank. They cannot transfer risk to it.

Additionally, the public will be very suspicious of an overtly expansionary central bank. They know it is operated by the private banks and entirely for their own benefit. Any inflation concerns will translate into higher interest rates and that is detrimental to the highly leveraged banking sector. I would expect the private banks, now operating without any safety net from the state but under the suspicious gaze of their own customers, to be very cautious about how much money they print.

Easy money is great for the banks for as long as they can lower reserve and capital ratios. That was much easier when they could rely on government backstops or when meeting official regulatory requirements already gave their balance sheet policy an official seal of approval. Now that they are on their own, monetary expansion and thus debt accumulation and leverage are a double-edged sword. It will pay again to run a bank prudently and even advertise your higher capital and reserve ratios.

Furthermore, the relatively sounder banks (if we assume for a moment that those indeed exist) have little interest in running the jointly owned central bank for the benefit of the weakest banks. To the contrary, it is in the interest of the stronger banks to see weaker banks fail and exit the market. At the same time, it is not in the interest of even the strongest banks to see widespread bank runs or a general distrust in banks as that could quickly come to haunt them, too. I think it is very reasonable to assume that under my plan of complete privatization the key challenge of allowing corporate failure in banking on the one hand but avoiding a complete collapse of the banking system on the other will be managed much better. The reason is that this task is now given to bankers as entrepreneurs who have a keen interest in getting that balance right. As long as banking is under the protection of the state, monetary and banking policy will be conducted for the benefit of the weakest banks, and the strongest banks will simply reap windfall profits.

Does the state get off too lightly?

The state no longer has any responsibility for the banks or money. No more setting of policy, no big hearings in Washington, no bailouts, no IMF, no World Bank. A lot of money will be saved and many explicit and implicit claims on the taxpayer will be eliminated. But also, the state can no longer tell the banks that government bonds are safe and encourage the banks through bank regulation and official capital requirements to invest in them. There is no longer any bank regulation from the state. Banks will be regulated by the market, which means ultimately by the consumer. The state also loses the central bank and can thus no longer create an artificial demand for its securities. Remember, last year 61% of new Treasuries were placed with the Fed. Why should the banks, which now own the central bank, continue to accept this?

Government bonds everywhere benefit from the idea that states can’t go bankrupt because they can always print the money. This idea is fundamentally wrong as I have argued repeatedly. Once the debt load reaches a certain level, it can no longer be inflated away. If this is still tried, currency disaster will ensue. Be that as it may, with the state officially separated from the field of money and banking, it would have to manage its finances like any other entity, like a private corporation or a household (or almost like any other entity as it still benefits from the privilege of taxation). We would certainly see higher state borrowing costs, lower levels of spending and smaller deficits. This would be an important step to what Doug Casey calls “starving the beast”.

Of course, in such an environment we would not have to worry at all about how the banks arrange their executive pay, how their bonus schemes work, or if bank shareholders hold their board members at all responsible for their mistakes and failures. These are internal affairs of entirely private and capitalist enterprises. If bank shareholders get this wrong and set the wrong incentives, only they will bear the consequences. The idea that banking is a public service for which a specific set of rules and regulations must be designed and administered by the state does no longer apply.

Come to think of it, this proposal looks much better in terms of consistency and clarity than any other, in my humble opinion. Those who argue for an official gold standard are asking the state to design and implement a new monetary order. Those who ask for a ban on fractional-reserve banking ask the state to define what constitutes legitimate banking business and then enforce it. Those who want to introduce new legislation in response to executive pay and bonus schemes, ask the state to interfere in the relationship between shareholder (principal) and manager (agent).

I ask the state to do just one thing: Get the hell out of money and banking! Now!

In the meantime, the debasement of paper money continues.

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32 Responses to The separation of money and state

  1. Paul Troon says:

    I suspect most people will react to your proposal with something along the lines of, “I don’t trust the elites that run banks to look out for my interests. I want to have a democratic say and so the government should be involved.”

    I wish people were more educated about how capitalism is more democratic than what is passed off as democracy. The view of capitalism as being undemocratic can be debunked using a thought experiment like the following:

    When you move your savings from one bank to another, you make a single issue vote. If your specific concerns about the relative soundness of the bank in question are legitimate, other self interested depositors are likely to make similar votes by moving their money. The result will be depositors directly influencing how banks operate.

    When you vote for one legislative representative over another, you have only one vote that you use to support or oppose an entire agenda – not just their views on how banks should be run. Any laws created that change the soundness of your bank will largely effect the soundness of all banks, giving you little choice of where to move your money if you don’t agree with it.

    Certain industries are often argued to be incompatible with capitalism – health care, charity and banking are common examples. Vague notions of democracy versus capitalism are often invoked at these times. If individual commercial freedom is not a direct democratic process, then I don’t know what is.

    • Damien Phillips says:

      Well said.

    • John Campbell says:

      Paul, I agree completely. Governments have credibility because so many people have accepted the lie that governments are the only thing keeping the wolf outside the door. As conditions deteriorate, people will likely cling to this idea even more, but the illusion will collapse under the weight of debt and reality. The tipping point for debts and the benevolent government illusion are before us, but I see them as inevitable. Detlev has convinced me of them both.

      • Single Acts of Tyranny says:

        Yes indeed, to see how benevolent the government is, drop by London at the moment to see Robocop everywhere and missiles plonked down on private property without even asking permission.

  2. Habib Kadiri says:

    Thank you for this article, it’s an interesting take on the monetary system’s problems. I especially like the first part, where you say “there is no painless exit. The cleansing crisis is inevitable”. This is closer to the Hayekian view on the current financial crisis, rather than the false accusations that he would have been for so-called Austerity. He knew there was no easy way out. I wish the anti-cuts campaigners would realise this too.

  3. Peter Surda says:

    As Mises wrote a hundred years ago:

    If a country has a metallic standard, then the only measure of currency policy that it can carry out by itself is to go over to another kind of money.

    Just let me remark one more thing. All the proposals I know require legislative action, sometimes extensive. This includes the Austrians, whether it’s the freebanking or gold standard school branch (even moreso Hayek’s proposal). There is one notable exception: Bitcoin. Bitcoin does not need a legal reform, it already works. If the banking system implodes, Bitcoin will continue to work. Since it is form-invariant, it does not need deposit banking (=money substitutes). That eliminates the central part of the conflict of various theories. If anything, the current legal system favours Bitcoin, because it increases the barriers to entry for other reform proposals. Of course, some legal reforms would benefit Bitcoin even more. My analysis brought up two particular ones, if people were permitted to use it as a unit of account in their accounting and if there was no capital gains tax on it. But these are not necessary. And, of course, as you rightly pointed out during the panel talk at the Bitcoin conference, once the old system collapses, the legal restrictions will become irrelevant anyway.

  4. Damien Phillips says:

    One of your best articles so far, Detlev. Brilliantly argued, and it has certainly helped create some more clarity for me about how we might transition out of this ungodly mess. The idea of letting the state decide what new monetary system emerges, even if it was aiming for a gold standard, and then trusting the central bank to simply oversee that system without mission creep was a real stretch for my cynical brain.

    About halfway through your book and really enjoying it – it’s a surprising page turner – although I now feel a healthy dose of worry about the future, especially when I hear that both the BoE and the Fed are thinking of yet another round of QE. As one commentator in the US put it, their policy is “Print or die”. I wonder if the next round will push the system into crisis or I still have time left to build up a stash of gold?

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  6. Aodhan says:

    Dear Detlev,

    Under this scheme, if ownership of the central bank were transferred to multiple private banks, ownership would then be joint. How would control over the central bank be distributed, negotiated, and resolved? If I started up my own new bank, how would I get to have a say in the running of the central bank, in the absence of state-issued legislation authorizing it?

    Best wishes,

    Aodhan

    • Lex says:

      It could be done in the way that control of the IMF is distributed today. The ‘member banks’ of the central bank get voting rights distributed among them, according to how big they are.

    • The first goal is to get the state out of money. To achieve this, ownership in the central bank is transferred to the banks according to the size of the deposits (bank reserves) these banks hold at the central bank. Now it is up to the banks what they do with the central bank and how they arrange its management and how they resolve conflicts of interest among themselves. Of course, the bigger banks will have more of a say but I don’t see why that should be a problem. First, that is already the case now. Second, bigger shareholders have a bigger say in the running of private companies and networks as well. And for good reasons. Third, it can be in nobody’s interest to somehow disadvantage the big banks from the start, for example by giving everybody equal voting rights regardless of size. If you start your own bank you have no right to demand access to the central bank or, for that matter, any other private network if those who established that network – and who have ownership-rights in the network because they established it and made it work long before you were even a banker – do not want you as a member. Again, I am just applying the concept of private property here. The central bank and any other part of the banking infrastructure are no longer public goods. So do not think of them as public good to which everybody is supposed to have equal access – which is the reason most ‘public’ goods look pretty run down very quickly. We want banking and money to be private businesses. Private property gives the owner the right to exclude. (Public goods are a mirage, anyway, a construct of statist ideology. There are no public goods in a free society.) Of course, you can try and negotiate access to the network. You can make yourself attractive to the network-owners. Maybe you can bring something to the table that encourages them to let you in (anything that lowers the cost and risks of running the network, for example). If they keep you out (and they have every right to do this) you are obviously free to start a competing network that offers better services to the public. Remember, there are no legal or regulatory barriers to entering the banking business. You may say that the existing network has a head start and that therefore the costs of establishing a new network from scratch are prohibitive. But if that is the case in a free market, it only means that the benefit to the public of having an alternative network does not outweigh the drain on resources (cost) of establishing such a network.

      • LittleMissMessy says:

        Excellent article Mr Schlichter – makes total sense. I very much doubt the state will get the hell out of money and banking in the UK so Paper Money Collapse here we come. Con/Lib/Lab won’t and…

        Here is an email exchange I had with UKIP:

        ——————————————————-

        Hello,

        What does Mr Farage think about the state getting out of money and the banking system?

        http://papermoneycollapse.com/DSnew/2012/04/the-separation-of-money-and-state/

        I look forward to hearing from you.

        ——————————————————-

        Dear ##

        Thanks for asking this. Strangely enough, the state (a sovereign, democratic state, that is) should have more control over money and banks. The Bank of England should be nationalised, for example, and monetary policy should be controlled by Ministers of the Crown. This would actually be very good for genuine private enterprise, because the current system is run by huge, privately-owned corporations for their own benefit.

        We need a firm, patriotic hand on the financial tiller, less regulation, in general, and a currency based on real goods – an end to debt-based fiat and “quantitative easing” (i.e. artificial inflation)

        Yours sincerely

        Andrew S. Reed

        Office of Nigel Farage, Brussels

        • Thanks, LittleMissMessy. As to UKIP, they response shows what true economic geniuses they are. Why not get “huge, privately owned corporations” (boo!) out of the market for computers and bananas as well, so that the Ministers of the Crown (yeah!) can fix their prices. What is needed is a “firm, patriotic hand”.
          Patriotic monetary policy?
          Good luck.

  7. bc says:

    Wonderful article. The simplicity is beautiful.

    Thank you for writing it.

  8. Myno says:

    Brilliant. Simply brilliant. You have earned the mantle of von Mises. Well done.

  9. George says:

    Hi Detlev – How do you prevent the problem of only a few very large banks controlling the banking industry. I remember growing up in the UK in the 1950′s and 60′s when there were many smaller, successful community banks with local branches, which were all eventually taken over by their larger rivals. I feel we now need these small community banks providing basic banking services, which is all the vast majority of people need. Do you envisage the formation of these smaller financial institutions once the market is opened up?

    • Lex says:

      Already there are moves towards smaller, more local banks. Many towns have re-established credit unions (my home town of Reading has one). Simiarly, the Co-operative Bank has enjoyed lots of success in recent years as people flock away from the big FTSE100 players. Their main appeal is their very prudent management of customers’ money: the Co-op holds no eurozone government bonds and has little exposure to European banks (including no direct exposure to Greece and minimal exposure to Portugal).

    • I don’t really have a strong view on that. Does size matter? — Obviously, banking is not a free market industry at present, for obvious reasons: state fiat money, central banking, lender-of-last resort, monetary policy with banks as transmission mechanism, heavy regulation, bailouts, I could go on and on. What would a free banking industry on the basis of apolitical hard money look like? – Nobody knows. Maybe there would be a few big banks doing the lion’s share of banking business, plus maybe a few niche players. I don’t think that there is anything inherently wrong with big business. In certain industries substantial economies of scale exist, which means that bigger firms can deliver what the consumer wants more efficiently than a whole range of smaller firms. The market has to decide what the correct size of a firm is. Would we really want hundreds of small to medium-size car manufacturers? Is that even feasible? – I think there are tremendous economies of scale in banking so I would not be surprised if a free banking market would be dominated by a few big players. But that does not mean that they ‘control’ this market. Remember, we have no state central bank and no regulatory and legal barriers to entry. In uninhibited markets, even the biggest firms can be outmaneuvered by more innovative smaller competitors, if they come up with better solutions to the needs of banking customers. The risk from big business today is not that it controls markets by its sheer size but that it operates in an environment of heavy state intervention and that big business can obtain political influence and use state regulation and legislation to suppress competition. In an entirely free market, even the biggest firms have to be constantly on their guard and again and again deliver a good service to their customers. The moment they no longer do this they will invite more efficient and more nimble competitors to enter the fray and take their business.

  10. [...] This article was previously published at Paper Money Collapse. [...]

  11. Adriano says:

    Hi Detlev,

    While I completely agree with you, my guess is that your plan is simply not feasible.

    Getting the state out of money and banking would require some kind of reform and reforms need political support.
    That is, it would require people, most of the people, to get conscious of the real mess we are in and to kick out the current political and economical establishment. A consistent rise in support to Ron Paul and the like would be a good beginning.

    Unfortunately, I cannot see this happening any time soon. I see only lies and mystification of reality being broadcasted over and over again.

    Mises has simply being forgotten (better say erased) as he did not give the state and bureaucrats any chance at all to manipulate his ideas or statements for their sake. He has been so great and rigorous that nothing of his work, not even a sentence, could be of any use for the statist.

    Therefore, Mises … Mises who?

    Bernanke prides himself to be some sort of Friedman’s disciple.
    Isn’t he following Friedman’s recommendations in order to avoid another great depression?
    This is what people are told! The state must control money for the economy to work properly. Friedman said that, it must be the right thing to do!
    But… Mises said the opposite!
    Mises??? … Mises who?

    1986, “Has Government Any Role in Money “, in the “Journal of Monetary Economics”, Milton Friedman & Anna Schwartz wrote:
    “Our own conclusion … is that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement. …
    Let me emphasize that this note is not a plea for a return to a gold standard…. I regard a return to a gold standard as neither desirable nor feasible — with the one exception that it might become feasible if the doomsday predictions of hyperinflation under our present system should prove correct.”

    In must have been a different Friedman!!!
    And, what the hell of “doomsday prediction” is this other Friedman talking about? Mises’?

    Mises who???

    • That is a great Friedman/Schwarz quote. Excellent! Thanks for pointing that out!
      I absolutely agree. What I propose will not be implemented. As I said, that is why I spent so little time and effort to articulate it. The political establishment has no interest and no desire to get out of money and banking. The bankers believe – falsely – that their Faustian pact with the state could always be made to work to their benefit, as it did over recent decades when profits were private and losses public – but soon the state will be in charge completely. And the masses lack the intellectual capacity to see through this. Also, they are now thoroughly brainwashed and believe that the state can solve everything. And by the way, it is a democratic state so they (the masses) are really calling the shots – why would we want to give that up?!! The stupidity knows no bounds!
      That is why separation of money and state is purely a thought experiment. When you ask me what is going to happen, I will refer you to all my other pronouncements: Paper Money Collapse. That is what will happen. Complete economic meltdown. And on the way there we will see what I call in my book ‘the nationalization of money and credit’! And that is pretty much the opposite of the separation of money and state!
      The doomsday will come. Friedman was wrong to say the gold standard was not desirable. He was right when he said it will become “feasible if the doomsday prediction of hyperinflation under our present system” is proved “correct”!
      That is still my prediction.

      • Alister Cyril Blanc says:

        Detlev, “the masses [do not] lack the intellectual [capacities] to see through this”! It’s less a matter of their individual capacities & more a matter of personal preferences & backward yet widespread systems of government schooling. Most SME owners, for example, work so hard in trying to profitably serve their local community on a day-to-day basis that they prefer to spend what little leisure time they can afford themselves on socialising in a relaxed fashion, and ideally do not focus on obscenely abstract and distressing phenomena, such as that which inevitably arises when investigating the esoteric debates amongst feuding economists, who if anything are themselves more inclined towards stupidity than the “common man on the street”.

        And as for “schooling”, well most systems of government education are, I trust you already know, if not designed to obfuscate, then most surely manage to just simply ignore the fact that other means of learning could potentially prove far superior to that form which the government “gives” to the people thanks to the stolen savings they previously extorted from the aforementioned SME owners! Most textbook authors or “educators”, for example, are I suppose even genuinely clueless themselves…but again, not necessarily thanks to their own unique stupidity…but rather to a gradual dissolution of clear thinking resulting in them, too, receiving a poor education from a very young age. To complain or talk negatively about ostensibly dumb teachers or “regular folk” is doing your own very excellent work a true disservice I think. Also, I mentioned you in a comment-post to Azizonomics blog recently: http://azizonomics.com/2012/08/14/the-shape-of-the-debt-reset/ John Locke sure was ahead of his time!

  12. Dave says:

    Great article. Would your solution work? Yes. Would any current gevernment consider it? Unfortunately no. We will have to wait until the entire fiat/fractional reserve system collapses. The biggest problem is the ignorance of the general population regarding the monetary system.

  13. Single Acts of Tyranny says:

    A very interesting post. Assuming we did revert to some kind of gold standard, do you think we would see significant deflation or an upward valuation of gold in monetary terms?

    i.e. you suggest gold held is about 5% of M2 money, so would a significant upward march in the gold price of many multiples be likely?

    • I think probably a combination of both. The gold price would be adjusted upwards so as to provide backing for more paper money units (or paper money would be devalued versus gold). But under the new gold standard the potential for additional money printing would be limited so banks would reduced balance sheet risk by reducing lending and shrinking the supply of deposit money. That would be deflationary. In this scenario there would be some upside for gold but we would not get the inflationary meltdown. However, we both agree that a voluntary return to gold has a very low probability. For political reasons it is much more likely that money printing will continue and ultimately even accelerate. In that scenario gold is an essential form of protection against a fiat money disaster.

  14. Single Acts of Tyranny says:

    I should perhaps have added, the likelyhood of a bunch of clueless statists giving up paper money (and thus limitless power) voluntarily is close to nil, but like Mugabe before them, it may soon be out of their hands,

  15. Martie Quick says:

    A quote from H. Parker Willis, the first secretary of the Federal Reserve Board,

    “Central banks,” …will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of vague ‘stabilization’ that will, in the long run, be for the greater good.”

    He must be turning in his grave.

  16. Chris says:

    Privatise the central bank. What a joke, ha ha.

    Isn’t that what happened on Jeckyl Island in 1913. The deal? We will be there to fund your deficits, just let us create money out of nothing and earn interest on it.

    You have all been duped and now a huge percentage of your tax base goes straight to the banks as interest on your debt. Theft, pure and simple.

    Debt you don’t need to have when you are a sovereign issuer of the world’s reserve currency. Just repay it and accept the devaluation, which will be much smaller than people think.

    The entire weekly social security bill could be met simply by crediting the account holders of those with entitlements.

    New thinking is needed. Sadly noone with any power and influence has the intellectual brain matter to ever understand this.

  17. Srinivas Muthadi says:

    Thanks for another excellent post!

    The solution seems interesting. But my opinion is that they won’t be implemented. Simple reason is that no one wants to swallow a bitter pill. All your options are definitely going to cause pain to lot of people. People flock to anyone who says he/she can cure the disease with a sweet pill. Unfortunately no sweet pill is going to work.
    Another reason is that for implementation any of the policy change, it needs the people in power to do it and they will never be inclined to do it.
    I think solution lies in the peoples hands. We can do it by avoiding or reducing dependance on banks, refusing to take loans (like housing/education), avoiding/reducing stock market and building our own reserve of commodities etc.,

  18. David Goldstone says:

    Hi Detlev

    Great piece as ever.

    But why not just abolish the central bank and distribute its assets (vis the gold reserves) to taxpayers by way of shares in the newly privatised Gold Reserve Corp? (analogously to the privatisation of the old British Telecom). Otherwise you are just giving a windfall to existing bank depositors.

    I cannot see that there is any function of the central bank that would need to be retained after abolition, except perhaps clearing. But that is a minor issue. The banks could easily set up a new clearing system overnight, or just take over the existing central bank clearing mechanism (you also refer to the central bank’s role in “administering reserves” but I’m not clear what that would mean in a privatised context).

    Of course depositors might think twice about retaining deposits once state guarantees are withdrawn, but then it is up to the (now genuinely private) banks to address that problem by raising their reserve levels, whether of gold or whatever.

    David

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