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The twentieth century witnessed the shift from the classical order of free markets and hard, non-political money – epitomized by the gold standard – to fully elastic money and credit markets under the control of state central banks. This shift was completed in August 1971 with the termination of Bretton Woods, the gold standard’s last surviving, but limp and sickly cousin. Finally freed from the golden shackles that had always been the monetary anchor of capitalism, the global financial system produced, for the past 40-plus years, rapidly growing imbalances and progressively more devastating crises, from Japan in the late 1980s to US subprime in 2007 and 2008, and the eurozone debt crisis more recently.
The underlying problems of elastic money, limitless credit and unconstrained central banking are still not officially recognized as the prime causes of financial disaster but remain beyond reproach in mainstream debate. Instead, central banks are given more powers and become happily more interventionist by the day. Bizarrely, the chief perpetrators emerge strengthened from the mess they created.
To sell this to the public history has to be rewritten. While nobody can deny any longer that easy money – ultimately provided by the central banks – led to what is commonly lamented as “excessive risk-taking”, the problem was apparently not easy money per se, but rather the central banks not simultaneously focussing on “financial stability” as well. This needs to be rectified now by giving them yet more powers, in particular in the area of bank supervision and financial regulation.
Read the rest here.
The twentieth century witnessed the shift from the classical order of free markets and hard, non-political money – epitomized by the gold standard – to fully elastic money and credit markets under the control of state central banks. This shift was completed in August 1971 with the termination of Bretton Woods, the gold standard’s last surviving, but limp and sickly cousin. Finally freed from the golden shackles that had always been the monetary anchor of capitalism, the global financial system produced, for the past 40-plus years, rapidly growing imbalances and progressively more devastating crises, from Japan in the late 1980s to US subprime in 2007 and 2008, and the eurozone debt crisis more recently.
The underlying problems of elastic money, limitless credit and unconstrained central banking are still not officially recognized as the prime causes of financial disaster but remain beyond reproach in mainstream debate. Instead, central banks are given more powers and become happily more interventionist by the day. Bizarrely, the chief perpetrators emerge strengthened from the mess they created.
To sell this to the public history has to be rewritten. While nobody can deny any longer that easy money – ultimately provided by the central banks – led to what is commonly lamented as “excessive risk-taking”, the problem was apparently not easy money per se, but rather the central banks not simultaneously focussing on “financial stability” as well. This needs to be rectified now by giving them yet more powers, in particular in the area of bank supervision and financial regulation.
Read the rest here.
