the world financial system entered a state of collapse, commentators
said that Russia had traded shortages of socialism for the bank
runs and financial panics of capitalism. In fact, modern finance
and banking are built on unstable, socialistic foundations.
Banking. Earlier in this century, Western nations established
a cartel-like arrangement among their largest banks and the government.
From the bankers' point of view, these mutual protection rackets
were a way of collectivizing their risk of runs and making imprudent
credit expansion permanently possible. Governments liked having
their favorite non-tax revenue regularized (coin clipping having
become a political problem).
economists were there to claim that the financial system required
constant injections of "liquidity," and that central banks would
abolish financial panics. In fact, they eliminated crucial competitive
forces that would otherwise force banks to lend prudently. When
trouble comes, they rely on the money-creation powers of the central
bank as the lender of last resort. In contrast, a market-driven
banking system would be wholly private and responsible solely to
its depositors' demand for sound lending policies.
Banking. A competitive banking system would constantly face
the threat of runs and would therefore be forced to stay heavily
capitalized to meet its obligations. Depositors would retain title
to their deposits, which could only be lent out on a contractual
basis. Checking accounts (demand deposits) would therefore be backed
by I 00 percent reserves.
fractional-reserve banking is the norm all over the world. But it
still takes people by surprise when they discover this. In Russia,
dollar-denominated accounts were held fractionally so people could
not withdraw their money when they wanted it. They rightly called
this robbery. What they didn't know is that it is the established
practice in all countries.
Insurance. This was a New Deal invention, a Band-Aid to patch
up a system fatally flawed by the existence of central banking and
fractional reserves. So rather than bring more stability, deposit
insurance permits banks to act even less responsibly.
banks are rewarded for performing loans, but are allowed to slough
off their losses on non-performing loans to society at large.
is an entrepreneurial business which, like other speculative activities,
is inherently uninsurable, as Mises explained. That's why there
can only be government "insurance," which is socialism disguised
by the language of commerce.
IMF. Created after World War II to become a new global central
bank, the IMF of Keynes's dream didn't workout. But instead of closing
shop, the IMF has become a cash cow for undercapitalized banking
systems and profligate governments. For example, just prior to Russia's
banking crisis, the IMF promoted a lending package worth $23 billion.
It was not only a waste; it encouraged destructive behavior. When
the U.S. bailed out Mexico three years ago, supporters said greater
monitoring would prevent the problem from spreading. Instead, it
made more bailouts an inevitability.
Exchange Rates. In a sound money system, there is a tendency
toward the creation of a single money in all countries. Before 1973,
the single money was a gold-backed dollar. Before World War I, all
civilized countries based their currencies directly on gold. But
since the advent of pure paper money, currencies have traded against
each other in a system of floating exchange rates that has only
created new instabilities and new inefficiencies.
world dollar standard helps mitigate such problems, but this system
also contains a crucial flaw. If the dollar falls, it will take
down the world economy with it. The solution isn't to fix exchange
rates or to hope for new competitors to the dollar like the Euro.
It is to base currencies on a fixed gold standard that deters all
manner of political manipulation.
READING: Ludwig von Mises, The
Theory of Money and Credit (Indianapolis: LibertyClassics,
 1980); Murray N. Rothbard, The
Case Against the Fed (Auburn, Ala.: Mises Institute, 1994);
Murray N. Rothbard, The
Case for a 100 Percent Gold Dollar (Auburn, Ala.: Mises
Institute,  1991); and Murray N. Rothbard, What
Has Government Done to Our Money? (Auburn, Ala.: Mises Institute,