In chapter 9 of my book, Money, Bank Credit, and Economic Cycles (pp. 789803), I design a process of transition toward the only world financial order that, being fully compatible with the free-enterprise system, can eliminate the financial crises and economic recessions that cyclically affect the world’s economies. Such a proposal for international financial reform is, of course, extremely relevant at this time, since the disconcerted governments of Europe and America are planning a world conference to reform the international monetary system in order to avoid future financial and banking crises such as the one that currently grips the entire Western world. As I explain in detail over the nine chapters of my book, any future reform will fail as miserably as past reforms unless it strikes at the very root of the present problems and rests on the following principles:
- the reestablishment of a 100% reserve requirement on all bank demand deposits and equivalents;
- the elimination of central banks as lenders of last resort (which will be unnecessary if the first principle is applied, and harmful if they continue to act as financial central-planning agencies); and
- the privatization of the current, monopolistic, and fiduciary state-issued money and its replacement with a classic gold standard.
This radical, definitive reform would essentially mark the culmination of the 1989 fall of the Berlin Wall and real socialism, since it would mean the application of the same principles of liberalization and private property to the only sphere finance and banking that has until now remained mired in central planning (by "central" banks), extreme interventionism (the fixing of interest rates, the tangled web of government regulations), and state monopoly (legal-tender laws, which require the acceptance of the current, state-issued fiduciary money) circumstances with disastrous consequences, as we have seen.
January 22, 2009
Jess Huerta de Soto, professor of economics at Rey Juan Carlos University in Madrid, is Spain’s leading Austrian economist. As an author, translator, publisher, and teacher, he also ranks among the world’s most active ambassadors for classical liberalism. He is the author of Money, Bank Credit, and Economic Cycles.