My friend Jeffrey Tucker knows more than his Gregorian chant. Most of the readers here will know him from The Chant Cafe. Did you know that Tucker also knows a thing or two about economics and that he is on the staff of Acton University each year?
Let’s say you go to the doctor with a pain in your gut, and the doctor very astutely discovers that you have been poisoned. He knows how and when it happened. He knows the precise kind of poison that victimized you. Then he gives your prescription: more poison in higher doses.
You would be at once grateful and alarmed.
This is roughly how I feel about the “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority,” a document [Can't we all just start calling it a "white paper"?] just issued by the Vatican’s Pontifical Council for Justice and Peace.
Reading from the top down gave me a real charge. Some people at the Vatican have gotten the message about the dangers of the fiat money system that generates unlimited amount of credit, and even traced it all to the monetary reforms of 40 years ago.
In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system.
Exactly. The dollar was once based in gold, which provides a physical limit to the expansion of credit. All bills had to be paid. The government was limited. The banking system was a real business, not a socialist enterprise that experienced unlimited bailouts. Credit went to the creditworthy. Those who issued fake money paid a price.
Under a gold standard, there can be no creation of money that is not redeemable in something real. This automatically provides a check on both banks and governments — and therefore producers and consumers as well. An over-expansion leads to gold outflows and a restriction on credit expansion at home, as inevitably as night follows day. Therefore you have to live within your means. The bills have to be paid by real stuff.
Then President Nixon decided one day that we weren’t sending our gold anywhere. With that move, he ended the basis of the monetary system that had ruled the governments and banking systems since the ancient world. Every problem we’ve had since — inflation, bubbles, credit addiction, bank racketeering – can be traced to this one act. (This is not to say that Bretton Woods was perfect; what we really need is a system of full, domestic convertibility on demand and in real coins.)
That the Vatican gets this, or seems to, is a very good sign.
What’s more, credit is as addictive as any drug:
After World War II, national economies made progress, albeit with enormous sacrifices for millions, indeed billions of people who, as producers and entrepreneurs on the one hand and as savers and consumers on the other, had put their confidence in a regular and progressive expansion of money supply and investment in line with opportunities for real growth of the economy.
Everyone is addicted to paper. Consumers love it. Producers live on it. Competition drives everyone to partake. The real world fades and the make-believe world of paper profits rules the day. This is a false hope. It is like a house built on sand.
[... I'll cut some of this so you'll also read over there and to keep this short. Believe me, it's worth it. ...]
It is on this basis that the document ["white paper" not part of the Magisterium] first begins its attack on “liberalist policies.” Now, hold on a minute here. There is nothing in old-fashioned liberalism (i.e., the free market) that endorses the “freedom” to issue paper forever and call it money. On the contrary, the free market is heavily regulated by a sound money regime. The only freedom banks have here is to operate as normal businesses. Those who expand without limit are going to die and those who maintain sound finance will thrive.[NB] Nonetheless, the document’s identification of loose credit with market liberty is the beginning of the end of the good sense here. From this point, we plunge straight away into a full endorsement of a world central bank, a world political authority, taxes on financial trading, and heavy regulations. The document doesn’t actually call for an end to the free market. On the contrary, it imagines that enlightened world planners will protect, guard, and even “create” what it calls “free and stable markets.” [Yahhhh... right.]
This is beyond naive. It seems to illustrate a near total absence of clear thinking. Centralization of money and credit caused this problem. Centralization of political authority caused this problem. Why would anyone imagine that more centralization is therefore the answer? This approach takes a terrible situation and makes it much worse. [This is rather along the lines of what I wrote: "National banks have, after all, done such a good job that we should now make the effort transnational!"]
Probably this document had many authors, one of whom gets the Austrian theory of the business cycle. He prevailed in the first section. Another author seems to know nothing about politics and power or the history of the problems of centralized states and central banking. He prevailed in the second section. [He is probably right.] Tragically, this document is music to the ears of the very institutions that are responsible for our current plight. The document might as well announce to the world: “Give the power and financial elites more power!”
What is the alternative? Sound money needs to be restored. Business and finance need to be subject to profit and loss. The bailouts must stop. The liquidations must be allowed to take place. Governments must be disciplined and controlled, and devolved to the smallest, local units. In other words, we need real free markets and subsidiarity. This is the only path to a responsibly regulated world. Otherwise, we are going to end up creating even more problems down the line.
The Vatican seems to be growing in intellectual sophistication over worldly affairs. Now it gets economic matters half right. Sadly, being half right on something this important can lead to permanent calamity. To return to the original metaphor, the patient should thank the doctor for discovering the illness, but flee the poisonous “cure.”