Moral wrong is related to intentionality. You must wish to do harm if the harm you do is to be a matter of blame. Whatever else the people who run our central bank may intend, they are trying to do good as best they can. To describe the Reserve Bank board as “the evil princes of Martin Place” immediately removes the book from being about economic policy to one about morality and blame.
In spite of that, and to my surprise, the first eight chapters turned out to be a very interesting discussion on Austrian monetary theory and the Austrian theory of the cycle. I have not read everything and there may well be other, better books around. But if you would like to understand the Austrian view of how one of the most crucial parts of our economic system works, and why the way it now operates creates dangers for our prosperity, this would be a very good place to start.
But going back to the title on a different matter this time, I think it’s unfortunate that the author chose a title that would make a potential reader assume it is a book mostly about Australia and its central bank when it is a book about the nature of economic policy and central banking everywhere. And the Global Financial Crisis, as the book makes clear, was not a local Australian event but one which began in the United States and has affected economies across the world. The title will therefore and unfortunately deter many people overseas who might have found the book useful from picking it up because of the implication embedded in the title that it is about Australia without a more general international interest.
Moreover, the arguments of the book are built on a foundation of Christian theology and Roman jurisprudence which may not be everyone’s cup of tea and which might also put some people off. It does take some effort to see the point because of this context. But in many ways the historical journey through Roman law, and the distinctions that were important these couple of thousand years ago, provides a basis for seeing that there are other ways of looking at these issues that once did exist and are now lost. I found this discussion fascinating.
The book also provides an historical review of the various issues that is quite extensive. This is the kind of sentence one does not come across very often in anything written nowadays about economics: “From the earliest days of banking, namely in Babylonia perhaps as early as 3500 BCE . . .” but it is representative of Leithner’s approach.
And this is the message that the author wants you to understand. Economies in which normal banking practice systematically creates loans from demand deposits necessarily suffer economic crises, and these economic crises include the failure of large numbers of banks. Therefore, we should stop banks from lending out the money they hold on behalf of other people. A bank can be a place where deposits are held in relative safety and can be used to transfer money from one person to another. But as soon as banks are permitted to lend money out to other people so that there is less than 100% of the value of deposits on hand in the bank when depositors might want their funds, we are well on the way to banking crises, instability, unemployment and inflation. If you put a stop to fractional reserve banking, where deposits are created from nothing and lent to third parties, these kinds of crises will come to an end and most financial instability of this sort will cease.
This is an arguable proposition and while I don’t think it is a complete story it is a story worth thinking about. The value in this approach is to return theory towards the theory of the cycle where broader causes of recessions and large scale unemployment are seen as intrinsic to the way in which the economy operates. Crises and recessions are not blue sky events but have actual endogenous causes unrelated to deficient demand. It is a different way of thinking about economic issues which has now almost totally disappeared from mainstream economic thought.
But really, the context in which he puts his economic arguments are guaranteed to ensure that hardly anyone at all will pay attention to what he says. What sense can it make to discuss any part of our economic system under the heading, “The Central Bank: Mere Idol or Agent of Satan?” (p 527). He may wish to discuss economic policy and the proper theory behind it, but once he decides to indulge himself in that kind of rhetorical overkill he is ensuring that no one pay the slightest attention to anything he says. Even though there are major moral issues involved which are properly part of any such discussion, theological arguments are not economic arguments. There will be no converts based on such arguments. This kind of statement loses the battle even before there is any engagement at all.
And then there the title of Chapter 9 to consider. After eight chapters that deal with the nature of the fractional reserve system and the problems it might or might not cause, he titles this chapter: “The Monetary Roots of Democratic Pathologies”. And then the first sub-heading in the chapter: “Democracy is Evil!” in bold black letters. Seriously, how completely off putting can any statement be. While nothing is perfect, as Churchill famously said, “democracy is the worst form of government except all those other forms that have been tried from time to time”. Those of us who live in democracies like them and do not wish to be rid of them. No one who is apt to read this book would like to live in any other kind of political system. Had he looked to find some means to discredit his own ideas as thoroughly as possible, it is hard to think how he might have done so more comprehensively than this.
And it’s not as if he puts up an alternative to democracy. Whatever may be the economic consequences of democracy, the economic consequences of any other form of political system are far far worse. If Leithner doesn’t think so, he should at least explain why. To say democracy is bad, and the solution to our economic problems is to get rid of democracy, only makes me think that these problems will never be completely fixed and so we should get on with life.
The bottom line. There is an Austrian theory of the cycle. There is an argument to be made against fractional reserve banking. There are useful theological concepts that might be drawn into these arguments. But when all is said and done, the way the book is written, the political and moral judgments overwhelm whatever economic arguments there are. There is a very interesting book to be written that lurks inside the book that was finally published. If you are able to get past the politics, the morals and the theology, you might find this a very interesting book to read. But these are obstacles that will make it hard for many to see the point.
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