Conservatives and the Elephant in the Living Room

One of my pet peeves is the conservative who lectures us on the “limits” of markets and looks with a self-satisfied and condescending shake of the head upon the stupid rubes he must endure who persist in supporting the market all the same. Why, haven’t these dopes read Wilhelm Roepke, whose views are to be considered definitive?

In this unfortunate post, we get the usual laments about what “capitalism” has done to the public. If only banking had stayed local we wouldn’t have had all these problems, etc.

Absent as always from these critiques is any discussion of the Federal Reserve, the elephant in the living room, which is a friend neither of localism nor the free market. Likewise absent is any acknowledgment that to call the banking system of today a “free market” is at best an expression of one’s sense of humor. As I’ve noted elsewhere, the current system is rather far from the Misesian ideal; it includes:

(1) a coercively imposed monopoly on the production of money;

(2) monopolistic legal tender laws, which artificially privilege the money issued by the government-established central bank;

(3) a central bank with the monopoly power to create legal-tender money out of thin air, a power granted to it by the government, and with a mandate to manipulate the money supply in the purported service of maximizing output and minimizing unemployment and price inflation;

(4) interest rates influenced by a monopoly monetary authority instead of by the free market;

(5) implicit and explicit bailout guarantees for large financial institutions;

(6) artificially low borrowing costs for large institutions, since the public knows these institutions will be bailed out;

(7) artificial protection of the banks, in the form of government deposit insurance and various Federal Reserve mechanisms, thereby keeping afloat a fractional-reserve system that would be radically different under a free market; under the existing system the banks will therefore create more money out of thin air than they otherwise would.

This is just off the top of my head. A free-market banking system would have no central bank and no “monetary policy.” It would not rely on politicians to print up “interest-free money.” It would not require any guns or badges. It would preserve the purchasing power of people’s money, as it did even under the classical gold standard. It would make entrepreneurial profit-and-loss calculation far easier, without the white noise introduced by the monetary manipulations of the government or its privileged central bank.

Second, the idea that if only “capitalism” hadn’t created mortgage-backed securities, we wouldn’t have had this problem, amounts to an especially defiant refusal to consider the role of the Fed. Consider this description of events (trust me: it’s worth reading the whole thing):

Rising prices affected both banks and their customers with an optimism which swept aside the conservative standards of experience and promoted extravagance and speculation. Whatever the customers purchased, whether merchandise or land, they were able to sell at an extraordinary profit; whatever was produced on their farms brought unusual returns. Some few persons, uncertain of what disposition should be made of the unexpected harvest, began reducing their fixed indebtedness. It was not long, however, until the continuously rising prices, the encouragement of the bankers, and the methods used by the government in selling war securities, had convinced the majority that debt was a blessing in disguise, as it became progressively easier to liquidate and offered a means of extending profit-making activities. Under the urge of these influences, industry expanded and thrived, promoters of all types came into their own, and thrift gave way to extravagance. Bankers found their accustomed standards of credit analysis growing obsolete, for values increased automatically with the passage of time. Hence it was that, as the speculative fever gained a foothold and grew and the demands for bank funds enlarged, credit was extended to all manner of persons on — or without — all kinds of security, excess lines became commonplace, customers’ notes given to promoters of questionable and fraudulent enterprises were discounted for rich rewards, and large sums were advanced to land speculators. Borrowing for the purpose of relending became an established practice. Time and time again the banks were saved from the effects of their ill-advised acts by the continued growth of deposits.

This must be a commentary on the recent economic boom that came to an end in 2007-08, right? Actually, this passage appeared in the Journal of Land & Public Utility Economics in 1926, and it’s a description of how the credit expansion of 1914 to 1920 affected Iowa.

Finally, surely there ought to be some admission that any “limits” on the market necessarily strengthen the political class. This is usually not acknowledged. I see no reason to consider it self-evidently desirable, especially for a conservative.

(For more on the elephant in the living room, see the free chapter of Meltdown, my 2009 book on the subject. Note also that I love The American Conservative, where I am a contributing editor, but all friends disagree from time to time.)