The online edition of the Handelsblatt, a major German business newspaper, recently featured an op-ed blaming government-created ’fiat money’ for the current financial crisis.
It recommends privately-issued, commodity-backed currencies as an alternative. To the best of my knowledge, this is the first time that a mainstream German newspaper has covered such a radically different interpretation of the crisis.
The author’s analysis is clearly rooted in the business cycle theory of the Austrian School of economics. According to this perspective, interest rates ought to reflect society’s ‘time preference’, the degree to which people are willing to forego consumption today in exchange for (greater) consumption tomorrow.
This rate determines the ‘time structure’ of an economy – the allocation of resources between consumption and investment purposes. It also affects the distribution of investment funds between projects that pay off after a short time and those that require a longer period.
In the Austrian interpretation, the interest rate is the key parameter in the coordination of economic activities. Manipulating it can upset the whole balance of the economy.
If the central bank injects more money into the economy by pushing interest rates below the ‘natural rate’, market actors are lured into believing that people have become more ‘patient’. Hence, additional investment projects are started, especially ones with a long-term horizon.
But these projects are castles built in the sky, because no additional funds for investment have been made available. People’s time preference has not changed. Eventually, the shortage of capital must come to light, interest rates must rise again, and a lot of projects fail. In the Austrian view, the ‘bust’ really means that the time structure of the economy is brought back into line with society’s preferences.
The author of the Handelsblatt article advocates abandoning the system of government-provided money. In a first step, he wants to return to a gold standard system, administered by the central bank. In the long run, he wants to abolish central banking altogether and see it replaced by a system of free banking.
Although many will disagree with this radical conclusion, it is important that Austrian ideas are more widely understood. Hopefully their exposition in the German press will not be a one-off. Austrian School disciples around the world have spent years translating the works of Mises and Hayek into various different languages. It would be ironic if these writings continued to be ignored in a place where people could read them in the original!