The Austrian Economics Wiki - User contributions [en]

Talk:Gresham's Law

2011-08-25T08:43:52Z

192.100.130.228: Thiers' Law.

There's also the opposite to Gresham's Law - [http://en.wikipedia.org/wiki/Gresham%27s_law#Reverse_of_Gresham.27s_Law_.28Thiers.27_Law.29 Thiers' Law]. [[Special:Contributions/192.100.130.228|192.100.130.228]] 12:43, 25 August 2011 (MSD)

Criticism of fractional reserve banking

2010-11-23T09:24:06Z

192.100.130.228: /* Typical criticisms */ Can we get a source on quotes like these?

{{main|Fractional-reserve banking}}
{{wikipedia text}}
'''Criticisms of [[fractional reserve banking]]''' have been put forward from a variety of perspectives. Critics have included economists such as [[Irving Fisher]],<ref>{{Citation
| title = 100% Money
| publisher = Pickering & Chatto Ltd;
| first = Irving
| last = Fisher
| isbn = 978-1851962365
| year = 1997 }}</ref> [[Frank Knight]]<ref>{{Citation
| title = Ecological Economics: Principles and Applications
| publisher = Island Press
| first = Herman E
| last = Daly
| first2 = Joshua
| last2 = Farley
| page = 250
| isbn = 1-55963-312-3
| year = 2004 }}</ref> and [[Milton Friedman]].<ref>Friedman, M., A Program for Monetary Stability, New York, Fordham University Press, 1960, pp. 65</ref><ref>[http://mises.org/daily/3108 The Social Imperative of Sound Money], Lew Rockwell: "I find it sickening that there are so few voices outside the [[Austrian School]] that will stand up to this policy (of [[fiat money]]/[[fractional reserve banking]]/[[central banking]])".</ref> Within the economics profession, most criticisms are based upon [[heterodox economics|"non-mainstream" economic theories]] such as those of the [[Austrian School]].<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]] (includes detailed commentary on [[fractional reserve banking|FRB]])</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://mises.org/store/Meltdown-P557.aspx ''Meltdown''], Tom Woods, Regnery Press ISBN: 9781596985872</ref> There are also critics from outside the economics profession who advocate [[monetary reform]].<ref>For an example of the writings of these groups, see [http://www.bilderberg.org/monref.htm this] contribution from Bilderberg.org</ref>

==Terminology==

Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term '''debt-based monetary system''',<ref name="speech">For an example of the public use of the term, see the [http://www.prosperityuk.com/prosperity/articles/earl.html speech] of the Earl of Caithness in the House of Lords on 5 March 1997</ref> or '''credit-based monetary system'''<ref>For example of the public use of the term, see this speech given by [[Zhou Xiaochuan]], [http://www.bis.org/review/r090402c.pdf Reform the monetary system], 23 March 2009 (BIS), and this article, [http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html ''Roving Cavaliers of Credit''] by Steve Keen (with commentary by Yves Smith)</ref>.

The term, "debt-based monetary system," and related terms, such as "debt money" are not used by conventional economists or academic [[mainstream economics|mainstream economists]]. Mainstream economists often refer to "debt money" simply as [[Credit (finance)|credit]], and distinguish clearly between types of money once it is created.<ref>For an example of the mainstream use of the term "credit" instead of "debt-money" see [http://www.ft.com/cms/s/bdfa429e-17a2-11dd-b98a-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fbdfa429e-17a2-11dd-b98a-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fasia this] example from the Financial Times, 1 May 2008</ref> The subject of debt-based money (as distinct from traditional monetary policy) is absent from most reputable established mainstream academic economic publications.<ref>Paul Krugman, writing at Slate.com, says the Austrian theory of business cycles is "about as worthy of serious study as the phlogiston theory of fire". http://www.slate.com/id/9593</ref>

== Typical criticisms ==

Robert H. Hemphill, credit manager of the Federal Reserve in Atlanta, stated in 1939:

“If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.” {{Fact}}

Certain [[monetary reform]]ers claim that a fractional-reserve based banking system is inherently destructive and inevitably generates [[monetary inflation|debasement of the currency]], [[debt slavery|extreme inequality]] or [[systemic risk|periodic crises]].<ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref><ref name="books.google.com">{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Engdahl Publishing|isbn= 0979560802 }}</ref><ref name="death"/><ref name="monetary.org">[http://www.monetary.org/lostscienceofmoney.html Stephen A. Zarlenga, ''The Lost Science of Money'' AMI (2002)]</ref><ref>[http://mises.org/story/3108 Sound Money], Lew Rockwell</ref><ref>[http://mises.org/story/1971 Our Money Madness], Lew Rockwell</ref><ref>[http://mises.org/rothbard/genuine.asp The Case for a Gold Dollar], Murray Rothbard</ref><ref name="twilight"/> This view is not accepted by mainstream economists, and the dire nature of the claim is considered by some to be akin to [[conspiracy theory|conspiracy theories]].<ref>[http://www.capitalspectator.com/archives/2005/11/does_m3_matter.html Capital Spectator, "Does M3 Matter"], November 16, 2005.</ref>

Mainstream economists do not dispute the idea that banks "create money by extending loans," and this basic concept is covered in most introductory economics textbooks and many popular reference works.<ref>See, for example, [http://books.google.com/books?id=krc-Tf9JfY0C&pg=PA134&dq=economics+fractional+reserve+banking&sig=sg6LSwy7a43Lufkzm_j11wWfiaw#PPA133,M1 Peter Kennedy, Macroeconomic Essentials: Understanding Economics in the News, p. 133] "The key thing to recognize is that banks create money by extending loans."</ref> Critics of fractional reserve banking often focus on this mechanism and frequently argue that since money creation requires ''loans'' from the banking system, people are required to go further into debt in order for any new money to be created. They theorize that this eventually causes [[credit cycle]]s (or [[Austrian Business Cycle Theory|business cycles]]) and necessarily debases the [[means of exchange]]. Critics find it problematic that banks "create money out of nothing."<ref>[http://www.dailypaul.com/node/119914 Ron Paul video - fractional reserve banking is fraudulent]</ref>

Debt-focused critics link the alleged negative effects of fractional reserve banking with a government-enforced "paper" or [[fiat currency]], which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the [[money supply]], thereby causing inherently unsustainable "[[bubble (economics)|bubbles]]" in asset and capital markets, which are vulnerable to speculation in by highly leveraged [[hedge funds]] and other bank agents.<ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref name="books.google.com">{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref><ref name="death"/><ref name="monetary.org">[http://www.monetary.org/lostscienceofmoney.html Stephen A. Zarlenga, ''The Lost Science of Money'' AMI (2002)]</ref><ref>[http://mises.org/story/3108 Sound Money], Lew Rockwell</ref><ref>[http://mises.org/story/1971 Our Money Madness], Lew Rockwell</ref><ref>[http://mises.org/rothbard/genuine.asp The Case for a Gold Dollar], Murray Rothbard</ref><ref name="twilight"/>

Another argument made by critics is that a nation should only have a "full reserve" banking system. Virtually all banking systems worldwide operate on some form of fractional reserve banking (although the level of required bank reserves and the degree of regulatory constraints on banking differ greatly, with Iceland, Britain and the U.S. being examples of countries with low government-imposed reserve requirements).<ref>[http://books.google.com/books?id=DFv6OzeBWpQC&pg=PP3&dq=steven+horwitz++banking&sig=VZasp_8pGVvpQsFKMI3W9yp4AlM#PPA231,M1 Microfoundations and Macroeconomics: An Austrian Perspective], Steven Horwitz, pp. 223.</ref><ref>[http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=full-reserve+banking AmosWEB, "Full Reserve Banking"]</ref>

=== Non-mainstream views ===

On considering economic thinkers outside of the mainstream, it should be noted that views on the topic of fractional reserve banking vary greatly. Even within such groups as the Austrian school, at least one thinker has argued that full-reserve banking would impose similar costs of price adjustments in reaction to growth (through a ''reduction'' in the overall price level) as would [[inflation]], and hence offer no inherent advantages over fiat currencies and fractional reserve banking.<ref>[http://books.google.com/books?id=DFv6OzeBWpQC&pg=PP3&dq=steven+horwitz++banking&sig=VZasp_8pGVvpQsFKMI3W9yp4AlM#PPA231,M1 Microfoundations and Macroeconomics: An Austrian Perspective], Steven Horwitz, pp. 223-232.</ref>

==Basic debate==

In stark contrast to conventional economic analysis, some commentators focus on the combined use of [[fiat currency]], [[fractional-reserve banking]] and [[central banking]] as a negative feature of modern monetary systems.<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]]</ref><ref>[http://mises.org/store/Meltdown-P557.aspx ''Meltdown''], Tom Woods, Regnery Press ISBN: 9781596985872</ref> These commentators use the term "debt-based monetary system" to refer to an economic system where [[money]] is created primarily through fractional-reserve banking techniques, using the banking system.<ref name="speech"/> This form of money is called "debt-based" because as a ''condition of its creation'' it must be paid back plus interest at some time in the future.

To some commentators, this implies that as the [[money supply]] and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref><ref name="twilight">[http://www.marketoracle.co.uk/Article4489.html Antal E. Fekete, The Twilight of Irredeemable Debt]</ref><ref name="The Forgotten War">[http://news.goldseek.com/GoldSeek/1192819378.php The Forgotten War]</ref>

One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.<ref name="death"/><ref name="twilight"/>

Others argue that there is in fact no mathematical necessity for the money supply in a debt-based system to grow, since the interest portion of loan payments is not taken out of circulation, but goes into the lender’s account, where it can be spent back into circulation and eventually be used to pay off some loan principal. The "exponential" growth of debt need not be a concern because if GDP growth is positive, GDP is also growing exponentially and the ratio of debt to GDP may improve.

==Basic nature of system==

The economic, environmental and social effects arising from money creation through fractional-reserve banking has been subject to much heated political debate for well over two centuries.<ref name="books.google.com"/><ref name="death"/><ref name="twilight"/><ref>[http://www.silverbearcafe.com/private/fracbank.html Antal E. Fekete, Fractional Reserve Banking Revisited]</ref>

Critics claim that, in contrast to "debt money" (which is money created in parallel with the issuance of debt or [[Credit (finance)|credit]]), "true" fiat currency is issued by the [[Treasury]] of a [[central government]] debt-free, as no requirement for its eventual return is made as a condition of its creation.<ref name="monetary.org"/><ref name="The Forgotten War"/> Government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" or even [[sound money]] (if backed by [[gold]] or [[silver]]) and although not as stable as [[hard currency]], government-issued debt-free notes and coins (such as [[United States Note]]s and [[silver certificate]]s) do not have the same effects of debt-based money described below.<ref>[http://www.entrewave.com/freebooks/docs/a_pdfs/gnhm.pdf Honest Money]</ref> It should be noted however that fiat currency can be a source of [[hyperinflation]] if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - ''provided'' it is accepted as "money" by the [[private bank]]ing system.<ref>[http://mises.org/books/shorthistorypapermoney.pdf A Short History of Paper Money in the United States], William M. Gouge, Mises Institute</ref> Notes and coins in circulation (being defined as [[M0]]) now account for a tiny fraction of the total M3 [[money supply]] in all developed, debt-based [[capitalism|capitalist]] economies (M0 generally being less than 10% of the total [[M2 (economics)|M2]] money supply in most developed economies).<ref>[http://www.dollardaze.org/blog/?post_id=00216 Global Money Supply Ratios]</ref>

Similarly, gold, silver and other [[precious metals]] have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some [[monetary reform]]ers believe a return to the [[gold standard]], or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and [[silver standard]] as "sound money" or "honest money".

==Other economic and political criticisms==

In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".<ref name="house.gov">[http://www.house.gov/paul/congrec/congrec2003/cr090503.htm Paper Ron Paul, Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003]</ref>

Some economic thinkers (primarily members of the [[Austrian School]]) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "[[fraud]]" in that it creates money "costlessly" through the use of [[fractional-reserve banking]] techniques.<ref>[http://www.mises.org/rothbard/moneyback.asp Taking Money Back, by Murray Rothbard]</ref>

Though [[Michael Rowbotham]] has no formal training in political science or economics, he is an active proponent of [[monetary reform]], and argues that this system of [[money supply]] is perverse and inherently "anti-[[democratic]]", and creates inflationary [[exponential growth]] in the economy which leads to [[Natural environment|environment]]ally damaging and unstable [[over-consumption]]. Critics such as Rowbotham argue that the indebted are forced to induce new [[consumers]] to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in [[foreclosure]] for those businesses and [[insolvency]] in the banking system that leads to economic collapse due to the sudden contraction of the money supply.<ref name="death"/><ref name="Ponzi Nation">[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation]</ref>

Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as [[Hyman Minsky]]) argue that this system of money supply has characteristics similar to a [[pyramid scheme]], where the newly indebted are compelled to induce others into debt to pay off their own debts.<ref>{{Citation| first=Mark | last=Anielski| coauthors=| contribution=Fertile Obfuscation: Making Money Whilst Eroding Living Capital| title=34th Annual Conference of the Canadian Economics Association| publisher=Redefining Progress| place=San Francisco, CA| pages=41–2| year=2000| contribution-url=http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf| format=PDF| accessdate=2007-12-17 }}</ref> It is therefore argued by a number of monetary reformers that fractional-reserve banking and the associated exponential growth of money in the economy "forces" the economy towards indebted [[consumerism]].<ref name="books.google.com"/>

Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on [[agriculture]], claiming that [[residential development]] produces one of the greatest continuous injections of debt money into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density [[House|housing]].<ref name="death"/>
If this is correct, this trend will lead to the destruction of fertile [[arable land]], as this land is progressively re-zoned for speculative new residential development. Rowbotham also predicts that the global supply of fertile [[arable land]] will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.<ref name="death"/><ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Naomi Spencer, World Socialist Website, "Severe food shortages, price spikes threaten world population", 22 December 2007]</ref>

If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to [[food supply]]) could find basic foodstuffs increasingly expensive, ultimately resulting in food security becoming a major public policy issue.<ref name="death"/><ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Severe food shortages, price spikes threaten world population]</ref>

===Effects on economic health===

According to Michael Rowbotham the expansion of money through debt creates [[Boom and bust|economic bubbles]]. This concentrates [[wealth]] in the hands of private banks as the populace is forced into [[debt]] simply to own a home and educate their children.<ref name="death"/> Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a monetary [[Ponzi scheme]].<ref>[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation,"Who is Hyman Minsky?", para 6]</ref>

The bust phase of this [[business cycle]] where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.<ref name="death"/><ref name="Ponzi Nation"/>

===Effects on the environment===
There are also critics in the left-wing and [[environmentalist]] camps who contend fractional reserve banking (by creating a necessity for indefinite [[economic growth]]) leads to environmental destruction and depletion of natural resources.<ref>David Korten, ''Agenda For A New Economy'', Berret-Koehler, 2009</ref><ref>[http://www.monbiot.com/archives/2004/10/06/no-longer-obeying-orders/ George Monbiot], about five sixths of the way down</ref>

===Inherent problems with the system===

Some monetary reformers predict that there will be an increased incidence of financial crises in the developed world, as economic and [[population growth]] inevitably slow and as the success of [[laissez-faire]] economic political policies result in a reduction in redistributive [[tax]] policies which, combined with the debt-legacy of the [[welfare state]], allows an intense and unsustainable concentration of wealth and political power in the financial services sector.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref>

Some monetary reformers argue that perverse incentives in the financial services industry lead to a collusive relationship between governments and bankers which are economically and socially destablizing in the long run.<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], Jorg Guido Hulsmann</ref>

Some monetary reformers argue that it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.<ref>[http://www.senate.gov/~budget/democratic/statements/2005/fs_reconciliationfloorstmt102005.pdf Speech by Senator Kent Conrad (D-ND) on October 20, 2005 regarding the "misleading" reporting of deficit spending by the mainstream media]</ref> The associated growth of derivatives during the upward phase of the debt money cycle was referred to as "[[innovation]]" in financial markets.<ref>[http://www.nytimes.com/2007/12/03/opinion/03krugman.html?em&ex=1196917200&en=ac60abcdbd977d07&ei=5087%0A Innovating Our Way to Financial Crisis, by Paul Krugman]</ref>

[[Bankruptcy]] laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income [[sequestration]]. Although in [[Christian]], [[Jewish]] and [[Muslim]] religious practice there have been traditions of [[debt relief]] or laws against [[usury]], in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new [[debt money]] being injected into the [[money supply]] to pay for the currently outstanding debts.<ref>[http://www.nakedcapitalism.com/2007/11/new-bankruptcy-law-backfires-by.html Bankruptcy law backfires]</ref>

On a national level, if the issuance of [[government bonds]] becomes unsustainable, sovereign [[bankruptcy]] can occur - and has occurred many times in history.<ref>[http://elainemeinelsupkis.typepad.com/money_matters/2007/10/greenspaniel-an.html Greenspaniel and U.S. bankruptcy]</ref> [[Sovereign debt]] crises due to the inability of nations to pay interest on [[government bonds]] have occurred in [[third world]] countries as a result of high levels of unsustainable [[third world debt]]. The [[Latin American debt crisis]] is an example of sovereign debt levels becoming unsustainable, resulting in a [[currency crisis]] and economic collapse, as [[interest rates]] rise precipitously due to the inability of the national government to attract financiers to purchase new [[government bonds]] to inject new [[debt money]] into the ailing economy.

At such times, it is the responsibility of the [[IMF]] to come in as a kind of supranational [[central bank]] to mediate between the national government and international financiers. The role of the [[IMF]] as [[central bank]] to the world has similar responsibilities and risks inherent in [[central bank]]ing which are described below in relation to the role of the [[Federal Reserve]]. If the [[IMF]] repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce [[moral hazard]] and can encourage the financing of reckless government spending and borrowing.<ref>[http://www.rgemonitor.com/41 IMF Reform and International Lender of Last Resort, RGE Monitor]</ref> <ref>[http://info.interactivist.net/article.pl?sid=02/11/07/199213&mode=thread&tid=8 Banking Bunkum, by Henry C.K. Liu]</ref>

A [[single currency]] regime such as the [[Euro]] can mask national liquidity or solvency crises, by ensuring that a national currency is not quickly exchangeable for another, thereby restricting the ability of national governments to depreciate their currencies and allow the real value of [[government bond]] interest repayments to decline relative to other currencies.<ref>[http://www.dailymail.co.uk/news/article-1316442/Anglo-Irish-Bank-bail-Will-Irish-economic-meltdown-hit-UKs-fragile-recovery.html Irish Meltdown], UK Mail On-line,</ref><ref>[http://www.marketoracle.co.uk/Article24459.html Ireland Bailout Consequences for Britain, Portugal Next?], Nadeem Walayat</ref><ref>[http://news.goldseek.com/RichardDaughty/1192374060.php The Mogambo Theory of Currency Relativity]</ref>

===Types of downturns===
{{main|Austrian Business Cycle Theory}}

There are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.

A "credit squeeze" occurs where new debt money is difficult to access without a high [[credit rating]]. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the [[private bank]]s through widespread [[foreclosure]] or [[bankruptcy]] and re-sold to those with the money to buy the distressed assets.<ref name="marketoracle.co.uk">[http://www.marketoracle.co.uk/Article2882.html Market Fundamentalism, by Richard C. Cook]</ref>

A "credit crunch" occurs where new debt money is not available at any [[interest rate]] - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is [[insolvent]] and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.<ref>[http://www.scribd.com/doc/3906112/Credit-CrunchThe-New-Financial-Snack Credit Crunch, by Satyajit Das]</ref>

At any stage during the downward spiral of a "credit crunch", the [[central bank]] in a modern economy can try to save the system from complete economic [[meltdown]] by purchasing (either indefinitely or temporarily) the failed debts of the private banks.<ref>[http://www.marketoracle.co.uk/Article24489.html Does the Fed Create Money?] Michael Pento</ref><ref>[http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/19/ccom119.xml ECB's mind-numbing cash injection]</ref> However, doing so results in cash being transferred to the private banks in exchange for [[bad debt]], thereby violating the general economic precept to avoid [[moral hazard]] and effectively makes liquid the failed lending decisions of the [[private bank]]s.<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privitizing Profits and Socializing Losses, by Nouriel Roubini]</ref> In the U.S. banking system this is called "opening the Fed discount window", where the [[Federal Reserve]] temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a [[counterparty]] to borrow the debt money that is being offered. If all market participants realize a "[[bubble (economics)|bubble]]" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense [[central bank]] support.

Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.<ref>[http://www.ft.com/cms/s/0/233ae764-abef-11dc-82f0-0000779fd2ac.html Central Banks have No Plan]</ref><ref>[http://www.rgemonitor.com/blog/roubini/233120 Central Banks get desperate]</ref>

===Pushing on a string===
Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "[[pushing on a string|pushing on a piece of string]]", as this measure does not solve the key problem – creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets.<ref>[http://www.mises.org/story/2695 Don't Discount the Fed Discount Window]</ref><ref>[http://www.federalreserve.gov/Pubs/FEDS/2004/200401/200401pap.pdf Monetary Policy in Deflation: The Liquidity Trap in History and Practice]</ref> This is because unlimited central bank money and low interest rates ''allow'' credit creation, but do not ''force'' it.

To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be [[liquidate]]d at or close to their original value. When [[Alan Greenspan]] repeatedly resorted to this tactic to revive illiquid [[money market]]s this became known in the market as the "[[Greenspan put]]", as the effect of these repeated reductions in interest rates was similar to a [[put option]] in the [[stockmarket]], insuring [[bank]]s' lending mistakes would be covered up by the Federal Reserve.<ref>[http://www.iie.com/publications/wp/02-1.pdf Moral Hazard and the "Greenspan Put"]</ref>

===Inequities in system===

Aside from the [[moral hazard]] issue, the key risk with this tactic (cutting [[interest rate]]s to encourage new debt money creation) is that the [[central bank]] exposes the financial system to a [[currency crisis]], as the growth in the [[money supply]] spirals out of control due to the need to save the [[bank]]s from themselves.<ref>[http://www.swlearning.com/economics/hall/hall-lieb2e-upd/ppt_lecture/exchange_rate_macro_policy.ppt Exchange Rates and Macroeconomic Policy]</ref><ref>[http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VGT-41WBFRG-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=4e89075114dcdb58b503172ff1801bd2 Central Bank Intervention]</ref><ref>[http://www.federalreserve.gov/newsevents/speech/mishkin20071026a.htm Financial Instability and the Federal Reserve as a Liquidity Provider, by Frederic S. Mishkin]</ref>

For these reasons, a collapse in confidence in the [[solvency]] of the banking system is one of the most complex and difficult policy issues any [[government]] can face.

In such crises of confidence, a central bank may choose to save the current players in the banking sector by printing money and inflating its way out of the crisis, thereby debasing the value of the domestic [[currency]].

This is referred to by some [[monetary reform]]ers and [[economist]]s as "[[socialism for the rich and capitalism for the poor]]", as many indebted [[consumers]] will still lose their [[house]]s and be declared [[bankrupt]] regardless whether or not the central bank intervenes to save marginal lenders who have been made [[insolvent]] through their mis-timing of the [[credit cycle]].<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privatizing Profits and Socializing Losses, by Nouriel Roubini]</ref><ref>[http://www.beearly.com/pdfFiles/Satyajit%20Das.pdf Regulatory Debauchery by Satyajit Das]</ref> Future generations of innocent taxpayers may ultimately finance any [[bail out]] of reckless lenders, as the money used to fund any [[bail out]] will be funds diverted from the general revenue of the central government.<ref>[http://www.ft.com/cms/s/0/f4cf8426-654d-11dc-bf89-0000779fd2ac.html A run on the bank]</ref>

Some bankers and financial commentators still refer to [[Walter Bagehot]]'s 1873 commentary on monetary crises, ''Lombard Street'', in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems.<ref>[http://blogs.ft.com/economistsforum/2010/04/a-history-lesson-from-lombard-street-for-wall-street-in-2010/ History Lesson from Lombard Street], Roger Farmer, Ft.com</ref>

A prime example of the fatal effects of combining aging demographics with reckless bank lending can be found in the case of the [[Japanese asset price bubble]].<ref>[http://www.economist.com/displaystory.cfm?story_id=10286992 The Japanese and American Bubbles: Been There, Done Some of That]</ref>

===Potential societal impact===

Some more extreme monetary reformers and [[conspiracy theorists]] anticipate the declaration of [[martial law]] and the imposition of [[fascist]]-style restrictions on [[civil rights]] and [[freedom of speech]] by the political [[The Establishment|Establishment]] to physically protect it from [[anarchy]] or military [[coup]] when the [[bubble (economics)|bubble]] of debt completely bursts, either through a precipitous currency crisis or debt-created [[Depression (economics)|depression]].<ref>[http://www.house.gov/paul/congrec/congrec2007/cr120507h.htm New security legislation threats freedoms]</ref> Some conspiracy theorists also anticipate the forced elimination - by any means necessary - of any actual or potential competing [[currencies]] or voluntary mediums of exchange that could threaten the viability or legitimacy of the [[monopoly]] currency, which could include the compulsory confiscation of all privately-owned [[gold]] (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).<ref>[http://news.goldseek.com/GoldSeek/1196605589.php America's Trade Debts Lead to a Likely Gold Confiscation]</ref><ref>[http://www.libertydollar.org/ld/legal/raid.htm FBI Raids Liberty Dollar]</ref><ref>[http://www.lewrockwell.com/rothbard/solution.html The Solution]</ref><ref>[http://prudentinvestor.blogspot.com/2007/09/us-mint-suspends-gold-coin-sales-due-to.html US Mint Suspends Gold Coin Sales]</ref><ref>[http://www.swissamerica.com/article.php?art=06-2004/200406140537f.txt Why a Gold Standard Now?]</ref>

There have been many [[financial crisis|monetary crises]] throughout history<ref>[http://mises.org/store/Early-Speculative-Bubbles-P578.aspx Early Speculative Bubbles and Increases in the Money Supply], Doug French, Mises Institute ISBN: 978-1-933550-44-2</ref> and prior to widespread anarchy or [[revolution]], in the late stages of a [[financial bubble]], there are a number of warning signs of impending [[chaos]] caused by a complete breakdown of trust in the debt-based [[monetary system]].<ref>[http://mises.org/store/Product.aspx?ProductId=435 Fiat Money Inflation in France], Andrew Dickson White, Mises Institute</ref> Just prior to the complete collapse of the [[pyramid scheme]] of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created [[Depression (economics)|depression]]s or periods of [[hyperinflation]] have occurred in [[Europe]], the [[U.S.]] and [[China]], there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished [[consumers]], who are either unwilling or unable to go into further debt without forceful coercion.<ref name="http">{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California
Press |isbn= 0520222903 }}</ref><ref>[http://mises.org/daily/3569 John Law and the Invention of Modern Finance], Doug French (Mises.org)</ref><ref>[http://mises.org/daily/1690 The Saga of John Law and Richard Cantillon], Sean Corrigan (Mises.org)</ref> [[Long-term]] investment and sustained [[capital investment]] are almost impossible in this environment because the "measuring stick" of [[return on investment]] (the real value of [[money]]) is so uncertain at times of debt-induced [[credit crunch]], depression or hyperinflation.

As potential new [[borrower]]s and international financiers are scared away from participating in the [[pyramid scheme]] of debt and borrowing further, the [[monetary system]] seizes up, starved of the fresh injections of [[debt money]] it needs for its survival, thereby precipitating economic [[anarchy]], widespread [[lawlessness]] and [[insolvency]] of the monetary and banking system.<ref>[http://www.oftwominds.com/blognov07/empire-debt1.html Empire of Debt]</ref>

This final denouement is triggered when [[borrower]]s cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency [[depreciation]]. Some analysts predict that the [[monetary system]] will seize up due to a [[deflationary]] depression or a sustained period of [[stagflation]]ary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref>

This has often occurred after a failed [[aggressive war]], as international financiers realize the heavily indebted [[government]] they funded will not gain the [[resources]] it planned to seize as a result of the waging of [[aggressive war]]. When this pay-off does not materialize, the government is left with the [[debt]] of war without the ability to offset this [[government debt]] through the imposition of [[reparations]] on the defeated [[nation]] and the acquisition of the defeated state's [[resources]]. This occurred to [[Germany]] after the [[First World War]] and [[Japan]] after the [[Second World War]].

Whatever the trigger, the key warning sign of any impending monetary crisis and economic [[anarchy]] is a sudden [[currency crisis]]. Early warning signs that the [[private banks]] themselves are aware of an impending breakdown in the [[solvency]] of the [[financial system]] would be: a spike in the prices for [[oil]] (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of [[hard currency]], oil sometimes being referred to as "black gold"), [[gold]] and other inherently limited [[natural resources]] essential for non-discretionary industrial production; a spike in the [[futures contract]]s for "non-perishable" agricultural [[commodities]] such as [[sugar]], [[coffee]], [[wheat]], [[soybean]]s and [[rice]], as investors realize the debt-based monetary system has squeezed supplies of [[arable land]]; a sudden flight of money to [[Treasury bills]]; and/or a sudden spike in the [[interest rate]] differential between short-term [[Treasury bills]] and asset-backed corporate paper (or a sudden spike in the [[LIBOR]] rate in [[London]]).<ref>[http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/03/cnrates103.xml&CMP=ILC-mostviewedbox Pleas for rate cut as interbank loans dive]</ref>

Shortly thereafter, some [[monetary reform]]ers predict that there would be desperate, but ultimately futile [[central bank]] intervention, a [[currency crisis]], a panic run on a number of marginal, [[insolvent]] [[banks]] and [[hedge funds]] as desperate wealthy investors try to get [[cash]] out before the [[pyramid scheme]] collapses to invest in inherently limited, non-perishable, in-demand commodities such as [[oil]] and [[gold]] (and undeveloped agricultural and industrial [[land]] in areas of the world with strong [[economic growth]]), followed by a [[recession]] or [[depression]] in the broader heavily indebted economy as the [[money supply]] contracts.<ref>[http://www.newyorkfed.org/research/staff_reports/sr291.pdf Hedge Funds, Financial Intermediation and Systemic Risk]</ref>

===Potential solutions===
Although time is the only real remedy for monetary crises (allowing re-inflation of the markets through the gradual injection of new [[debt money]] into the system through new borrowings), time is something panicked financiers and investors are least likely to want to give up when the threat is never getting their [[money]] out of the imploding investment [[bubble]]. In extreme cases [[bank]]s could set up "independent" corporate investment vehicles to buy the assets associated with the [[bad debt]],<ref>[http://www.dealbreaker.com/2007/10/citigroup_looks_to_lend_money.php Citigroup looks to lend money]</ref> thereby allowing [[borrower]]s to liquidate their investments and allow time for the markets to re-inflate, however the holding costs involved in this measure would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets. More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from [[foreclosure]] and [[bankruptcy]], nor do they address the pernicious long-term dysfunctional aspects of [[fractional reserve banking]] described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples.<ref>[http://www.informationclearinghouse.info/article18431.htm The Era of Global Financial Instability, by Mike Whitney]</ref>

Given these repeated financial crises arising from the debt-based monetary system, many [[monetary reform]]ers predict that there will inevitably be a return to the [[gold standard]], a fundamental change in the way money is produced and distributed (with a return to the prevalence of government-issued debt-free [[fiat currency]] and/or [[free banking]]) - or a complete financial "[[meltdown]]" as fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated.<ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the System, by Robert K. Landis]</ref> As extreme inequality increases, [[foreclosure]]s mount and financial crises repeatedly erupt, these [[monetary reform]]ers believe a political crisis will eventually result in calls for fundamental [[monetary reform]].

These on-going, worsening, [[debt]]-created crises in the economy and society (and the unsustainable damage to the [[environment]] caused by debt-created [[overconsumption]]) could turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem".

===Proposals for monetary reform===
====Libertarians and commodity money====

[[Libertarians]] envision a society of [[free markets]], [[small government]] and money backed by a [[gold standard]] or [[silver standard]].<ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://radio.goldseek.com/griffin04.10.10.php Goldseek interview] with [[G. Edward Griffin]]</ref><ref>See also these [[Murray Rothbard]] articles: [http://www.mises.org/money.asp What Has Government Done to Our Money?], [http://www.mises.org/story/1829 The Case for the 100% Gold Dollar]; [http://www.lewrockwell.com/rothbard/cartelization.pdf The Fed as Cartel], [http://www.lewrockwell.com/rothbard/rothbard191.html Private Coinage], [http://www.lewrockwell.com/rothbard/rothbard190.html Repudiate the National Debt]; [http://www.lewrockwell.com/rothbard/rothbard181.html Taking Money Back], [http://www.lewrockwell.com/rothbard/rothbard163.html Anatomy of the Bank Run], [http://www.lewrockwell.com/rothbard/rothbard128.html Money and the Individual]</ref> Some Libertarians would also support experimentation with [[full-reserve banking]],<ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref> recognizing that when fractional-reserve banking is combined with the gold standard a deflationary bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those Libertarians who support full reserve banking would strongly support more flexible and forgiving bankruptcy laws in a fractional reserve banking environment, recognizing that no [[social stigma|stigma]] should be attached to bankruptcy given the anti-Libertarian "unjust acquisition" of real wealth implicit in both fractional reserve banking and [[taxation]].<ref name="Repudiating the National Debt">[http://mises.org/article.aspx?Id=1423 Repudiating the National Debt], Murray Rothbard</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref>

Regarding the current accumulation of [[government bonds]] and private debt, some Libertarians believe that the creation of the [[Federal Reserve System|Federal Reserve]] under the [[Federal Reserve Act]] of 1913 was [[Criticism of the Federal Reserve|unconstitutional]] and some Libertarians consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the gold standard in recognition of its fundamental illegitimacy.<ref name="Repudiating the National Debt"/> Arguably this would be supported by the "just acquisition" [[jurisprudence]] of legal philosopher [[Robert Nozick]] and Libertarian advocate [[Murray Rothbard]].<ref name="Repudiating the National Debt"/>

In late 2010, financial commentator Max Keiser started the [[Buy Silver Crash JP Morgan Campaign 2010]] in an attempt to expose the flaws underlying the [[fractional reserve banking]] system.

====Reform within fiat currency systems====
[[Ellen Hodgson Brown]] calls for the nationalization of the private banking system once the full losses on the banks' portfolios are recognized.<ref>[http://www.webofdebt.com/articles/new_theory.php Time for a New Theory of Money]</ref><ref>[http://www.webofdebt.com/articles/force_nationalization.php Foreclosuregate could force bank nationalization]</ref> She also supports "QE2" - which she describes as a necessary and desirable funding of government spending via money printing rather than by the indirect means of issuing of interest-bearing government bonds, which simply allows private bankers to profit from costless money creation.<ref>[http://www.marketoracle.co.uk/Article24443.html QE2 and the Looming Threat of a Crippling Debt Service]</ref>. In late 2010, [[Ellen Hodgson Brown]] and Austrian School commentator [[Gary North]] engaged in an intense debate over the direction of [[monetary reform]], with gold-standard supporter [[Gary North]] accusing Brown of going down a path that inevitably leads to the economics of fascism.<ref>[http://www.lewrockwell.com/north/north908.html Criticism of Ellen Hodgson Brown]</ref>

[[Michael Rowbotham]] also seeks the cancellation of "unjust" debts (such as [[third world debt]]), but would also support the re-introduction of strongly redistributive tax policies involving higher financial transaction taxes (such as a [[Tobin tax]]), [[land tax]]es and [[inheritance tax]]es, and, crucially and most importantly, a [[social security]] [[safety net]] involving a guaranteed minimum [[social credit|debt-free income]] (sourced from government-issued debt-free money independent of any central bank) for all citizens in the debt-based economy. Under this proposal, every adult citizen would be given a livable debt-free income transferred electronically into their [[bank account]], simply by virtue of their [[citizen]]ship. They could then use this debt-free money to pay off their [[mortgage]]s or to live, debt-free, without being compelled to work as a [[wage slavery|wage slave]] in the market economy if they chose not to. The government would finance these payments simply by ordering the private banks to accept their electronic instructions as legal tender. It would therefore not result in the expansion of [[government debt]].

Instead of [[money]] being created "indirectly" and "furtively" at the point of [[loan]] creation by the private banking system, with periodic [[bailouts]] to [[socialism for the rich and capitalism for the poor|already-rich bankers]], it would be created directly and openly by the democratically elected government and issued to its [[citizen]]ry by way of instruction to the private banking system.

Rowbotham argues in his book, ''The Grip of Death'', that this would ''not'' be [[inflation]]ary (or at least would not be as inflationary or as dysfunctional as the present system). This would also reduce [[overconsumption]] and the associated [[Natural environment|environment]]al damage associated with debt-based [[consumerism]]. It would also give individuals the free time to engage once again in non-marketable [[religious]], [[artistic]] and [[recreation]]al activities if they chose to do so.<ref name="death"/>

Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free money and zero-interest credit by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.<ref name="marketoracle.co.uk"/>

It is to be expected that these policies would be violently opposed by the [[private bank]]ing "[[elite]]", as it would render impotent their control over the [[money supply]], dissipating this crucial decision-making power away from its current power base. It would also be likely to reduce [[economic growth]], dramatically increase the cost of [[labor]] and, potentially, simply increase asset price inflation as individuals used the additional income simply to bid up the cost of [[housing]]. However, this proposal would undoubtedly address the problem of [[inequality]] inherent in a debt-based monetary system and reduce the devastating impact of personal [[bankruptcy]] and allow individual citizens to quickly recover from financial hardship. It would also ensure that this [[social security]] measure (and government spending in general) would not have to be paid for by future generations from future streams of [[income tax]].

===Left-leaning ideas===
Many left-leaning [[social democrats]] would also support the taxing of the banking system and the enforcement of strongly redistributive income and [[land tax]]es to ensure the financially dispossessed are "replenished" with income. They would also support a [[social security]] [[safety net]] involving the provision of unemployment benefits and government-supplied free medical care, education and other essential services and [[public goods]]. It is to be expected however that, without the issuance of debt-free [[fiat currency]], this system would result in the persistent, exponential, accumulation of [[government debt]], financed by the [[private banking]] system by the issuance of [[government bonds]]. If not properly managed, this could result in a progressively higher tax burden and may result in higher [[interest rates]] in the long term, as financiers require higher [[interest rates]] to lend to the increasingly indebted central government. Without the issuance of [[debt-free money]] these policies can be self-defeating, with the net result simply being that a larger stream of guaranteed income goes to the [[private bank]]ing system via the issuance of interest-bearing [[government bonds]] (which are purchased by the [[private banks]] "out of nothing" through [[fractional reserve banking]] techniques). This [[government debt]] must then be financed in perpetuity by compulsorily acquired [[tax]]es from future generations.

It could be argued that the early success of extreme right-wing [[fascism]] in [[Nazi Germany]] and [[Italy]] in the period after [[World War I]] was a response to the economic chaos created by the debt-based monetary system in early 20th century [[Europe]]. Some of the economic policies introduced by [[Hitler]] and [[Mussolini]] were in direct response to the economic collapse and social [[anarchy]] caused by soaring government and personal debt levels in both countries in the post-[[Versailles Treaty]] era, and (indirectly) arose from the writings of [[Silvio Gesell]] and others on the nature of the problems associated with a debt-based [[monetary system]]. Although many [[historian]]s justifiably criticize many of the non-economic policies of the [[fascist]] governments of [[Germany]] and [[Italy]] during this period, it cannot seriously be disputed that the [[economics of fascism]] provided a degree of [[prosperity]] to the populace, and that the economic policies that were implemented during this period by these [[fascist]] governments succeeded in their stated objective of restoring economic and social order during the pre-[[World War II]] era.

Similarly it could be argued that [[socialism]] and [[communism]] were movements inspired by the inequalities caused by the intense (and in [[Karl Marx]]'s view unsustainable) concentrations of monetary wealth, power and influence inherent in the practice of [[fractional reserve banking]] in a [[laissez-faire]], [[free market]] [[capitalist]] environment (particularly when [[fractional reserve banking]] is combined with a [[gold standard]] or other [[hard currency]] [[monetary system]]).

The [[communist]]/[[socialist]] solution to the problem of [[fractional reserve banking]] is simple: wholesale repudiation of [[government debt]] resulting in complete debt [[default]]; forced [[expropriation]] of [[land]] and wealth from the [[upper classes]] to the dispossessed and needy [[working classes]]; [[nationalization]] of the [[private banks]] (which has required armed [[coup]]s by the [[military]] in some past [[revolution]]s); and the return of the banking function from a dominant, speculative to a subordinate, administrative institution, where the banking system is reduced to a subservient arm of the centralized [[Leviathan]]. In this system, government-owned banks are directed by government policy; often provide different kinds of loans to different industry sectors at different interest rates depending on the perceived "needs" of the economy and the community; normally have a significant proportion of [[non-performing loan]]s due to weak or non-existent [[bankruptcy]] laws; and periodically "forgive" failed debts in recognition of the impossibility of some businesses in paying this debt money back.

It is to be expected that the [[profitability]] of the government-owned banking system would be more stable - but dramatically lower - than that in a debt-based [[capitalist]] economy. It is also to be expected that a significantly higher misallocation of resources could occur in this system, where lending decisions are "infected" by political considerations and are not made on the basis of expected [[return on investment]]. The risk of [[corruption]] in the banking system is also expected to be higher where there is no separation between the political and monetary systems in an economy. Market-oriented [[monetary reform]]ers and [[neo-classical]] economists therefore do not support [[nationalization]] of the [[private banking]] system.

It should be noted that partial [[nationalization]] of the [[private bank]]ing system would only be temporary, as any remaining [[private banks]] could still engage in unlimited [[fractional reserve banking]] and facilitate the eventual acquisition and control of any strategic assets in a partially socialized economic system. It is to be expected that in the absence of complete [[nationalization]] of the banking system, the [[private bank]]ing system would eventually dominate the financial system in any nominally [[socialist]] society.

===Status under current systems===
Whatever their political leanings, nearly all [[monetary reform]]ers agree that the current mixture of policies prevalent in most Western democracies, involving the perpetuation of government-protected [[private bank]]s (organizations legally permitted to engage in unlimited and inherently speculative [[fractional reserve banking]] activities, with recourse to [[central bank]]s to provide [[bail out]]s of [[fiat money]] as lenders of last resort), [[laissez-faire]] economic policies (which have the effect of increasing the marketization and commodification of human activity), strictly enforced [[bankruptcy]] laws (which permit the periodic transfer of assets from failed [[bankrupt]] investors to the [[private banks]] and their associates) and [[personal income tax]] (which, combined with periodic economic collapses, dispossesses the majority of the populace from their accumulated [[income]] and [[wealth]] and transfers this wealth to the owners of [[government bonds]]) amounts to an inherently unstable, unjust and dysfunctional [[economic system]] resulting in [[environment]]ally damaging [[over-consumption]], the systematic and irredeemable destruction of fertile [[arable land]] and the government-sponsored (and ultimately unsustainable) oppression of the indebted, impoverished and economically enslaved majority.

==See also==
* [[Criticism of the Federal Reserve]]
* [[Austrian Business Cycle Theory]]
* [[Hyman Minsky]]
* [[G. Edward Griffin]]
* [[Michael Rowbotham]]
* [[Monetary reform]]
* [[Money as Debt]]
* [[Murray Rothbard]]
* [[Ron Paul]]
* [[Silvio Gesell]]

==References==
{{reflist|2}}

==External links==
*[http://libertariannation.org/b/money.htm Libertarian Nation Foundation - Money and Banking]
*[http://econpapers.repec.org/paper/wpawuwpma/0203005.htm Fractional Reserve Banking as Economic Parasitism]
*[http://www.prosperityuk.com/prosperity/links/links.html Monetary Reform websites]
*[http://www.jamesrobertson.com/books.htm#creating James Robertson: Creating New Money: A Monetary Reform for the Information Age]
*[http://www.relfe.com/plus_5_.html I want the Earth Plus 5%]
*[http://video.google.com/videoplay?docid=-9050474362583451279 Money As Debt (videoplay animation)]
*[http://libertariannation.org/b/money.htm Money and Banking]
*[http://www.webofdebt.com/ Web of Debt]
*[http://www.prudentbear.com/ PrudentBear.com]
*[http://www.marketoracle.co.uk/ Market Oracle]
*[http://www.rgemonitor.com/index.php RGE Monitor]
*[http://www.financialarmageddon.com/ Financial Armageddon]
*[http://elainemeinelsupkis.typepad.com/money_matters/ Money Matters]

{{DEFAULTSORT:Criticism Of Fractional-Reserve Banking}}
[[Category:Argumentation]]
[[Category:Money]]

Deflation

2010-03-23T12:13:49Z

192.100.130.228: Adding categories

{{Stub}}

'''Deflation''' is a contraction in the supply of [[money]].<ref name="Rothbard_deflation">[[Murray N. Rothbard]]. [http://mises.org/rothbard/mes/chap12f.asp#11C._Secondary_Developments "C. Secondary Developments of the Business Cycle"], [[Man, Economy and State]], referenced 2010-03-09.</ref>

It is the opposite phenomenon to [[inflation]].

==Deflation and falling prices==
Deflation can cause a fall in [[price]]s. But calling falling prices "deflation" is a profound confusion between prosperity and depression. There are two distinct causes of generally falling prices. The leading cause of falling prices is economic progress, whose essential feature is an increasing [[production]] and supply of goods and services, which operates to make prices fall. The other is a decrease in the quantity of money and or volume of spending in the economic system. Falling prices is the only effect that they have in common. They differ profoundly with respect to their other effects.

Falling prices caused by '''increased production''' do not reduce the general or average rate of profit in the economic system and do not make debt repayment more difficult. For example, if falling prices result from the fact that while the quantity of money and volume of spending in the economic system are rising at a two percent annual rate, production and supply are rising at a three percent annual rate, the average seller in the economic system is in the position of having three percent more goods to sell at prices that are only one percent lower. His sales revenues will be two percent higher, and that is what counts for his nominal profits and his ability to repay debts. His profits will be higher and his ability to repay debt will be greater. There are lower prices, but no deflation.

What wipes out profits and makes debt repayment more difficult is not falling prices but '''monetary contraction''', i.e., the reduction in the quantity of money and or volume of spending in the economic system. This is what serves to reduce sales revenues, and, in the face of costs determined on the basis of prior outlays of money, causes a corresponding reduction in profits. It is also what makes debt payment more difficult, in that there is simply less money available to be earned and thus available to be used for the repayment of debts. Falling prices in response to monetary contraction are precisely what enable a reduced quantity of money and volume of spending to buy as many goods and to employ as many workers as did the previously larger quantity of money and volume of spending.<ref name="Reisman_deflation">George Reisman. [http://mises.org/daily/1298 "The Anatomy of Deflation"], Mises Daily, August 2003, referenced 2010-03-09.</ref>

'''Falling prices''' have been recorded in the computer industry and appliances, which have gone down in price dramatically over the years even as sales have risen higher and higher. Why? Because the companies have gotten better and better at doing what they do, and have been able to make profits even in the face of continual price declines.<ref name="Rockwell_deflation">Llewellyn H. Rockwell, Jr. [http://mises.org/freemarket_detail.aspx?control=451 "Deflation: Hurrah!"], The Free Market Volume 23, Number 8, August 2003. Referenced 2010-03-09.</ref>

==Deflation and falling credit==
When Joe lends $100 to Bob via a [[bank]], this means that Joe (via the intermediary) lends his money to Bob. On the maturity date, Bob transfers the money back to the bank and the bank in turn (after charging a fee) transfers the $100 plus interest to Joe. The money never disappears or is created; the original $100 is paid back to Joe.

But things are very different when Joe keeps the $100 in the demand deposit, ready to employ it at any time he likes. If the bank lends Bob $50 by taking it from Joe's demand deposit, the bank will have created $50 of unbacked credit, out of "thin air." By lending $50 to Bob, the bank creates $50 of extra demand deposits. Thus, there is now $150 in demand deposits that are backed by only $100. In this sense, the lending is without a lender. The intermediary, i.e., the bank, has created a mirage transaction without any proper lender. On the maturity date, when Bob repays the money to the bank, that money disappears.

An increase in credit out of thin air, all other things being equal, results in an expansion of the money supply. A fall in credit out of thin air, all other things being equal, results in a contraction of the money supply. A fall in normal credit (i.e., credit that has an original lender) doesn't alter the money supply and hence has nothing to do with deflation. For instance, if Joe directly lent Bob his $100, when Bob repays the money there will be a fall in credit with no change in money supply.

Only a fall in credit created out of thin air (i.e. [[Fractional reserve banking]]) can result in deflation.<ref name="Shostak_deflation">Frank Shostak. [http://mises.org/daily/3810 "Does a Fall in Credit Lead to Deflation?"], Mises Daily, October 2009, referenced 2010-03-09.</ref>

==Opinions on Deflation==
The opinions on '''deflation''' vary widely. Austrian economists define it as a contraction of the money supply, while mainstream
economists, define deflation as a general fall in prices. Most mainstream economists want to prevent deflation.<ref name="Bernanke_deflation">Ben S. Bernanke. [http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm#fn2 "Deflation: Making Sure "It" Doesn't Happen Here"], Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C., November 21, 2002, referenced 2010-03-16.</ref><ref name="Bagus_deflation">Philipp Bagus. [http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf "Deflation: When Austrians Become Interventionists"], The Quarterly Journal of Austrian Economics, Vol. 6, No. 4 (WINTER 2003), referenced 2010-03-16.</ref> But even Austrians differ in their perspective of deflation, and some wish to prevent it as well.

'''[[Murray Rothbard|Rothbard]]''' refutes three common arguments: First, that falling prices would depress business. Second, a deflation induced increase in real debt would hamper production. Third, credit contraction would worsen and aggravate the depression. He stresses that the anticipation of falling prices "lead to an immediate fall in factor prices," since entrepreneurs would simply bid down the prices of the factors of production to the anticipated levels. "What matters for business is not the general behavior of prices, but the price differentials between selling prices and costs (the "natural rate of interest"). If wage rates, for example, fall more rapidly than product prices, this stimulates business activity and employment."<ref name="Rothbard_depression">Murray N. Rothbard. [http://mises.org/rothbard/agd.pdf "America's Great Depression"], The Positive Theory of the Cycle, p. 17, referenced 2010-03-16.</ref> He points out, that a credit contraction in a depression will have the beneficial effect of speeding up the adjustment process, since it returns the economy to free-market proportions much sooner than otherwise. Also, in a depression have some of the [[Malinvestment|wrong investment]] projects have to be liquidated, because there are not enough savings available to sustain them. A credit contraction induces an increase in savings, so fewer adjustments are necessary. While stating that deflation could at least potentially play a role in a monetary reform, he finally decides against it.<ref name="Bagus_deflation" />

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Deflation|Deflation]] on Wikipedia
* [http://mises.org/daily/3249 Deflation: Nothing to Fear], December 2008, by Jeff Bonn
[[Category:Economical Concepts]]

Money and banking in Ancient Rome

2010-02-11T12:50:25Z

192.100.130.228: /* The Rise and Fall of the Roman Empire */ Typo.

'''[[Wikipedia:Ancient Rome|Ancient Rome]]''' grew out of a small city state in Italy to a great empire, that dominated much of Europe. Eventually, it broke apart, the Western part disintegrated, while the [[Wikipedia:Byzantine Empire|Byzantine Empire]] lived on in the east.

The silver [[Wikipedia:Denarius|denarius]], patterned after the Greek drachma, was introduced about 212 BC. Soon after, the prior copper coin (''[[Wikipedia:As (Roman coin)|aes]]'', or libra) began to be debased until, by the onset of the empire, its weight had been reduced from 1 pound (12 Roman ounces) to half an ounce. By contrast the silver denarius and the gold [[Wikipedia:Aureus|aureus]] (introduced about 87 BC) suffered only minor debasement until the time of [[Wikipedia:Nero|Nero]] (AD 54), when almost continuous tampering with the coinage began. The metal content of the gold and silver coins was reduced, while the proportion of alloy was increased to three-fourths or more of its weight.<ref name="Britannica_money">Encyclopedia Britannica. [http://www.britannica.com/EBchecked/topic/389170/money "Money"], referenced 2009-08-09.</ref>

==Roman Republic==
The first Roman coin was the bronze '''[[Wikipedia:As (Roman coin)|as]]''', introduced in 289 BC after the successful war with [[Wikipedia:Samnium|Samnium]]. It was heavy, weighing a full Roman pound (327,45 g, equal to 12 ounces).

<center>1 as = 2 semis = 3 quadrans = 6 sextans = 12 uncia</center>

The first silver coin was the '''didrachm''', introduced 269 BC after victory in war with [[Wikipedia:Pyrrhic War|Tarentum]] and [[Wikipedia:Pyrrhus of Epirus|Pyrrhus]] - Rome controlled Samnium, [[Wikipedia:Lucania|Lucania]] and [[Wikipedia:Calabria|Bruttium]], practically all of Italy, leading to the conflict with [[Wikipedia:Carthage|Carthago]]. The wealth gained in the war made a silver currency possible, though the coins with a Greek-Italic design were probably made for the conquered lands, which were using Greek [[Wikipedia:Drachma|drachmas]] for centuries. In 241 the [[Wikipedia:First Punic War|war with Carthago]] brought [[Wikipedia:Sicily|Sicily]] under control. In 235 BC were the unwieldy bronze coins reduced to a half weight with the same nominal value, turning them into credit coins.

Italy is poor in precious metal ores. The [[Wikipedia:Apennine Mountains|Apennines]] had no metals. Most important were the deposits in [[Wikipedia:Tuscany|Tuscany]], mainly with iron, copper and tin, little silver and no gold. Only in Bruttium was a significant amount of silver.

<center>1 denarius = 2 [[Wikipedia:Quinarius|quinarii]] = 4 [[Wikipedia:Sestertius|sestertii]] = 10 as</center>

Rome was the official place to mint coins, only [[Wikipedia:Imperator|Imperators]] were allowed to coin outside of Rome. Gold coins are rare until Caesar's times, mostly made by Imperators ([[Wikipedia:Lucius Cornelius Sulla|Sulla]], [[Wikipedia:Sextus Pompey|Sextus Pompeius]]).

The [[Wikipedia:Second Punic War|Second Punic War]] was led mainly for [[Wikipedia:Hispania|Hispania]] (Spain), among other things for its wealth in gold and silver. After the terrible defeat at [[Wikipedia:Battle of Cannae|Cannae]] followed the reduction of the ''as'' to 4 ounces. In 201 BC was Carthago defeated and Hispania finally became a colony. Rome could pursue numerous wars in the east, by 148 BC were [[Wikipedia:Macedonian Wars|Macedonia]] and Greece turned into provinces.

In 187 BC were introduced actual Roman silver coins with the '''[[Wikipedia:Denarius|denarius]]'''. 1 pound of silver was divided into 72 ''denarii'', weighing 4,55 g. A denar was 10 ''as'', which was reduced to the weight of the old sextant of two ounces (54 g).<ref name="Gaettens_Roman">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Der Zusammenbruch des römischen Münnzwesens'' (The Collapse of the Roman Currency) p. 22-39. ISBN: ISBN 3-87045-211-0. Referenced 2010-01-20.</ref>

==The Rise and Fall of the Roman Empire==
From at least the 4th century B.C.. the Roman government bought grain in times of shortage and resold it at a lower price. At 58 B.C. was the law changed: every citizen should receive free wheat. To the surprise of the government, most farmers left the country to live in Rome without working. To deal with the increasing economical problems, the emperors gradually began to devalue their currency.<ref name="Schuettinger_Rome">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 2 - The Roman Republic and Empire, p. 19-27, referenced 2009-08-09.</ref>

The Roman Republic was not exactly prepared to be a world power with many colonies. The [[Wikipedia:Roman Senate|Senate]] could not pass laws, only perform duties transferred to it, the officials were elected annually. the huge incomes from the provinces fell to the [[Wikipedia:Patrician (ancient Rome)|patricians]] that ran them, the money used for politics and a life of opulence. The debt many went into and their spending are well documented. [[Wikipedia:Julius Caesar|Caesar]] himself is one example, but he gained great wealth in his wars against the [[Wikipedia:Gallic Wars|Gallic and Germanic]] tribes. When the [[Wikipedia:Caesar's Civil War|Civil War]] was over, Caesar celebrated a huge [[Wikipedia:Roman triumph|triumph]], with many feasts and games for the people. His troops have been rewarded with gold coins. Made for the occasion, the production of the '''[[Wikipedia:Aureus|aureus]]''' continued and it still belongs to the most frequently found Roman gold coins. (40 ''aurei'' were made from a pound, each 8,19 gram gold).

Under [[Wikipedia:Augustus|Augustus]], coining of silver and gold became the privilege of the emperor. The Senate was only responsible for bronze coins in Rome, some provinces, like Syria and Egypt, had the privilege to make their own coins. Gold and silver were fixed in a relation of 12 ½. 42 ''aurei'' were made from a pound of gold, weighing 7,96 g. A pound silver was made into 84 ''denarii'' at 3,9 g (the purity ranged from 100-95%, most probably due to technical limitations). This binding of prices between [[gold]] and [[silver]] (and bronze) made the system subject to [[Gresham's Law]] and so more vulnerable. The sestercius and [[Wikipedia:Dupondius|dupondius]] were made from [[Wikipedia:Orichalcum|aurichalcum]] ([[Wikipedia:Brass|brass]]), which was valued more than bronze at the time. The as and quadrans (a quarter of an as) were made from pure copper.

<center>1 aureus = 25 denarii = 100 sestertii = 200 dupondii = 400 asses</center>

Augustus wanted the aureus and denarius to circulate not only in the Roman Empire, but to make them a world currency - and he succeeded. [[Wikipedia:Roman trade with India|India]] accepted the gold and silver coins in large amounts and much silver was hoarded in [[Wikipedia:Germania|Germania]]. The coins made their way to China, are known from [[Wikipedia:Siberia|Siberia]] and Scandinavia, as from Africa's East Coast.

The currency remained unchanged until the rule of [[Wikipedia:Nero|Nero]]. The aureus was reduced to 7,29g (45 per pound of gold) and the denarius to 3,41g (96 per pound silver). The denarius was minted with an 5-10% addition of base metal, but its ratio to the aureus was kept. It was theorized, that this was done to prevent the outflow of silver and gold; and indeed, India stopped accepting the denarius completely, while the Germans preferred the older coins.<ref name="Gaettens_Roman" />

===The crisis and soldier-emperors===
Another devaluation followed under [[Wikipedia:Trajan|Trajan]], the denarius was set to a purity of about 85%. The price of silver and gold has changed due to the great loot in gold from the [[Wikipedia:Trajan's Dacian Wars|Dacian Wars]] and Trajan's drive for gold mining in the region. A further lowering of the content to 75% followed under [[Wikipedia:Marcus Aurelius|Marcus Aurelius]], probably because of the [[Wikipedia:Marcomannic Wars|Marcomannic Wars]]. The Germans ceased to accept the denarius and preferred gold instead. The silver content sunk to 50% under [[Wikipedia:Septimius Severus|Septimius Severus]].

[[Wikipedia:Caracalla|Caracalla]] reformed the currency in 215 AD. The aureus was set down to 50 per pound. A new silver coin was introduced with a weight of about 5,1g of a worse purity than the denarius, the '''[[Wikipedia:Antoninianus|antoninianus]]''' (later possibly called the [[Wikipedia:Miliarense|miliarense]]). The reason may have been the steadily falling price of bronze - a pound of gold went from 4000 to 5000 sestertii. But the denarius was still coined by some emperors.

After the Severan line died out in 235 AD, the "[[Wikipedia:Crisis of the Third Century|soldier emperors]]" were in constant need of money. The crisis came into full display under [[Wikipedia:Valerian (emperor)|Valerian I]] and his son [[Wikipedia:Gallienus|Gallienus]], who couldn't get enough silver for coinage. Its content in the antoninian was lowered to 20%, but soon down to 5%. It basically stopped being a silver coin, and had a plating of silver and later tin to maintain its color. A rapid inflation followed. The constant civil wars, destruction of property and the falling price of bronze leading to the outflow of gold and silver did not help the situation either. (It was estimated, that from the time of Augustus to the half of the 3rd century Rome has lost 4/5ths of its gold and 2/3rds of silver.) Foreign and domestic trade came to an effective halt, there was great uncertainty, followed by impoverishment and outright depopulation. Prices have risen ten to hundred times after Galienus.

[[Wikipedia:Aurelian|Aurelian]] (270-275) was a very capable soldier, who succeeded in reuniting the Empire. He destroyed the kingdom of Queen [[Wikipedia:Zenobia|Zenobia]], that included even Egypt, and brought the Gallic lands back into the fold. From the year 273 is known an uprising of the minters in Rome led by [[Wikipedia:Felicissimus|Felicissimus]], which hints at the size of inflation - 7000 soldiers fell, with estimated 40.000 minters taking part in the revolt. The cause may have been Aurelianus' reform of the currency. He has created a new coin (the name is uncertain, probably '''[[Wikipedia:Nummus|nummus]]''', later called by some pseudoantoninianus). It was described as "new silver", but it simply had a thin silver-coating, a silver content of just about 2%. The privileges of the Senate to make copper coins and the provincial rights were taken away. With these measures, the inflation was not stopped, but it was slowed down.<ref name="Gaettens_Roman" />

===Diocletian's reforms and decline of the empire===
In a more serious reform in 293, [[Wikipedia:Diocletian|Diocletian]] introduced a new 5-denarius coin of fine silver, the '''[[Wikipedia:Argenteus|argenteus]]''' (96 per pound). The gold coins have become rare and their weights so different, that they were only accepted for their weight. [[Wikipedia:Carus|Carus]] or Carinus have set the weight of the aureus to 70 per pound, which Diocletian raised to 60 per pound of gold. In the same year was the Empire divided into four parts, ruled by co-emperors, the [[Wikipedia:Tetrarchy|Tetrarchy]]. Around 295 AD was introduced a new copper coin, marked as the pseudoantoninianus, but weighing 10g.

Diocletian most probably released the binds between coins of various metals, which continued to fluctuate. Gold and silver started to circulate again, but the bronze coins were still credit coins and were soon devalued again. The relative peace of the time brought some degree of economic stability, but the prices continued to rise.<ref name="Gaettens_Roman" />

To limit the prices, Diocletian issued the [[Wikipedia:Edict on Maximum Prices|Edict on Maximum Prices]] in 301. Justified by the avarice of merchants and hoarders, the prices of many goods and the wages of many workers were set to a fixed value. Death was the punishment for dealing at higher prices or hoarding, and much blood was shed in its cause. It is unknown how long it took, before the law was completely ignored, but in 305 Diocletian voluntarily abdicated, as the only Roman emperor on record; and the law was dead by then. The debasement continued.

In the years of chaos preceding Diocleatian's rule, trade has been reduced to barter and the middle class was almost obliterated. Since money was unreliable at best, he devised a system of payments in kind. This tax reform has bound the lower classes to the soil and made them effective serfs. The once free men suffered under the state and its taxes and "prayed that the barbarians would deliver them from it."<ref name="Schuettinger_Rome" /> When people tried to get out they were by law compelled to remain in the occupation that they were in. The occupations were made hereditary. These laws started by being restricted to the defense-oriented industries but, of course, gradually it was realized that everything is defense-oriented.

The peasantry, known as the ''[[Wikipedia:Colonus (person)|coloni]]'', were leaseholders on both imperial and private estates. They too were formerly a free class. Under the same pressures as all smallholders, they began to drift away, to find better opportunities, better leases, or better occupations. So under Diocletian the coloni were now bound to the soil. Anyone who had a lease on a particular piece of land could not give that lease up. More than that, they had to stay on the land and work it. In effect, this is the beginning of what in the Middle Ages is called [[Wikipedia:Serfdom|serfdom]].

The silver currency was basically abandoned, so much that the government started to demand payment of taxes in kind and in services instead of coin. [[Wikipedia:Constantine I|Constantine the Great]] issued the golden '''[[Wikipedia:Solidus (coin)|solidus]]''' in large numbers. The government moved away from collecting taxes and paying salaries in kind, and began to use gold. But taxes had to be paid in gold [[Wikipedia:Precious metal#Bullion|bullion]], as the government refused its own coins, since was never sure how adulterated the coinage really was. The inflation of lesser coins continued, even cities were free to make their own token coins. Most people had to buy gold coins to pay taxes with, those who couldn't afford it lost their lands or became delinquents. So there was a relatively stable 'gold standard' used by the growing number of soldiers and civil servants, and an increasingly worthless currency for the rest of the citizenry. A rapid decline of their fortunes and personal freedoms followed.<ref name="Peden_Inflation_Fall_of_Rome">Joseph R. Peden. [http://mises.org/story/3663 "Inflation and the Fall of the Roman Empire"], posted on 2009-09-07 in Mises Daily, referenced 2009-09-11.</ref>

The solidus weighed 4,55g of pure gold (72 per pound). For centuries, it was the only gold coin in Europe, it was the base coin for Germanic kingdoms of the [[Wikipedia:Merovingian dynasty|Merovings]] and the [[Wikipedia:Byzantine Empire|Byzantine Empire]] continued to make it for a millenium. The new silver coin, the '''[[Wikipedia:Siliqua|siliqua]]''', was a credit coin of variable weight. The copper coin, this time in bronze, was fully subject to devaluation. Both silver and bronze coins were probably weighed as a result in daily use. Diocletian's 5-denarius piece with 10g had by 311 only 4,4g, by 320 3,1g and 1,5g by 344. More attempts at reform followed, as huge finds of the period attest. Some of the bronze coins were still used at the beginning of the 19th century in southern France.<ref name="Gaettens_Roman" />

===Inflation in numbers===
The silver content in the denarius fell over the ages:

{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
! (emperor)
! Purity
|-
| Augustus (27 BC - 14 AD)
| about 97%
|-
| Nero (54 - 68)
| 90%
|-
| Trajan (98 - 117)
| 85%
|-
| Marcus Aurelius (161 - 180)
| 75%
|-
| Septimus Severus (193 - 211) and Caracalla (198 - 217)
| 50%
|-
| Traianus Decius (249 - 251)
| 40%
|-
| Gallienus (253 - 268)
| 20-25%
|-
| Aurelian (270 - 275)
| 2%
|}

The inflation is hard to document, but one good indicator are the payments a [[Wikipedia:Roman legion|Roman legionary]] would receive:

{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
! (emperor)
! yearly pay in Denarii
|-
| Augustus (27 BC - 14 AD)
| 225
|-
| Domitian (81 - 96)
| 300
|-
| Commodus (176 - 192)
| 375
|-
| Septimus Severus (193 - 211)
| 500
|-
| Caracalla (198 - 217)
| 750
|}

The devaluation of silver money to a half has led to a similar increase in their wages. This doubling of prices over the course of a century is also documented for bread.<ref name="Gaettens_Roman" />

In Diocletian's time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii.<ref name="Peden_Inflation_Fall_of_Rome" />

==Roman banking==
Banking was highly developed and subject to [[Wikipedia:Roman Law|Roman Law]], money deposits were to be safeguarded and not lent out. A specialty were banker associations or ''societates argentariae'', where members supplied capital to form them, but they had unlimited liability to prevent fraud. Most banks failed during the economic crises of the third and fourth centuries A.D.<ref name="De_Soto_Rome">Jesús Huerta de Soto. [http://mises.org/books/desoto.pdf "Money, Bank Credit, and Economic Cycles"]. 2. Historical Violations of the Legal Principles Governing the Monetary Irregular-Deposit Contract, p. 53-58, referenced 2009-10-29.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Ancient Rome|Ancient Rome]], [[Wikipedia:Roman currency|its currency]] and [[Wikipedia:Roman history|history]] on Wikipedia
* [http://mises.org/daily/4088 Big Business in Politics], February 2010 by H. J. Haskell
[[Category:Historical]]

Austrian School

2009-04-24T15:01:24Z

192.100.130.228: Created first draft of the page

While the roots of the Austrian School of Economics go back as far as 15th century, its beginnings are connected to notable 19th century economists of Austrian origin. The school emphasizes the spontaneous organizing power of the price mechanism and holds that the complexity of subjective human choices makes mathematical modelling of the evolving market extremely difficult (or impossible). Its proponents tend to advocate a laissez faire approach to the economy and the enforcement of voluntary contractual agreements between economic agents, but otherwise the smallest imposition of coercive force (especially government-imposed) on commercial transactions.

==History==

Quote: http://mises.org/etexts/austrian.asp

The Austrian School derives its name from its predominantly Austrian founders and early supporters, including [[Carl Menger]], [[Eugen von Böhm-Bawerk]] and [[Ludwig von Mises]]. Prominent Austrian School economists of the 20th century include [[Joseph Schumpeter]], [[Henry Hazlitt]], [[Murray Rothbard]], and Nobel Laureate [[Friedrich Hayek]]. A rather prominent institution is the [[Mises Institute|Ludwig von Mises Institute]].

Austrian School economists advocate strict adherence to [[methodological individualism]] – analyzing human action from the perspective of individual agents.<ref name="Mises">Ludwig von Mises [http://mises.org/humanaction/chap2sec4.asp "The Principle of Methodological Individualism"], ''[[Human Action]]'', [[Mises Institute]]. Referenced 2009-04-24}.</ref> Proponents of this method, [[praxeology]], argue that the only means of arriving at a valid economic theory is to derive it logically from basic principles of human action. Proponents of this method hold that it allows for the discovery of fundamental economic laws valid for all human action. Alongside praxeology, the school has traditionally advocated an interpretive approach to history to address specific historical events.

<references />

==External links==
* [http://mises.org/etexts/austrian.asp What is Austrian Economics?] from the [[Mises Institute]]
* [[Wikipedia:Austrian School]]
* [http://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html Austrian School of Economics] from The Concise Encyclopedia of Economics
* [http://homepage.newschool.edu/het//schools/austrian.htm The Austrian School] from the History of Economic Thought page