[This is Chapter 12 of Murphey’s book Emergent
Chapter 12
THE MONETARY AND BANKING INSTITUTIONS OF THE FREE SOCIETY
This is a book on the general philosophy of liberty and on the religion of emergence. It is not within its scope to undertake a detailed discussion of highly technical problems. But there is nevertheless an important place in this book for some constructive comment upon the need of a free society for a functional system of money and banking that (without being subject to a built-in tendency toward political manipulation) will provide the free society with a stable medium of exchange. Before making a more specific discussion of monetary and banking problems, it is necessary to look at the problem from a perspective that is broader than that usually given it.
I believe
there is a certain legitimacy in the point, raised by
some, that there can be no danger of a permanent destruction of free
institutions. This view is based upon
the somewhat idealistic conception that, because human beings will constantly
struggle for means of self-expression, no authoritarian system can become more
than a passing obstruction so far as the eventual freedom of human beings is
concerned. [Note in 2005: The collapse of the
While there may be a certain truth in this, it has always seemed to me that such a view is based upon so high degree of generality, and is so separated from the consideration of any given time and place, that although it may be good as an inspirational hope, it can hardly serve as a substitute for genuine concern over the fate of free institutions in the contemporary era. It may very well be that, under the pressures of Soviet Communism and of other manifestations of the doctrines of coercivism, the general liberty of the individual will be suffocated for a long time to come.
There are vast forces at work leading toward the destruction of liberty. The advocates of socialism and of Communism never tire of stressing the alleged “inevitability” of the victory of these forces. The fact, of course, remains that, despite what such persons might say, this movement is far from inevitable. It may very well be overcome if enough human beings apply themselves in the opposite direction.
The task will become far greater if we destroy the present civilization which is primarily based on liberty and must, at a later date, reestablish many of its foundations. When American “conservatives” ask themselves “how much time do we have?,” they are essentially asking themselves “how much time is there during which an effective effort may be made to begin again the movement toward liberty while we still enjoy the existence of the basic institutions upon which our past liberties have been based and upon which we would hope to continue our future ones?”
The aspect of time is important. And it has a close relation to the subject-matter of this chapter. Several years ago, before I began law school, I felt very strongly, and I believe correctly so, that the greatest danger of a rapid acceleration of the movement into the Welfare State and toward socialism existed in the problem of the “business cycle.” I felt that if there were another major recession or depression there would be little hope, under prevailing ideological conditions, that we would not move drastically away from the free market toward more governmental control. And, although to a lesser extent, I feel that a rapid inflation would also go far toward bringing the imposition of extended governmental regulation, such as may be found in price control, wage control and federal care for the aged.
Because of this concern, I spend some time studying the problems of the business cycle. The subject is an immense one, carrying within it virtually all of the more technical aspects of the study of economics. As I have indicated, we will not be able to make a detailed analysis of it in this chapter. But it is important that we not overlook it or pass it by, because the whole problem of the business cycle is one to which intellectuals concerned with the philosophy of liberty must give a great deal of attention within the next few years. Its intellectual priority is so great that we must at least draw it to the attention of the reader here, in the hope that we may thereby stimulate a much more extensive creative thought in this connection.
The stark, brutal fact would seem to be that the capitalistic system has never successfully evolved a monetary and banking system that is capable of providing it with the stable medium of exchange that it requires if it is to function satisfactorily without the recurrent hardships and dislocations that are involved in economic “booms” and “busts.” The banking system that has evolved is essentially one that turns the supply of money (in the narrow sense of that term) into a reserve upon which a vast amount of bank credit may be established. Unfortunately, this bank credit is subject to extensive expansion and contraction. It is the credit, far more than the actual coins or printed money, that makes up the largest part of our medium of exchange.
It is sometimes thought by “conservatives” that the instability of such a system is the result of deviating from the “gold standard.” It is true that the “gold standard” takes out from under political influence the supply of actual money in the economic system. But it is very important to recognize, too, that, so long as the supply of bank credit is subject to excessive fluctuation, there is a deep-seated potential for instability arising out of the banking system itself.
Equilibrium analysis of the market economy offers no explanation for recurring periods of economic activity and stagnation. Rather, all of the concepts of economics in this field reveal the strongest reasons why business should flourish continuously. With the exception of time of pestilence and famine, both of which belong primarily to earlier historical periods and not to our own in America, men might be expected to produce at a constant pace to provide themselves with articles to exchange for those things that they themselves need at all times. Obviously, the explanation for business cycles is to be found in factors that equilibrium analysis does not take into account.
It has long been known that these other factors are essentially monetary, and that it is changes in the quantity and rate of expenditure of the medium of exchange, combined with the effects these changes bring in their wake, that offer the key to understanding this otherwise inexplicable disturbance. Just as any rapid shift in expenditure by any part of the population would produce a need for a reallocation of the productive resources out of the old production and toward the meeting of the new demand, causing disruptions, significant changes in the volume and use of money offer an analogous cause for sudden dislocations which, because of their very suddenness, cannot undergo the relatively smooth adjustment that we would see if the changes took place gradually. Indeed, a fluctuating medium of exchange is perhaps to be viewed as more pervasive in its influence than a change in demand from one good to another. No explanation of the vast business cycle catastrophies that have occurred during history could be satisfactory unless it pertained to causes of sufficient magnitude to bring on such a dislocation. (Necessarily, of course, no single causative factor need be large, but the chain of causes must be able to explain the total result.)
The medium of exchange is “expanded in volume” today principally through the enlargement of outstanding bank credit. How money can be “created” by the extension of credit is simply understood when we realize that “economies” are made in the use of money when that money is deposited in the banking system. That is to say, the depositor continues to use his money as he did before depositing it, but the amount he does not spend at any one time is, instead of remaining as an idle balance, made available by the bank to others for their expenditure. Thus released, the money may be spent many times before all of it finally becomes part of the reserves held by the banking system. We see that what is called the “expansion of the money supply by the extension of credit” is in fact an augmentation of the turnover of existing money. It is an increase in the effective use to which money is put.
Those fluctuations that fall under the term “business cycles” find a necessary cause in the expansion and contraction of bank credit. Other factors, such as the psychology and expectations that appear during an economic crisis, are important in explaining the reactions of the economy to this credit cycle.
I believe that the intellectual concerned with liberty must give a great deal of serious thought to whether this banking system, which largely evolved without any intellectually conscious assurance that it is of such a nature as will provide the capitalistic system with the stable monetary framework it needs, ought out to be considered subject to certain major alterations in its basic structure as will remove the possibility of a very significant fluctuation in the volume of the medium of exchange. I do not wish to suggest at this time what such alterations should be. I would merely suggest that we should not accept as unquestionable the monetary and banking institutions that have evolved for capitalism, especially in light of the disastrous consequences that have been apparent for so many years. It may very well be that the problem of the business cycle, from the point of view of the person most concerned about the preservation of free institutions, calls for a radical solution. [Note in 2005: This is an important passage that shows that I have for many years been deeply concerned about the market economy’s being truly “workable” in its servicing of the society’s needs. A concern along these lines is what moved me to write my much later book The Emerging Crisis of Economic Displacement, where I call for a radical rethinking of economic institutions to meet the crisis that will come from technology’s replacement of work as the major source of income.]
It is one of the tragedies attendant upon the rise of the contemporary intellectual orthodoxy, which has a mentality basically opposed to the free capitalistic economic system, that the mainstream of intellectual endeavor was diverted from a constructive study of this problem. Very little attention was given, before the intellectuals began diverting their attention, to the problem of how a capitalistic society may best, consistently with its own freedom, solve the problem of the business cycle. As remarked earlier in another connection, if the great volume of intellectual energy that has poured into the destructive economic theories of John Maynard Keynes had been used in a constructive effort actually to solve the problem of the business cycle in a manner compatible with the market economy, it is altogether likely that, not only theoretically but as a matter of political fact, we would have gone far toward a constructive modification of our monetary and banking institution as as to provide the stable framework that we need. In large measure, the responsibility for our failure in this connection lies directly with modern intellectuals and the orthodoxy to which they adhere.
The centrally controlled system of money and credit under which we are now operating with the Federal Reserve System is, however, probably as good a makeshift as we could hope for to enable us to keep our monetary system running smoothly, in the absence of a more fundamental solution. We have placed the monetary system under conscious “planning.” I believe this is altogether preferable so far as the market economy is concerned to remaining under a banking system that, in the absence of planning for stability, would regularly fluctuate the volume of the medium of exchange. If our choices are merely to accept a central control of the system of money and credit or to accept an uncontrolled banking system of the type that evolved under capitalism, it would certainly seem preferable to support the first of these alternatives. This is so because a stable monetary system is an essential prerequisite not only to the smooth functioning of the capitalistic economic system, but also – as we have remarked – to the effective preservation of liberty in our times.
There is much about a centrally planned banking system, however, that is repugnant to the philosophy of liberty. Insofar as we accept such central planning, we should do so only as a temporary expedient which we should support only until a better alternative, more compatible with the free market, is formulated by us and brought to a point where there is a practical political possibility of putting it into effect.
There are several important reasons why a centrally planned monetary system, such as that operated by the Federal Reserve Board, is far from the ideal solution so far as a market economy is concerned. It should be apparent that such a system vests a high degree of power in government. It is the constant desire of the philosophy of liberty, of course, to reduce to the greatest possible extent the power of governments. Such power as government does possess is, whenever possible, only such as is necessary for it to carry out its purposes of minimizing coercion elsewhere and of providing certain institutional preconditions for voluntary activity. If it should prove possible to provide a monetary and banking system that is self-controlling, it would then be preferable to have the government out of the picture.
Necessarily, any banking and monetary system will have to operate, as all other institutions in a free society, under certain general rules of law. Indeed, such rules would be like the skeletal basis for the modified system of money and banking. But there is a distinction between this, which involves permanent and general rules of law, and the operation of the monetary system by government in the making of recurrent monetary policy. A continuous conscious planning of the operation of a system that demands, for its successful operation, a perpetual renewal of policy decisions, has inherent within it a very great potential for political manipulation along at least two lines.
First, it
might be manipulated in favor of an upward fluctuation of the volume of credit
in keeping with an inflationary policy.
There are always strong political forces present that favor inflation as
a national policy. One of the important
issues in the 1960 presidential campaign in the
A second form of manipulation to which a centrally operated monetary system is subject is found in what has come to be known as “qualitative credit control.” By determining the specific industries, or even specific enterprises, to which bank credit may be given, a central planning board may exercise extensive powers that, by themselves, can go far toward controlling the entire direction of the economic system. Such credit control is among the instruments by which a tightly authoritarian socialism can be imposed. It is a method by which men and resources can be shifted from one area to another, according to the desires of the planner. All that we have said in connection with socialism stands, of course, as a criticism of qualitative credit control.
So long as we remain under a centrally controlled monetary system, the independence of the Federal Reserve Board must be scrupulously maintained. In no way should it become an instrument of national political policy. It can perform its function of providing the market economy with a satisfactory monetary foundation only if it adheres to a strict policy of stability in the volume of the medium of exchange, which consists both of money and credit.
The principal criticism of our monetary establishment consists in the fact that there can be no continuing assurance that the Federal Reserve Board will remain independent. Nor is there assurance that it will itself always adopt a policy of stability in the volume of money and credit. It does not have built-in provisions in either of these connections.
As I have indicated, it is not possible for me to attempt to set out in detail any suggestion as to the form a property money and banking system would take for a market economy. [Note in 2005: When this was written, probably in 1961, I must not have felt secure about endorsing a 100%-reserve banking system, which would seem to meet the criteria I was discussing. Even today, I am inclined to leave such a thing to those who spend their lives as economists. And I would think that if the 100%-reserve system were tried, it should be done so experimentally at first before it is locked into place by law or by Constitutional amendment.] Because I am not doing so here, it would perhaps be more dangerous than helpful even to attempt general suggestions. The purpose of the chapter is to pose the problem, to make the reader aware of the deficiencies both in the banking system as it evolved and in the centrally-managed financial structure, and to point up the fact that there is still a considerable intellectual challenge to those who favor the philosophy of liberty to formulate ideas that will help perfect the free society by providing it with a theoretical basis for an adequate monetary foundation. The process of development is far from complete and still needs lots of creative thinking before we can say with any degree of satisfaction that the libertarian intellectual tradition has completed its task in this context. This is one place where the libertarian intellectual tradition was cut short. As a result, both the theory and practice of capitalism is lacking in at least one vital connection.
It is not enough for an American “conservative” merely to suggest that we adopt once again the “gold standard.” The problem is much deeper than that would suggest. It may be that the institutional modifications required will prove very simple. But the intellectual questions are not simple. This is a problem as to which oversimplification, both intellectually and as to practical suggestions, should not be indulged.
The problem is essentially this: A flexible system of liberty and permits individuals to pursue their own courses in multiple directions requires a number of institutional preconditions, such as we have been discussing in this book. One of these preconditions is a monetary system that will make available a medium of exchange that is not subject to severe fluctuation. It must be a self-operative monetary system not needing the conscious intervention of government. For this, it must be capable of operating under general and permanent laws. It is one of the great challenges for the future intellectual.
By no means
is the task of preserving liberty a matter merely of maintaining intact the
basic institutions that have developed in
In short, those who favor the philosophy of liberty can only consider existing conditions a plateau from which to progress much further in the perfection of the institutional framework of liberty and in the human uses to which we put the liberty as it is achieved.