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The Banking Quagmire

The following was written as an 11th grade language arts assignment in a government school, surprisingly, I got an A on it.

The Banking Quagmire

By R. Stempien

Einstein once defined insanity as doing the same thing over and over and expecting different results. There is no organization that has been more guilty of this than the central banks and economists that oversee the money and economy of every industrial country. They try the same measures of money printing and adding of regulation and fractional reserve banking that have been tried after every depression sense the history of industrial society. What happens each time is that after awhile the depression subsides and a boom takes over, but this is only artificial due to the credit expansion done by central banks, and then, as this paper will show, this is inefficient and leads to another bust where things come back down. While at first it might appear that the solution to Europe's economic crises is tighter regulation and more spending by central banks, a closer look reveals that doing that would only make things worse, and that privatizing Europe's banking and currency system and repudiating all EU nations debt would correctly solve the problems. As a result, central banks are constantly using kludges to fix the economy and are in the end only making things worse.

To understand what is going on with the EU countries debt problems, one must first understand different terms and economic ideas. One term is what a central bank is. A central bank is basically the lender of last resort. It is established by government fiat and is often given the power to create currency and loan that currency to others, and regulate and license commercial banks. It tends to have a monopoly on the currency that citizens within its border are allowed to use through legal tender laws. The way it licenses and regulates commercial banks amounts to the commercial banks and the central bank being a cartel, an exclusive club that forbids competition with force, in this case, the force is government law. It is also good to know what exactly money is. To accurately understand this, one must first go back to a state before money, in a market without any restrictions. In this before time, people all have a skill that they are good at, such as wood cutting, welding, or gardening, and they have many skills that they are not good at, like farming, auto repair, or building maintenance, to keep from starving or otherwise poor living conditions, one must barter their skills in exchange for the skills of others. This makes things difficult though, because a welder who needs their car repaired must find a mechanic who needs something welded. What this leads to is everyone exchanging their skill or item for something that other people want, something valuable that everyone could use. Silver is an example, it is not in super abundance, like water, but not so scarce that it is unreachable like a rare painting. It is easy to break down and does not loose value when broken down like a painting is, and it is very easy to store.

So instead of bartering now, everyone converts the skill or item they have to silver, take it to whoever has the skill or item they need and convert the silver for that. Its an indirect trade, everyone wants silver so the problem of bartering is eliminated. The problem that is still there is that silver is bulky and shiny, and keeping a lot of it while mobile can be cumbersome. So the solution is to keep the silver with a trusted company or individual with safes and security guards. So the silver can still be exchanged, a piece of paper is printed to represent the silver, an IOU, that when turned into the company is redeemed for the silver. That is how the banking industry was born. What has just been described is called hard currency, currency that is backed by a tangible asset, a precious metal, or precious resource, the paper currency is simply an IOU for that. Unfortunately, what happens sometimes is that the bank owner who is holding all this silver decides that they need a little extra cash to feed the expensive love of vintage rare video games. So he starts taking some of the silver to fund it. The person keeps all the IOU's in circulation even though they all cannot be redeemed for silver, this is in effect fraud. It is done by most banks today though, and it is called Fractional Reserve Banking. They do not stop with this though, they create Fiat currency where none of the notes are redeemable for this scarce resource or metal because nothing backs it, it is an IOU for an IOU. And most of the time it is not worth the paper it is printed on. Some other terms to know are, Keynesian economics, which are a school of economics that emphasize consumption and regulation. Austrian economics are a school of economics that focus on the ideas of human action through Praxeology to establish basic truths about how humans interact and they apply that to economics. Privatization means that a good or service once done by the government is now done by competing organizations like companies, charities, or associations on a completely unregulated market.

Central banks and a government monopoly of currency seem to be pervasive in all industrial cultures. Periods of booms and busts seem to also be pervasive in these countries. There are many economists and political philosophers who feel that there is a reason why. Ludwig Von Mises, a great scholar and economist who specialized in the Austrian school of economics, pointed out,

The prices of the material factors of production, wage rates and interest rates on the one hand and the anticipated future prices of the consumers' goods on the other hand are the items that enter into the planning businessman's calculations shows the businessman whether or not a definite project will pay. If the market date underlying his calculations are falsified by the interference of the government, the result must be misleading. Deluded by an arithmetical operation with illusory figures, the entrepreneurs embark upon the realization of projects that are at variance with the most urgent desires of consumers” (Mises).

What Mises is talking about is something businesses end up doing everyday, because Central banks interfere with the data. A monopoly of the currency allows inflation to happen which leads to “economies subject to recurring credit-creation-driven booms and the resulting recessions accompanied by financial crisis” (Cochran). This creates artificial wealth that does not reallyexist and contributes to the miscalculation's that Mises talked about, this is the main cause of Europe's problems, and of every other country with a central bank. The solution is to get rid of this miscalculation, and privatizing banks and currency creation would end this miscalculation, because they would have to act like any other business, they would have to behave and offer a safe service or product or they would go out of business. Sending out useless paper that has no value in itself is not good business, and only survives because of government fiat, it would not last on a free market. Doing this would solve the economic issues plaguing Europe and other countries.

The debt of the different EU countries is insane, often many trillions of Euro's. Debates often focus on how to pay off this debt and to pay it off painlessly, no one asks if this is possible however, or if citizens are not responsible for this debt. Paul Cwik, a contributor to, has the answer, “The least harmful alternative is partial debt repudiation- in other words, defaulting on some of its debt” (Cwik). The EU countries would basically declare bankruptcy. They could simply not pay any of the debt, or they could sell off government assets, like buildings, parks, and highways, to private investors, and use the proceeds to pay off some of the creditors. Murray Rothbard, a famous Austrian Economist once said in the context of America's debt that,

If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don't pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable, Government commits not its own life, fortune, and sacred honor to repay the debt, but ours” (Rothbard).

Since the citizens of EU countries did not contract for this debt, they do not have an obligation to pay it, calling it debt and treating it like a legitimate private transaction is really a misnomer. All one has to ask to know if they are responsible for such debt is to ask if they signed a contract to pay this debt.

It is often felt that Europe's situation cannot get any worse. To prove this wrong one must remind people of Zimbabwe and the Weimar Republic. Murray Rothbard once again has the right idea. When he mentioned a common way to pay off a nation's debt was to print all the necessary money, he pointed out that introducing that much money into circulation would cause hyper inflation, and would devalue the currency into the same state that Germany was in, in 1923, where it was cheaper to burn the currency in the fireplace then to buy firewood. The problem is that countries flirt with this idea constantly, with a legal monopoly on currency and a central bank there is nothing stopping them from printing whatever money strikes their fancy. Ludwig Von Mises warned, that if most governments policy of money printing, borrowing, and interest rate control must stop, otherwise the hyperinflation Germany experienced in 1923 will happen again. The EU cannot continue down this path any longer. Cake cannot be had and eaten too, artificial wealth cannot be created without consequences. Many people do not realize that a lot of currencies are backed by the Euro. If Europe goes the way of Zimbabwe then everyone around the world will feel its consequences.

Many people have objections to the ides expressed in this paper. They often want to do the same kludges that have caused this issue. Sometimes the critics simply focus on the wrong solutions, like when Megan Mcardie felt that economic growth is the only way to fix this. She is right, growth is important, but it will not fix things, privatizing banking and currency will. When most people want growth, they really tend to mean printing more money. That might get more growth but it would be fake growth, fake wealth. It would contribute to the same issues that Ludwig Von Mises was talking about. Privatizing banking and currency creation would end this fake growth because such banks reckless printing of money would make them go out of business. Another disagreeing person had advice for any country that wanted to leave the EU. It is best summarized by Patrick Barron, another writer on, “In complete secrecy and with no prior discussion, renominate all Greek euro-denominated bank accounts into drachma-denominated accounts and devalue the drachma” (Barron). This is the standard Keynesian solution to any economic problem, print more currency to create more wealth, and make sure to ignore the debt unless money is added to it. This is what has been tried for years and leads to the same cycle's of booms and busts that societies have always had to deal with.

The problems that Europe is dealing with are the same problem that almost all rich, industrial country is dealing with, including the United States. Society made a deal with the devil, and the devil is the Bank Cartels and legal tender laws. Society wanted wealth and power and trusted a gang of counter fitters and Ponzi schemers to get that future. Such a thing cannot last. The Euro and the Dollar are used to back almost every other currency in the world. If these countries go the way of Zimbabwe then so will the rest of the currencies. The way to solve this is not to print more money or tighten more regulations, it is to end both, it is to privatize banking, end legal tender laws to privatize currency, and expose Fractional Reserve Banking for the legalized fraud it is and expose Fiat currency for the legalized counter fitting it is. Private banks would not be able to engage in Fractional Reserve Banking, and they would not be able to print money that has no value because they must compete on a market with other banks, and if they do these things then they will go out of business.



Work Cited

Barron, Patrick. "Bad Advice for the Greeks." The Ludwig Von Mises Institute, 15 Oct. 2012. Web. 10 Dec. 2012.

Cochran, John P. "Can Central Banks Be Tamed?" The Ludwig Von Mises Institute, 16 Nov. 2012. Web. 10 Dec. 2012.

Cwik, Paul. "Repudiation Is an Option." The Ludwig Von Mises Institute, 28 July 2011. Web. 10 Dec. 2012.

McArdle, Megan. "Europea[euro][TM]s Real Crisis." The Atlantic Apr. 2012. Gale Opposing Viewpoints In Context. Web. 11 Dec. 2012.

Mises, Ludwig V. "The Economic Consequences of Cheap Money." The Ludwig Von Mises Institute, 10 Sept. 2012. Web. 10 Dec. 2012.

Rothbard, Murray N. "Repudiating the National Debt." Chronicles. The Ludwig Von Mises Institute, 09 July 2012. Web. 10 Dec. 2012.

Thompson, Derek. "The Chart You Need to See to Understand the European Debt Crisis - Atlantic Mobile." The Atlantic. The Atlantic Monthly Group, 10 Aug. 2011. Web. 27 Jan. 2013.



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