27.01.2019 21:04

Since the 2008 crisis, the mainstream media and nearly all left-wing politicians around the world have been constantly roaring against diverse governments and the main central banks in the world for supposedly “perpetuating capitalism”. This movement has been going on for much more than 10 years, and it’s a clear sign of intellectual dishonesty form the left. They accuse of being a capitalist to every bureaucrat who doesn’t directly embrace socialism or communism. To put you in situation, they even called Mario Draghi a capitalist and a “neoliberal” when he declared that “he would do anything which was required to save the euro”. If you remember well, he was clearly stating the beginning of the QE program. So, how can be a devastating and liquidity-flooding stimulus program pro-capitalism? How can be the biggest public intervention in the economy of the last 50 years a sign of capitalism?

These anti-capitalist movements try to persuade voters through lies, through violent language and through an extreme polarization of society into social classes, basically following Marx’s “polilogism”; part of the central core of the Marxist ideology. These people blame a badly denominated “capitalist system” for all of their problems.  They should be blaming a social-democracy for all of their issues, as it is the kind of system in which we are leaving in today. A system allowing a minimum level of market competition between firms or permitting people to express their opinion freely by choosing what to consume and in what quantities doesn’t mean we are automatically in a free-market system. When more than 40% of GDP is generated by the State in terms of public spending, we can’t be living in a capitalist system! It’s an oxymoron!

But let’s concentrate on what’s the core issue of this article: the role of central banks in a free market economy from various perspectives. 

Central banks committed many errors throughout the last decade, but not precisely from a lack of interventionism but really from an excess of it. Inflation is always a monetary phenomenon, but crises are not. Economic crises can be generated by multiple causes, but they are always preceded by an excess of credit in the economy, and generally also overcapacity of production in it. Let’s look at the last one, the Great Recession of 2008. Central banks played a very big role in it, by lowering interest rates to minimum levels previous to the crisis, and then trying to rectify excessively fast, and we can even mention Alan Greenspan, president of the Federal Reserve from 1987 up to 2006 for partially causing the housing boom thanks to its interest rate policy and its obsession with introducing cheap credit in the economy. His predecessor, Ben Bernanke is not innocent either, as he inverted the yield curve, profiting more short term than long term bonds, and incentivizing short and incautious credit not only for housing, but above all for businesses and personal consumption; which was one of the greatest collateral effects which had a greater influence on debtors after the explosion of the housing and financial bubble.  

Before commenting about classical theories from a liberal/libertarian perspective on monetary theory, we should bear in mind the role of the government and fiscal as well as despicably applied supply-side policies on promoting economic recessions and incentivizing immediate consumption instead of saving, changing the time preferences of economic agents and disrupting the structure of production by government decree. One of the best models to explain how government disruption in the economy perturbs capital accumulation and leads to an excess of liquidity and credit, is shown in Hayek’s inter-temporal  structure of production; better known as Hayek’s triangle, which is also correlated in the same model to a PPF (Production Possibility Frontier) and to a credit market scheme of demand and supply for credit, demonstrating how a minimum movement in each of the three models will affect the other two. Summarising it, Hayek’s model shows how an artificial lowering of interest rates or an expansion of the monetary mass, will lead production to be temporarily beyond the scope of the PPF, leading it consequently to lose marginal value in the market. Other cases can also be applied to this model, as for example a sudden increase of the tax burden, which will consequently cause national production levels (GDP) to go under the PPF, not only implying unproductivity or inefficiency, but also leading to a sudden increase in the costs of borrowing. 

Neo-Keynesian promoters of MMT (Modern Monetary Theory), who think that the government can efficiently regulate markets by controlling interest rates and the monetary mass in the economy, haven been proved wrong once again. Keynesian fiscal stimulus were a complete failure previous to the 70s, leading to inflationary levels over 25% in many European and global developed nations, and nowadays Neo-Keynesianism has failed again with MMT, leading to overindebtness (with some countries with public debt over 250%/GDP), tremendous liquidity excesses, and stagnation in many economies around the world, which will suffer the worst effects of their past decisions, when time of repayment of their sovereign debt finally comes; as Spain, which will have to cover a total of 120,000 million euros of sovereign debt repayments over this and the next year.

In terms of classic libertarian economic literature, two are my preferred solutions for dealing with the intervention of central banks in the economy. Many of my readers will already know about these proposals, which are Friedman’s’ sustained rate of credit expansion below or equal to economic growth, and Hayek’s denationalisation of money. 

Milton Friedman was and still is one of the main intellectual references of the Monetarist School of Chicago. He was a declared monetarist, but not in the sense of Greenspan or Bernanke, and very far from Neo-Keynesians. Friedman thought that monetary policy was the main factor of influence in the economic cycle. In his book, A Monetary History of the United States, in 1954, he proposed that to neutralize the effects of monetary policy, the best possible solution was a continuous and constant annual credit expansion which should always be kept below the real growth rate to prevent inflation, or at least keep it low and stable. Friedman didn’t support monetary “shock policies” to incentivize growth in the short term, having to pay for it with greater debt levels. He believed that monetary policy should be oriented towards a long-term growth perspective.  This could actually be a feasible and non-utopic solution for nowadays central banks to reduce their influence on the economy, which is what many liberals/libertarians want, and which will give greater stability and more space for structural reforms towards a minimization of the State. 

In my opinion, Hayek’s proposal of the complete privatization of money, in his book The Denationalisation of Money, in 1976, is a bit utopic for nowadays economic and political environment, as it will require the complete elimination of government sovereignty over money, which is something governments will never agree about. We should remember that the last American President who actually permitted a completely and totally unrestricted and free monetary policy, was Andrew Jackson in the 1830s. Hayek argues that free competition between different “moneys” will lead to greater caution in terms of private monetary policy, and the expansions or contraction of the monetary mass will completely depend on the emitting institutions, leaving interest rates completely to market equilibrium. Hayek argued that, after some time, and as money needs to be widely accepted as a medium of exchange for it to be useful, the number of currencies circulating in the economy will be naturally restricted. It’s not that I don’t support Hayek’s theory, but it’s not more than that… a theory, and I personally find it unfeasible in our actual economic environment.


In conclusion, I think that after MMT having been exposed as a complete failure and a totally destructive policy for economic premises, now it’s time for liberty. Central banks should turn towards a more realistic, stable and structural policy, as that proposed by Milton Friedman. A stable monetary policy will lay the base for investment and long-term private economic calculation. We should turn our backs to MMT, but also to utopias which will never be realized. 


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