A brief note on economic recessions, banking reform and the future of capitalism

Abstract

In my book «Money, Bank Credit, and Economic Cycles» (1^st Spanish Edition 1992, 2^nd English Edition 2009) I present a detailed analysis of the Austrian Business Cycle Theory. Now I will concentrate on the financial crisis and the current worldwide economic recession as one of the most challenging problems we must now cope with and the way in which the Austrian Business Cycle Theory can help us to understand its causes and the best approach to economic recovery.

Having witnessed the intellectual and practical defeat of socialism specially during the last decades of the twentieth century, in my opinion one of the main challenges that still remains for the future of Capitalism is the urgent need to privatize money by dismantling the organ of central monetary planning: the Central Bank. In other words, real Socialism, represented by state money, Central banks and financial administrative regulations, is still in force in the monetary and credit sectors of the so called free market economies.

As a result of this fact we experience regularly in the area of money and credit all the negative consequences established by the Theorem of the Impossibility of Socialism discovered by those distinguished members of the Austrian School of Economics Ludwig von Mises and Friedrich Hayek.

Specifically, the central planners of state money are unable to know, to follow and to control the changes in both the demand and supply of money. Furthermore, the whole financial system is based on the legal privilege given by the state to private bankers to act with a fractional reserve ratio in relation with the demand deposits they receive from their clients. As a result of this privilege, private bankers are not true financial intermediaries, but are mainly creators of deposits materializing in credit expansions. These credit expansions are artificial and do not correspond to any previous increases in the voluntary savings of the citizens. In this way the current fractional reserve banking system, tends to worsen and amplify the systemic intertemporal distortions and investment misallocations that the macroeconomic planners working for central banks induce in the production structure of the whole real economy. These distortions manifest themselves in the stages of financial bubbles, economic boom, overall malinvestment and afterwards in the stages of financial crisis, deep economic recession and unemployment.