Le Québécois Libre, February 15, 2011, No 286.
How do you take a subject as potentially dry and sleep-inducing as the ongoing Global Financial Crisis and turn it into a book that is engaging and fun to read? The short answer is: you get Chris Leithner to write it. As regular readers of Le Québécois Libre already appreciate, Leithner knows the English language, and he knows his stuff. And it’s a good thing, too, because the subject he has chosen to write about is as vitally important as it is widely misunderstood.
I confess, I was a little intimidated when I felt the weight of the book’s 600+ pages in my hands, but at no point did reading The Evil Princes of Martin Place feel like a chore. On the contrary, delving into the economic history of booms and busts was exciting. Exploring from first principles why modern, fractional reserve banking is both immoral and impractical, illegitimately benefitting the powerful few and harming the rest, got my blood boiling. And the author’s frequent humorous quips took the edge off without lessening the power of his message.
The Global Financial Crisis, the latest bust to follow a boom, has caused a lot of human suffering. A general ignorance of economic history and theory on the part of many—and the downright malevolent ill will on the part of some—is ultimately responsible both for creating that suffering and for delaying the healing process. It would therefore behoove us to become informed about such an important subject.
Yes, Bankers Are Greedy, But…
What has caused the world’s ongoing financial troubles? Those who rail against the deregulation of the capitalist system and the greed of bankers are only half wrong. Yes, people are greedy, and bankers are people, as hard as it may be for some to believe. The thing is, as Leithner points out, blaming people’s greed is a little bit like blaming gravity. It’s always there and so, like gravity, while it may be the proximate cause, “it doesn’t really explain anything. Worse, if we simply wring our hands and bewail an undeniable and ineradicable feature of human nature then we abdicate the need to examine specific human error and flaws of institutional design.”
In addition, what enthusiasts of government control seem to ignore is that regulators are people, too, and if people are greedy, then regulators are greedy. It is precisely because people are greedy that we need the discipline of the free market to keep us honest. The supposed “deregulation” that took place in recent decades, far from exposing bankers to the discipline of market forces, instead privatized gains and socialized losses. It was therefore “a massive windfall to the financial services industry,” allowing them to foist the negative consequences of their reckless actions upon others without their consent.
Likewise, those who pin the blame on government efforts to encourage subprime mortgages to un-creditworthy borrowers are not seeing the whole picture. Ultimately, the cause of this bust, like the cause of practically all busts, is the artificial boom that preceded it. And the cause of the artificial boom is the inflation of the money supply.
“Lend” Me Your Money, I’ll Tell You a Lie
How does the money supply get inflated? A bank takes your deposits, sets a fraction of them aside, and lends the rest out to someone else. That person in turn deposits her loan, and the bank lends it out again, to yet another person. The process repeats itself, with the bank keeping a fraction of the deposit in reserve each time. Through such fractional reserve banking, banks literally create money out of thin air.
I remember being flabbergasted when I first came across this fact in a high school economics course. How could bankers—who are just people, after all—have the right to do this? By the time I got to university, I had read enough to know that something was amiss—and enough to doubt my professors when they tried to convince me, for instance, that the gold standard was one of the causes of the Great Depression.
Chris Leithner tells us that our first, commonsense reaction of disbelief when we find out that fractional reserve banks create money out of thin air is not crazy. On the contrary, it is perfectly correct. Fractional reserve banks commit fraud when they take your deposits, tell you that you can come and get them any time, and then lend them to other people. The jig is up when the resulting inflation-fuelled boom finally busts, as it always does, and people sensibly want to withdraw their money from the shaky institutions. The money isn’t there, and the banks go belly up.
Unless, of course, the government steps in and saves them, at taxpayer expense, as it has done time and time again, in what amounts to welfare for millionaires and billionaires. Indeed, this is why it is wrong to blame free-market capitalism for booms and busts. Without the backstop of government aid and privileges, banks would not be able to foist the consequences of their bad decisions on taxpayers. They would therefore have a strong incentive to behave in a responsible fashion and honour their commitments to safeguard your money.
Read This Book
There is of course much, much more to the story: the difference between deposits and loans, the harm of legal tender laws, the duplicitous role of central banks (the very entities charged with “controlling” inflation), the gradual abolition of the gold standard, the massive government interventions of Hoover and FDR, the forgotten depression of 1920-21, the importance of inflation in financing the welfare-warfare state, the specific details of the current crisis, and on and on and on—all explored and explained with clarity and wit.
If the outlook for the world’s financial system is dark—and it is—Leithner nonetheless finds somewhat of a silver lining in the renewed enthusiasm for Austrian economics. While Paul Krugman (“a Keynesian political operative at Princeton University who masquerades as an economist” and a “walking catalogue of economic fallacies”) provides pseudo-intellectual cover for presidents and central bankers (who remain unrepentant in spite of their failures to predict, prevent, or resolve the current crisis), a different current is gathering strength. “Today, thanks to the Internet and not least because people around the world and from many walks of life are searching for a sensible diagnosis and prognosis of the economic, financial and monetary distemper of our times, the Austrian tradition is more prominent than ever before.” A recent piece by David Boaz of the Cato Institute corroborates this trend.
Who should read this book? I am tempted to say “everyone,” but I know the true believers in the “perpetual prosperity machine” of central banking will do everything they can to resist exposing their stale dogmas to serious challenge. So everyone else, then, who wants to understand the current crisis, and explore the history and theory behind it. Advanced degrees are entirely optional, as Leithner assumes no in-depth knowledge of economics, explaining concepts carefully and clearly.
More specifically, I think this book holds many treasures for anyone who senses that there is indeed something wrong with modern banking, but is at least somewhat unsatisfied with the explanations offered by people like Michael Moore. It will also prove of great value to those who appreciate the benefits of free markets in goods and services generally, but somehow think that money is different and requires pervasive government intervention.
Our “leaders” and the parasites who benefit from the suffering of others will not give up their ill-gotten gains without a fight. Until a greater number of people take it upon themselves to understand the con, and to demand that it be brought to an end, governments will continue to create inflation through their central banks, devaluing the currency and causing the artificial booms that must one day bust. If the cyclical suffering is ever to stop, we all need to get informed about this vital issue. Chris Leithner’s book is the perfect place to start.
* Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL's English Editor.