Sound Money & A Sound Economy for India’s Future:

Centrally-Planned Reform versus

Spontaneous Action

Christopher LINGLE, PhDCLingle@ufm.edu

Universidad Francisco Marroquín—GuatemalaCentre for Civil Society—New Delhi

ChintanCCS – New Delhi19 January 2015

• “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.

• Ideologically it belongs in the same class with political constitutions & bills of rights. The demand for constitutional guarantees & for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage.”

• ~Ludwig von Mises~ “The Theory of Money & Credit”• “[Money is] the most marketable good which people accept

because they want to offer it in later acts of impersonal exchange.”

• ~Ludwig von Mises~ “Human Action”

Central Bank Policies• Official goals:– Preserve purchasing power of money (i.e., “sound” money)– Macroeconomic stability– Financial sector stability

• Realities: primary source of instabilities & unsound money– Central bank policy is captive to fiscal demands of States

• Support fiscal deficits with monetary expansions and/or artificially-lowering exchange rates to lower borrowing costs

• Fractional-reserve banking system & government-controlled fiat money infinitely-elastic supply of money rising deficits & debt ratios due to redistributive mindset of democratically-elected governments

– Monetary central planning & fixed prices • Nearly all economists reject central planning & price fixing except in

regard to monetary policy … !?!

Conceptualizing “Sound” Money• What is “sound” money & why desirable?

– Performs necessary role of money (i.e., medium for exchange)– Durable value greater predictability of transfers– “Sound” money = Free-market Money

• Mises' sound-money principle:– Money should be privately produced like other goods

» Currency chosen & produced by demand for & free supply of money » Monetary authorities cannot act to undermine purchasing value of money

– Defense against government violations of property rights

– “Sound” money not same as central bank “price stability”

• “Unsound” money: government monopoly to issue fiat money– Artificially-low interest rates credit supply growth > GDP growth

• Since 1980, US total debt grew at double rate of GDP growth

– Higher debt-to-GDP ratio debasement to reduce debt obligations– Asset & commodity “bubbles”

Can Central Banks Support Sound Money?• Mainstream Economists (i.e., Keynesian & Monetarist)– Anchoring expectations of price inflation is most important

aspect & indicator of “good” monetary policy– Friedman & Money

• Central banks can create stable monetary framework (markets cannot)• Commodity standard uses too many resources: paper money less costly• Money supply "rule": increased money supply growth fixed to

accommodate rate of real economic growth

• Austrian Economists– Central bank with monopoly control over fiat money system

cannot & will not support “sound” money• Realities of Central Bank Oversight of Fiat Money– Monetary system did not bring general economic stability– Central banks do not follow "rule" – Paper-money standard not less costly than commodity standard

Can Central Banks Support Macroeconomic Stability?• Monetary “central planning”– Central banks control interest rates & price levels

• Myopic focus on price aggregates (e.g., CPI) as indicator of appropriate monetary policy actions– Most central bankers support “inflation targeting” – Misplaced fixation on falling price levels or “too-low” inflation

• Central bankers use mainstream macroeconomic models – Ignore impact on asset or commodity prices (i.e., “bubbles”)

• “Bubbles” explained with pop-psychology (e.g., animal spirits, irrational exuberance) – Monetary policies tend to move in tandem to maintain relative positions

• Artificially-low interest rates macroeconomic instability– Mispriced risk distorted production structure (i.e., “malinvestments”)– “Financial repression” whereby saving is punished– Provides support for growing public-sector debt– Suppressed price inflatio– “Finacialization” of economy (i.e., funds diverted from real sector)

Can Central Banks Support Financial Stability?

• Regulatory & supervisory actions of central banks is guided by intention to promote financial stability– Create conditions so financial intermediaries can withstand

shocks without disrupting access to borrowing• Primary impact of central banks– Artificially-low interest rates create confusion by mispricing risk

→ excessively optimistic expectations about future → households, firms & financial institutions take on more risk during asset booms → increased instability of financial system

– Regulatory interventions block self-regulating market mechanisms

– Bail-outs “moral hazard” that lower costs of poor management of risk increased failures

• Central banks are primary source of financial instability

Sound Money for Macroeconomic & Financial Stability

• Essential conditions– End State monopoly on money production & management

• Abolish legal tender laws

– End bailout guarantees & tax-backed deposit insurance to reduce moral hazard in financial sector

• Privately-produced “sound” money– Revive/restore commodity (e.g., gold standard)– Competing private currencies

• “Free” (unregulated, private) banking • Crypto-currencies

Scenarios for Future of Sound Money

• Gold standard & free banking require legislative action– Weak incentives for politicians to support either reform– Opposition by Mainstream economists

• Spontaneous action & development of crypto-currencies most likely direction of change towards “sound” money

Scenarios for Future of Sound Money

• Gold standard & free banking require legislative action– Weak incentives for politicians to support either reform– Opposition by Mainstream economists

• Spontaneous action & development of crypto-currencies most likely direction of change towards “sound” money