"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, March 2, 2011

Murray Rothbard: The World Currency Crisis

The article below was written by Austrian Economist Murray Rothbard, and can be viewed on Mises.org.  The date of the article is 1995, and it is part of a longer series of writings by Murray Rothbard titled "Making Economic Sense."

This article, written in 1995, reads like prophecy.  But no magic or higher power enlightenment is needed here.  Just common sense and a basic understanding of economics and political realities tells you, even in 1995, that the world's experiment of free floating fiat currencies was destined to fail.  But most did not see this type of end coming.  Many still don't and cling to the belief that a global fiat currency will solve the crisis.

Here is the full article, the link follows.  For those that are interested in more of Murray Rothbard's writings on the global monetary system, I will provide a link at the end of the article.

The Keynesian Dream

For a half-century, the Keynesians have harbored a Dream. They have long dreamed of a world without gold, a world rid of any restrictions upon their desire to spend and spend, inflate and inflate, elect and elect. They have achieved a world where governments and Central Banks are free to inflate without suffering the limits and restrictions of the gold standard. But they still chafe at the fact that, although national governments are free to inflate and print money, they yet find themselves limited by depreciation of their currency. If Italy, for example, issues a great many lira, the lira will depreciate in terms of other currencies, and Italians will find the prices of their imports and of foreign resources skyrocketing.

What the Keynesians have dreamed of, then, is a world with one fiat currency, the issues of that paper currency being generated and controlled by one World Central Bank. What you call the new currency unit doesn't really matter: Keynes called his proposed unit at the Bretton Woods Conference of 1944, the "bancor"; Harry Dexter White, the U.S. Treasury negotiator at that time, called his proposed money the "unita"; and the London Economist has dubbed its suggested new world money the "phoenix." Fiat money by any name smells as sour.

Even though the United States and its Keynesian advisers dominated the international monetary scene at the end of World War II, they could not impose the full Keynesian goal; the jealousies and conflicts of national sovereignty were too intense. So the Keynesians reluctantly had to settle for the jerry-built dollar-gold international standard at Bretton Woods, with exchange rates flexibly fixed, and with no World Central Bank at its head.

As determined men with a goal, the Keynesians did not fail from not trying. They launched the Special Drawing Right (SDR) as an attempt to replace gold as an international reserve money, but SDRs proved to be a failure. Prominent Keynesians such as Edward M. Bernstein of the International Monetary Fund and Robert Triffin of Yale, launched well-known Plans bearing their names, but these too were not adopted.

Ever since the Bretton Woods system, hailed for nearly three decades as stable and eternal, collapsed in 1971, the Keynesians have had to suffer the indignity of floating exchange rates. Ever since the accession of Keynesian James R. Baker as Secretary of Treasury in 1985, the United States has abandoned its brief commitment to a monetarist hands-off the foreign exchange market policy, and has tried to engineer a phase transformation of the international monetary system. First, fixed exchange rates would be obtained by coordinated action of the large Central Banks. This has largely been achieved, at first covertly and then openly; the leading Central Banks picked a target point or zone, for, say, the dollar, and then by buying and selling dollars, manipulated exchange rates to stay within that zone. Their main difficulty has been figuring out what target to pick, since, indeed, they have no wisdom in rate-fixing beyond that of the market. Indeed, the concept of a just exchange-rate for the dollar is just as inane as the notion of the "just price" for a particular good.

A tempting opportunity for mischief has been offered the Keynesians by the coming of the European Community in 1992. The Keynesians, led by now Secretary of State James Baker, have been pushing for a new currency unit for this United Europe, to be issued by a European-wide Central Bank. This would not only mean an international economic government for Europe, it would also mean that it would become relatively easy for the post-1992 European Central Bank to become coordinated with the Central Banks of the United States and Japan, and to segue without too much trouble to the long-cherished goal of the World Central Bank and world currency unit.

Inflationist European countries, such as Italy and France, are eager for the coordinated European-wide inflation that a regional Central Bank would bring about. Hard-money countries such as West Germany, however, are highly critical of inflationary schemes. You would expect Germany, therefore, to resist these Europeanist demands; so why don't they? The problem is that, ever since World War II, the United States has had enormous political leverage upon West Germany and the United States and its Keynesian foreign secretary Baker have been pushing hard for European monetary unity. Only Great Britain, happily, has been throwing a monkey-wrench into these Keynesian proceedings. Hard-money oriented, and wary of infringements on its sovereignty--and also influenced by Monetarist adviser Sir Alan Wakers--Britain might just succeed in blocking the European Central Bank indefinitely.

At best, the Keynesian Dream is a long shot. It is always possible that, not only British opposition, but also the ordinary and numerous frictions between sovereign nations will insure that the Dream will never be achieved. It would be heartening, however, if principled opposition to the Dream could also be mounted. For what the Keynesians want is no less than an internationally coordinated and controlled world-wide, paper-money inflation, a fine-tuned inflation that would proceed unchecked upon its merry way until, whoops!, it landed the entire world smack into the middle of the untold horrors of global runaway hyperinflation.

Article Link HERE.  List of other articles HERE.


boatman said...

why do i get a mental picture of a dog chasing his tail when i read this?

why does warren and cullen n others believe we/someone could ever presciently use central banking/fiat money to fine tune the world for the benefit of all?

am i just some crusty old pessimistic old guy?

Misthos said...

Hey boatman,

I know, it's exasperating reading them sometimes. Don't get me wrong, Cullen brings up good points elsewhere, but on MMT, I completely disagree with him. Jesse's Cafe recently took on Cullen's arguments.

You're not pessimistic. You're realistic. It's basic understanding of human nature.

I'm still surprised to see Cullen and others think maybe we can get it right next time, when history has shown us time and time again, that easily expanded paper money always serves governments and banking systems until they collapse.

Tell me one government or bank that believes there is such a thing as too much of a good thing. If they can, they will gorge themselves until they blow up and take everyone else with them.

It's happening right now and these MMT'ers are completely clueless to it!

boatman said...

freidman takes phil donohue apart on human nature(old clip):

short version:


long version:


boatman said...

oh, n i will check out jesse on this.

mish took on QE as MORE than an asset swap today.

cullen is unbelieveable at market calls....got me out on the very DAY last may.....tips his hat at twitter: pragcapitalist

Misthos said...

hey boatman,

I kinda sparred with Cullen yesterday - in the comment section of :


He never answered the question I posed to show that fiat = financialization of the economy.

Cullen is good with the market, he represents the status quo - the herd mentality, so to speak.

My analysis, on the other hand, is long term and macro level, geopolitics and monetary theory. So in Cullen's defense, at one point we were arguing two different things.

But he has a lot of faith in fiat. I don't.

Thanks for the mauldin link - I'll read it.

Gary Anderson said...

I am totally opposed to the NWO of economics. But I also believe the Austrian ideal of full reserve banking is pie in the sky. What deregulation will do is allow the bankers in a fractional system to blow another bubble, with government guarantees. We need much more policing of banksters or they will get away with a lot of havoc in the future. And money could be issued by the government. That would be constitutional.

Misthos said...


I agree with your points, and although I lean towards the Austrian School, I am gradually taking a more eclectic view of economics, utilizing what I thinks makes sense, of every economic theory. Just as they can't all have it right, they can't all have it wrong - and that includes Marxism as well. Some are more wrong than others, of course...

That said, I think another dynamic is at play here - it is the generational habit of successive generations increasing risk, the consolidation of financial power, until the system crumbles under its own weight and a new cycle emerges.

Money issuance by the government carries its own risks... but for the Fed to lend (create) money at zero rates to banks which in turn re-lend it to the government at cost, to me, is outrageous.

I think it was Nassim Taleb who once said that banking should be like the utility companies are. Banking should be a low margin industry that serves the productive economy. Unlike the parasite to the productive economy, and threat to democracy it is today.

Ashraf Moussa M said...

Here is the solution: