I’ve just discovered a recent interview with Professor Huerta de Soto, released on April the 15th, this year. Okay, so this is hardly ‘hot off the press’, but I’m very much a believer in the school of better late than never, and the universal truths of human nature and human action never dim just because of a few measly days.
Here’s the interview:
Here’s the full description:
An exclusive interview with professor Huerta de Soto
In this interview, Jesús Huerta de Soto, Professor of Political Economy at Rey Juan Carlos University, Madrid, outlines how central banks caused the financial crisis. He explains why fractional reserve banking causes economic problems, and why artificially-low interest rates are a bad idea. Fractional reserve banking creates “too big to fail” banks. An 100 per cent reserve system would give smaller banks a chance to compete.
Huerta de Soto also discusses the paradox of blaming the free market for the financial crisis, how the monetary system has been nationalised, and how central banking amounts to “pure socialism”. De Soto argues that efforts by central banks to maintain an “optimum” money supply and fix interest rates at the “correct” level are doomed to failure.
Furthermore, he explains the three measures he would take to fix the financial system. These are 100 per cent bank reserve requirements, the abolition of central banks and the implementation of a pure gold standard. He outlines why under a free banking system, fractional reserve banking would die out.
Although gold would likely play a role in a free-market monetary system, the professor states that a gold standard system can only work in an 100 per cent bank reserve system. Huerta De Soto argues that the popularity of banking theories is irrelevant in assessing their validity.
At the end, he discusses how his book, Money, Bank Credit and Economic Cycles, has been favourably received and translated into many languages, and how it can help central bankers anticipate economic cycles. He also shares how encouraging it is that students around the world are becoming critics of fractional reserve banking and supporters of sound money.
You can read a full transcript of this video here.
Huerta de Soto is such a big man and his understanding of economics and more importantly his capacity to enunciate it is so powerful that he should be required reading for all governments. Those in the advanced economies that do listen to his advice will undoubtedly prosper and those that do not will be entering an irreversable economic decline. Developing countries are, of course, protected to some large extent by cheap labour and will not suffer for some decades.
When I wonder will the nonsense writings of Keynes be abandoned?
I appreciate de Soto’s work.
But I have a hard time getting beyond the appearance that it is the transition to a full-reserve banking system that will actually result in the stability in financial and monetary matters that we all seek.
His pointed criticisms of central bankers as agents of socialism and his support for the gold standard backing of any nation’s(?) currency are weak addendum to his correct full-reserve position.
From what I understand of his method of transformation from fractional to full-reserve banking, there is of necessity a major role for the central bank(government) to support the substitution of national monies to replace today’s money-multiplied bank credits.
And finally, while de Soto abhors the thought of a government-determined 2 percent growth of money in support of 2 percent increase in a nation’s potential GDP, it appears that he would be fine if we were on a gold-standard and the gold base increased by 2 percent per year.
Same result either way.
I think that de Soto needs to focus on the method of transition from fractional to full-reserve banking in order to gain wider understanding and acceptance of that which he speaks.
And, yes, I have read his book.
“while de Soto abhors the thought of a government-determined 2 percent growth of money in support of 2 percent increase in a nation’s potential GDP, it appears that he would be fine if we were on a gold-standard and the gold base increased by 2 percent per year. Same result either way.”
I’m puzzled by this too, as I’ve noted on this site in the past. I still haven’t seen a satisfactory answer.
In practice, of course, a fiat system has much greater potential for abuse.
I would think that gold miners , many hundreds and thousands of them spread around the world, all competing to sell us gold / money, as they have historically functioned, would do better at keeping the purchasing power of that which we want i.e. money to facilitate exchange, than in the case of the UK with the 9 Soviet style central planners being the deciders of our money supply levels.
A mining company has to do productive effort to dig up and then refine something that you want and exchange something for it that you are prepared to give up. This sounds honest to me. Goods for goods in free exchange. There will be ebb and flowing up and down, sideways, backwards and forwards as there always is in all demand and supply situations, but with gold historically as a stable anchor, it is the best man has come up with so far.
In a mature FRFB system with no government, this role can be done by FRFB’s issuing notes or liabilities. With competition in the production of money, they too like the gold miners will be pretty good safe keepers of our purchasing power. Due to precuationary money being used in error by banks for new loanable funds, this system is still prone to boom and bust – I my opinion.
So gold miners and competition first , FRFB’s second. The current system needs killings stone dead!
This is reply to Toby – didn’t want to interfere with mrg comments.
First, we all agree the present system needs killing stone dead.
Second, we all agree that only a fully-reserved banking sector can preserve a semblance of economic stability.
But as to point of whether some thousands of gold-miners can either add any stability or do a better job of maintaining the stable buying power of the currency than either you or myself, I am far from convinced.
What do hundreds or thousands of gold-miners CARE about the stable buying power of MY currency.
All gold mined is like all oil drilled from the ground – it is priced and traded globally. It may provide a limit to the over all growth of the GLOBAL economy – at that nominal 2 percent – but have either zero or maximum effect, at any rate unknown, on MY currency and my economy.
What I’m saying is that for those of us who seek the fair, level playing field for our national economies, meaning the preservation of the stable buying power for our currencies over the long term, these arguments are not so convincing.
Friedman proposed 3 percent per year annual monetary growth by legislative mandate. That may or may not be the correct number. But given that there IS and MUST BE a long-term trend in finding new gold, why not just legislate the trend in order to end the variability that can cause financial instability.
Again, the real stability solution is provided with full reserve banking, so the question becomes, if the bankers don’t create the new money, then who does?
“What do hundreds or thousands of gold-miners CARE about the stable buying power of MY currency.”
It is their product and if they produce too much than is demanded, then some of them will become marginal and go bust. Thus, they want to be investing just the right capital to get just the right amount out of the ground for you and zillions of others to use as money. They cant restrict supply if there is competition.
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