One of the main threads of the current crisis is the search for money to “save the economy.” No one doubts that this money is needed and that without it “the economy” will come to an end. And it is precisely this uncritical acceptance of things highly deserving doubt that prompted me to write this note.
The fact is that for the economy—that is, the process of creating goods through voluntary exchange and production—everything written on the topic of “there is no money to save the economy” has no significance whatsoever. More precisely: all “indicators,” “parameters,” and “aggregates” such as GDP are not economic phenomena in the true sense, as property rights, money, and so on are. They did not emerge for the needs of people participating in voluntary cooperation, but are political phenomena—and, above all, a means of state accounting and, in the modern world, one of the main tools for justifying the expansion of the state. Indeed, what does GDP mean for acting subjects? Who needs some averaged (according to various and often mutually contradictory methods) prices on some arbitrary territory over an arbitrary period of time? Would anyone in a free society agree to pay for such information? Or take the “trade balance.” Any economist knows that in the long run the balance will equal zero. This is not to mention that data on how much is imported and exported from some arbitrary territory is, again, in itself needed by no one. And this is the case with virtually any of the “indicators” that state propaganda operates with.
Unfortunately, despite the fact that the indicators themselves that the state operates with are not economic in the strict sense, the consequences of their application directly affect the economy, since they determine the nature of state regulation. For example, budget deficit. It means not that the state will be unable to spend as much money as it planned, but merely that with its available means it cannot collect the sum it considers necessary. But this does not stop it. In addition to available means, new ones will be deployed—usually loans—to finance the budget deficit. That is, the budget deficit promises us the withdrawal of funds from the productive economy, in addition to those already made to fill the budget’s “revenue” section. Or another typical story: in the struggle for votes, some party promises to introduce a minimum wage. Winning the elections, it fulfills the promise. As a result, unemployment develops, because the price of labor, like any other, is determined by supply and demand, not by parliamentary opinion. Those who were willing to work at a price below the minimum wage find themselves on the street—and society also suffers in the form of reduced supply of goods and services. The next government begins to fight the resulting unemployment. Of course, it does not abolish the minimum wage, but, say, increases benefits, introduces “programs” for training the unemployed, and so on. And all of this, of course, means an even greater burden on the productive economy. That is, state regulation leads to the emergence of problems that are solved by new state regulation, creating new problems, and so on to infinity.
This happens—and even to a greater extent—in those cases where state regulation is not as obvious as direct legislative price regulation (minimum wage, and so on). Moreover, in such cases, amazing systems often arise in which the participants themselves are directly interested in other participants acting not in one’s own interest (that is, in their own interests), but in the interests of the system itself and the state behind it. Everyone knows about the “solidarity” pension system operating on the principle of forced redistribution; I will give another example of regulation that holds the entire country hostage and solves its problems with new regulation leading to new losses, and so on.
Such an example is the modern financial system based on fractional reserves. Fractional reserves are the ability of a bank to use money held in demand deposits for its own purposes, usually for lending to third parties. For those not familiar with the subject, let me explain: as clients we enter into two main types of transactions with banks. The first is a demand deposit. You store money, make payments for transactions, and so on. This is your money; you do not lose ownership rights to it. Actually, these are the same dollars that are in your pocket, only instead of your pocket they are in the bank. Such accounts are called “current,” “settlement,” and so on, and, as a rule, they are undated (on demand). The second type of transaction is a loan to the bank. You give the bank money for a certain period in exchange for profit, which usually takes the form of interest on the amount. In this case, ownership of these funds transfers to the bank for the term of the transaction; you lose access to them until the term expires. Banks call such transactions “term deposits” precisely because the transaction is concluded for a certain period of time.
So, in the case of “term deposits,” everything is normal and honest. Fractional reserves are a problem of the first type of transaction—demand deposits. Why “fractional” and why “reserves”? These words mean that from your checking accounts, the bank issues as loans some portion and keeps the rest to serve the current needs of clients. That is, the bank proceeds from the consideration that “not everyone will come for their money from demand deposits at once” and directs part of them to loans, while keeping part of your money in “reserve” in case you need it. Fractional reserves were not always called that, and more precisely—only since the 19th century. Before that, for almost 2000 years of banking history, this was considered theft and, accordingly, was punished. However, at some point, when states, instead of borrowing money from bankers, decided to create their own banks and began to pursue a policy of nationalization (it would be more correct to say privatization) of money, fractional reserves were legalized by a number of court decisions in England and the United States, and then this practice became “legal” and today is considered the only possible one and—attention—has even acquired corresponding “theories” in its defense.
In fact, “fractional reserves” is a permit for theft, and in its modern form it is also a privilege for banks—an opportunity not to be liable for their obligations—that is, direct state regulation.
As I have said, this system makes us all its hostages and forces us to work for its interests. We have just witnessed such a situation. When the known events happened on the Maidan, people began withdrawing money from their accounts—usually from those very demand deposits. Let me remind you: these are their money. But immediately there were calls not to do this, because a “run on the banks” could “bring down” the banking system. That is, it turns out that people cannot take their money out of the bank and must keep in mind the interests of some system that may suffer from this. And all this is still the case even though there is no alternative to such a system. But the most interesting thing here is that if the run on the banks had acquired serious proportions and put some banks at risk of bankruptcy, the National Bank would have intervened and extinguished the fire with new liquidity, simply by printing more money. That is, to solve the problem caused by regulation, the state would resort to new regulation at our expense, because new money is a tax in favor of those who receive it first.
So, in this story, the only truly economic thing is people’s desire to withdraw their money from the bank. The cause of all other difficulties that arise in the process is state regulation in the form of privileges and in the form of the National Bank’s activities to save those banks it deems necessary to save.
This example is also noteworthy because it is obvious that in a world where there are no privileges, central banks, and state monetary monopoly, no bank runs can harm “the system as a whole.” Of course, nothing can prevent banks from using money from demand deposits for lending; the only question is responsibility for this. If it is determined economically rather than politically—that is, equal to the responsibility that people usually place on thieves and on enterprises that fail to meet their obligations—then it is easier and cheaper for a banker not to engage in this activity. The obligation of “full reserves” in practice means that if, when trying to access your demand deposit, you are told “there is no money now, come back tomorrow,” you can safely file a bankruptcy lawsuit. In a situation determined by economics rather than politics, only dishonest banks that disregard depositors’ property rights may suffer from a mass run on banks—and, as they say, serves them right. Banks maintaining full reserves (or, as it has become fashionable to say now, separating investment and savings functions) will not go bankrupt even if they lose all demand deposits. They will suffer losses as they will lose fees for account maintenance, payment processing, and so on, but they will not go bankrupt, and, most importantly, the system as a whole will not suffer from this at all, but will only improve by getting rid of swindlers.
The simple conclusions from the above are as follows:
The state always seeks to present the consequences of its activities as “objective” circumstances that it overcomes with its heroic decisions.
The overwhelming majority of “economic” problems are problems of state regulation. Within the framework of purely economic relations, most of the “problems” known to us simply cannot arise.
Damage is inflicted not only by state regulation, but also by the fact that the remedy for its consequences is always more regulation. Often, as a result, systems arise (the pension system, the financial system based on fractional reserves, health insurance in the case of developed countries) in which we are all hostages of the system and are forced to act with its preservation in mind.
Essentially, in most cases what is commonly referred to in everyday speech as the “economy” should be called “politics.” To understand what is happening and make adequate decisions, we must correctly identify phenomena.