Economics Professor Huerta de Soto explains:
Huerta de Soto advocates “bringing the fall of the Berlin Wall to its culmination in the financial sector.” As long as central banks continue to exist as “central planning agencies in western countries,” this follower of the Austrian School believes cycles of artificial credit expansion will repeat themselves again and again.
“Central banks insist on dictating manu militari what should be the freest of market prices (the interest rate), and on managing the money supply. Austrian theorists showed that a central planning agency could not possibly gather all the information necessary to make its commands meaningful. This is the principle of the impossibility of socialism. Monetary authorities trigger and reinforce economic cycles instead of stopping them.”
Huerta de Soto’s solutions would be “first, to eliminate planning agencies” and second, “to establish a system in which bankers are subject to general legal principles. In other words, there should be a 100% reserve requirement on all demand deposits and equivalents. This way, bankers could act solely as pure financial intermediaries: they could lend only what had been lent to them. This would separate the business of financial intermediation from the business of money creation.”
Without central banks, who would generate the money supply? The professor advocates “a return to the gold standard, since growth in the stock of gold is independent of human will. The world’s stock of gold grows between one and two percent per year, and hence we would eliminate the possibility of manipulating the financial system. All loans would be granted against prior saving, and there would be a balance between saving and investment. Recessions would then be history.”
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