Original title ‘Central Banks and Socialism Are Forever Linked Together’ by Jorg Guido Hulsmann on Mises.org
It is well known that socialism is a shortage economy. It is the economy of inefficiency and corruption, of indifferent workers and of bigwigs, of lacking spare parts, of lacking funds, of failure, of permanent reform needs and of constantly unsuccessful reforms. This concerns in particular total socialism, as it was realized in the Soviet Union or under National Socialism. But it is no less evident in the numerous partial socialisms that are featured in the real existing welfare state, in its numerous state “systems.” Budget deficits year in, year out despite high contributions—that is the reality in the state pension system and in the state health system. The state education system is similar: declining student performance and growing illiteracy despite sky-rocketing expenditure. No private entrepreneur could afford to let the costs get out of hand in such a way. Anyone who is in competition has to keep improving. Only those who have a legal monopoly and can make use of taxpayers’ money if necessary do not need it.
Now there is one partial socialism that stands out from the usual array of failures. Here we see gains instead of losses. Here we often find all the other signs of a successfully run company, from the private legal form to the pinstripe-filled boardroom. We are talking about central banking. The term “central bank” actually refers quite clearly to a centrally planned economy. But when people talk about the Fed, the ECB or other central banks today, hardly anyone thinks that they are talking about an offspring of the socialist spirit. On the contrary, central banks are typically viewed as particularly “capitalist.” After all, what would be more capitalist than money? And what would be more closely related to money than a bank?
Upon closer inspection, however, it appears that this connotation may not be entirely correct. In the unbridled market economy, private property and competition prevail. Central banks, on the other hand, are usually state institutions. Even those central banks that are private-law organizations (as in the United States, Japan, and Switzerland) are subject to special laws and their directors are appointed by national governments. In addition, central banks always and everywhere enjoy a legal monopoly. Their banknotes and their deposit money are largely withdrawn from free competition. The market participants are compelled to use the money of the central banks.
This money is one of a kind. Indeed, it can basically be produced in unlimited quantities. The production of money by the private commercial banks is limited by their equity capital and also by the cash deposits of their customers. But central banks do not need equity or cash deposits. It is they who create cash. They can generate cash out of nothing and practically for free. Certain legal limits are set for them, but in times of crisis, as in 2008–09 and in 2020–21, these limits can be relaxed quickly and dramatically. If necessary, they can also be abolished entirely.
Central banks therefore have potentially tremendous power. If only let loose, they can control all of the economy and society. There is almost no limit to the number of new loans they can issue. The can provide these loans to some and deny them to others. And by implication they can also control the use of all available resources. After all, labour usually moves where it is best paid. Raw materials and capital goods are typically sold to those who offer the highest prices. If you control the printing press, you can also let the real resources flow exactly where you think it is right. Whether this use of funds is also profitable plays a rather subordinate role for central banks (unlike commercial banks). You do not have to work hard and invest well to cover losses. One push of a button is enough.
Central banks are therefore made for do-gooders. He who runs a central bank does not need to do painstaking educational work in order to bring about any social change. The humanitarian with the printing press can finance all changes he wishes for at the push of a button. He can just pay other people to do what he wants. He does not need any savings or capital for this. He does not need a democratic majority either. As long as he has the printing press under control, he could by and large give a damn about what other people think or wish.
This momentous fact has not escaped the attention of socialist theorists. The Saint-Simonians in France had already grasped it at the beginning of the nineteenth century. They understood that the economy of a country could be controlled particularly easily and safely with the help of the printing press. A few years later, the demand for the “centralization of credit in the hands of the state through a national bank with state capital and an exclusive monopoly” soon also held center stage in the 1848 Communist Manifesto by Marx and Engels.
Unsurprisingly, the enormous possibilities of creating money from nothing have been used again and again to finance state industrial policy and socialist experiments. In the 1970s, British historian Antony Sutton reported that some of New York’s Wall Street banks had financed the radical transformation of traditional European societies. They supported Lenin and Stalin as well as Adolf Hitler with billions of dollars. That would not have been possible without the refinancing from the American central bank.
In our day, too, the historical connection between the central banking system and political utopias is being brought back to life. This time it appears in the form of a “green” and egalitarian transformation of the economy and society. The directors of the ECB [European Central Bank] and the Fed have already officially committed to this.
The new humanitarians with the printing press are undoubtedly a great danger to humanity. They threaten everyone’s prosperity by channeling scarce resources into unprofitable (and therefore unsustainable) uses. But they also threaten the free social order as a whole, in that they are preparing to disempower the open competition of all social forces. They want to replace this competition with the rule of a nonelected leadership caste.
However, green central bank policy is not to be condemned primarily because it supposedly pursues ecological goals, but because a central bank comes into its own here. Central banks are by their very nature destructive. Even if they are not led by self-proclaimed ecologists and socialists, they favor the cousin, favoritism and the bigwig economy. The economists of the Austrian school have shown, among other things, that central banks always and everywhere weaken economic growth by undermining the propensity to save; that they are destabilizing the economy by fueling a debt economy; that they incite greed and avarice; and that they create blatant inequalities in income and wealth. Central banks cannot be reformed, they must be abolished.