Proceedings of the 46th International Academic Conference, Rome

AUSTRIAN SCHOOL OF ECONOMICS’ PRESCRIPTIONS FOR MONETARY REFORMS WILL CAUSE COMPLETE CHAOS IN THE ECONOMY AND RUIN THE ECONOMIC SYSTEM

NABA KUMAR ADAK

Abstract:

The purpose of this paper is to show how the Austrian School of Economics’ suggestions and prescriptions can cause complete chaos and anarchy in the economic system. The Austrian School of Economics’ diagnosis of the defects in the functioning and practice of economics are more or less as the following. It thinks that the creation of money out of thin air and lowering interest rate for lending that money are the primary causes of inflation and boom-bust cycle, both of which are detrimental to the economy. Besides, this School’s opinion is that the government in connivance with the central bank adopts such policies like bailing out and spending excessively. It increases the government debt unnecessarily. To repay this debt, the government increases tax which in turn reduces the spending capacity of the tax-payers. Thus, according to this School, both the monetary policy of the central bank and the fiscal policy of the government (government intervention in the economics and financial system) cause unnatural and harmful effects on the overall economic condition of a nation. To ameliorate these defects, the Austrian School of Economics prescribes the following remedies. This School thinks, as money is not anchored to any commodity, so the central bank and government are in a position to increase the money supply without limit; this increase in money supply causes inflation which in turn leads to more demand for money supply. To meet this new demand for money the central bank creates and supplies more amount of money and lower the interest rate than the natural rate of interest. This increase in money-supply, again, causes inflation and renewed demand for extra money; again extra supply of money, again inflation increases. Thus the vicious circle of money supply and inflation leads to boom and bust. Therefore, this School suggests that money-creation should be anchored to some commodity so that creation of money cannot be unlimited. This School thinks that if money-creation is based on the standard of gold and silver then there will be no fiat money or easy money and inflation will be controlled and there will be little chance of occurring boom-bust cycle. There other suggestion is that the central bank should be dissolved or abolished and there should not be any central authority to impose any uniform monetary policy on the economy. In every area there will be banks independent of any superior authority; the monetary policy and the interest rates will be formulated by the market forces of the concerned area where the authority of a bank will be operative. This School prescribes unfettered market system. This School also suggests that government should not interfere into the economic and financial activities neither in the positive way like bailing out any falling bank or corporate nor by enforcing any law that may control the economy in any way. This School also suggests that government should minimize its expenditure even by curtailing its spending for what is considered as public works. This School is also of the opinion that government should lower its tax-rate or abolish tax altogether. According to the Austrian School of Economics, in the present economics system, the central bank creates fiat money or debt money to give loans and thus increases the supply of money. The Austrian School suggests that if money creation is followed strictly with the commodity (gold) standard then loan can be given only by using the savings and there will be no possibility of increase in the money-supply as existing money that is saved will be used for lending purposes. Therefore, no question of inflation due to increase in money-supply (fiat money that is created out of nothing) will arise. It will be simply impossible to deal with all the prescriptions and suggestions of the Austrian School in this paper and to suggest how those prescriptions may be developed further so as to make them function flawless or more correctly. It also becomes imperative to explain in which way the diagnosis and prescriptions of other Schools are wrong. It seems me that the differences of opinion among these Schools are mostly due to the absence of any universally accepted definition and function of money and how money should be oriented to suit our purpose of achieving a sustainable economic growth unhampered by occasional visit of boom-bust cycles. Therefore, the purpose of this paper is to suggest that while it is correct that money should be anchored to commodity, yet more thoughts are necessary as to how the growing demand for money with the expanding monetary activities could be met. If we can arrive at a correct definition of money and how we can orient the money to function in the way to eliminate those harmful effects that, the Austrian School of Economics has shown, occur in the present economic system. Therefore, primary aim of this paper is to examine how far the assertion that money must be any commodity is workable in the economic and financial systems of a country.

Keywords: Natural rate of interest, commodity money, fiat money, boom-bust cycle, government intervention in financial matters, inflation, free market

DOI: 10.20472/IAC.2019.046.002

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