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Volume 23, Number 9
September 2003

The Inflationist Dream
by Llewellyn H. Rockwell, Jr.

From time immemorial, monetary statists have proposed what they believed to be the final answer to the problem of currency instability: a world central bank and world currency. This is what Keynes dreamed of when he was instrumental in creating the IMF. And as Ron Paul has long warned, the creation of three great currency blocs (dollar, yen, euro) was only the next step towards the final goal of a globalized system operating under a single authority.

Sure enough, the Wall Street Journal editorial page (which never lets a week pass without calling for more money creation) made this precise recommendation in its June 30, 2003, edition: "World money, with a world central bank, seems a next logical step. . . . A world money would be an extraordinary boon to international stability, all currencies convertible into an international money, the dey (dollar, euro, yen) or perhaps the intor." "The supply of this currency," the Journal emphasizes, should be "under supervision of an international board."

So we can add the "dey" and the "intor" to the list of other proposed names for the new world fiat currency, which have included the "bancor" (Keynes), the "unita" (Harry Dexter White), and the "phoenix" (Economist). No matter what you call it, the result is the same, not stability but inflationary finance. As Rothbard wrote, "what the Keynesians want is no less than an internationally coordinated and controlled worldwide, paper-money inflation, a fine-tuned inflation that would proceed unchecked upon its merry way until, whoops!, it landed the entire world smack into the middle of the untold horrors of global runaway hyperinflation."

Central banks are a recent development in the history of civilization—the culmination of years of consolidation—but the tendency of governments to inflate the currency is not. Whenever kings have seized hold of the currency, they immediately got to work with a plan for using that power to make gains for themselves at others’ expense. The justifications were many but the result the same: the ruler’s treasury swelled as the people’s money became less valuable. Inflation was and is taxation through another means.

Central banks represent the most elaborate effort ever undertaken to give the king all monetary power and privilege, while providing a financial guarantee for the government and all its "services." Its genesis is the same in every country: the government provides protection for the banking industry against competition, in exchange for which the banking industry agrees to act as the money creator and lender-of-last-resort for the government.

The central bank never admits this, of course. Instead, it claims that it is merely guaranteeing the soundness of the banking system. Plausible? Imagine if Burger King and McDonald’s manage to get a law passed that excludes every other hamburger maker, under the rationale that they are merely guaranteeing the soundness of the industry. We would of course be suspicious, but when it comes to banking, people are more likely to believe the claims that its private interests are entirely in accord with the public interest.

There are many other excuses for why we need the Federal Reserve. We hear that the Fed tames business cycles, even though it actually creates them. We are told that the Fed gets us out of recession, even when it prolongs them. We hear that it curbs inflation even though the Fed has robbed the dollar of 95 percent of its purchasing power since it was created. We are told that the Fed prevents banks from going belly-up, but why shouldn’t banks be like every other business and be constantly faced with the possibility of bankruptcy?

Surely the most absurd excuse is that it protects us from deflation. First, there is nothing wrong with falling prices; it is the natural result of rising prosperity in an economy with a sound currency. Second, price indexes do not indicate that we will be blessed with overall declines in prices anytime soon. Third, as recent events remind us, warning about deflation is a transparent attempt to cover up an inflationary plot: witness the promise of central banks to do everything in their power to stomp out the great menace!

A Reuters story reported that "central bankers from around the world Sunday discussed ways to prevent deflation and kick start lackluster global growth, including unorthodox policies such as buying up financial assets." And with whose money will these banks buy these assets? If you and I buy assets, we have to borrow or dig deep, but when central banks do, they tap their one and only magic power: the ability to pay with money that did not previously exist. It is precisely this power that is heralded as the great contribution of central banks to civilization.

In the federal system of the United States, state governments do not have the ability or power to depend on a central bank. They must balance what they take in through taxes or bond sales with what they spend. Thus, even though state governments are in vastly better financial condition than the federal government, the headlines blast total panic about state budgets. The only difference is that states don’t have money machines.

The next time that someone complains to you about state finances, try suggesting this (with all appropriate irony): "The state of _______ should just create a central bank that would guarantee the state’s finances, and then it could buy up assets including state bonds even when the public is uninterested in doing so. It could do it all with newly created money, and also set interest rates low so banks can help out in flooding the state with money. We wouldn’t need higher taxes and all our problems will disappear!"

Someone might say: we tried something similar in the nineteenth century when states had their own currency systems, and it only created financial chaos. That’s true of course, but centralizing the banks only centralized the chaos. That’s because central banks don’t really make all problems go away. They create more. They reduce the value of circulating currency. They create instability in exchange, especially when other currencies are involved. They generate artificial booms that later turn to bust (the business cycle). These problems create pressure for further centralized banking, with the pressure ending in the ultimate mess of a global central bank.

Economists are at times drawn to the idea of a world central bank and currency because of the obvious efficiency gains. In fact, the best monetary system the world ever had was the global gold standard in which every major currency was nothing but a name for a certain weight of gold. There were no markets between currencies any more than there are markets between inches and feet. The system was reliable and stable, especially as compared to the current system.

But there is a huge difference between a pure gold standard for the world and a world central bank. Under a gold standard, there is no power to create currency. There is no political authority to corrupt the system. It provides no protection for banks or governments against bankruptcy. The monetary system operates like any other part of the market economy, subject to the same economic laws and pressures.

By eliminating competition between currencies (which tends to punish the most inflated currencies and reward the least inflated ones), a world central bank would eliminate the last check on inflation. It would amount to a world cartel of official counterfeiting from which only the state and its connected interests will benefit.

It would be no substitute for a gold standard. As bad as the present system is, as much of a menace as it is, it’s far better than Keynes’s dream, which the Wall Street Journal has now endorsed. Of course the Journal is hardly alone. The whole of the academic, governmental, and journalistic establishment would tend to agree that the world’s woes should be fixed by global institutions of one sort or another.

Nationalist pressures and the bungling of politicians (look at Iraq!) will likely prevent the plan from coming about. Even so, central banking of all sorts is surely the least controversial and most menacing threat the free society has ever faced. Once again, true advocates of the free market and sound money find themselves fighting against nefarious plots by the left and right to make an already bad system far worse.
Llewellyn H. Rockwell, jr. is president of the Mises Institute and editor of (





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