This book sounds like it is much needed.
Economic discussion and commentary is dominated by vested interests and the economy is currently being driven into decadal cycles that benefit very few, but cost very many.
There is a market driven "price of money", it is of course the Interest Rate which should represent the rental cost of money.
If allowed to be set by the market then this price will help keep financial balance. When artificially manipulated it leads to winners and losers, with effects that can occur decades after policy is enacted.
Clearly fractional reserve banking (creating money with debt, loaning money that wasn't saved) is a Ponzi set up that requires never ending growth to sustain itself. The fact that most of the new money was created *for housing only* has restricted the inflation to the housing sector...for now but it is still making a virtue out of an evil. Inflation bad...unless it is housing: is clearly not sensible...unless you are a boomer on your 4th investment property!
The history of fiat currencies should be known by all: they fail unless backed, or somehow tied to, real wealth.
Gold is out now: more wealth is created than gold is dug. Mapping tonnage of gold to economic output would be fruitless (and regressive).
The free market is actually the only way to "tie" currency to real wealth. For that to work we need transparent, un-manipulated markets where the economy sets the price of money based on savings/credit balance.
It sounds paradoxical, but I reckon a central not-for-profit bank is a good idea so long as they are constrained by the real market signals. Way too much "wealth" being extracted from economy by financial system. The tail truly is wagging the dog!

Good article, Sukrit. Yes no joke there are lots people on both the left and right wings of politics who believe that society gets wealthy by printing money. Amazing but true.

The left wing can’t give up their idea that the proper function of the state is wealth redistribution. It never occurs to them that once this power is granted, there’s nothing stopping the state redistributing wealth from the poorer to the financially sophisticated. Then they look with dismay on the results of their own handiwork and declare it’s the result of “unregulated capitalism”.

And of course both the left and right wing middle class can always be relied on to vote for credit expansion, as it silently vacuums wealth out of the pockets of the working class who don’t own their own homes, and into their own as capital gain and tax lurks. Since it’s much harder to make wealth by investments in productive activity, which are strangled with a thousand regulations, they instead turn to speculating on real estate by grace of the government’s monetary jiggery-pokery.

Ozandy
I agree with most of what you say. However the real market signals profit and loss. Therefore a central not-for-profit bank is not a good idea. The price of money arises from the different subjective time preferences of borrower and lender, and from the different subjective evaluations of risk and return as between lender and entrepreneur. These are utterly unknowable to any central planner. Their statistics are mere sacerdotal gizzard-lore. Central planning of the supply of money and credit is intrinsically unjust and chaotic.

There is no need to “map tonnage of gold to economic output”. Money is a market phenomenon. As money is the *medium* of exchange, it is the relative, not the absolute amount of money that’s important. There is always enough of the money commodity to perform the function of money. If there were not enough gold, people would use silver or copper. There is no need whatsoever for government to do anything, except enforce the law against fraud – starting with it’s own!

Peter. You make a lot of sense.
I guess I assume that many competing banks will still collude and use "commercial in confidence" to prop up industry profits vs the rest of the economy. A bit like the "Big 4" banks nominally "compete" yet still manage to keep profits really high. They are not really competing against each other, but against the regulators and the profit taking resilience of the rest of the economy.
Given that *someone* has to get new money first (both electronic and plastic), I'd prefer it was a not for profit entity that has to publish all numbers and justify it's decisions as a public entity.
We did do OK without central banks for so long, but I still can't picture the Mint to market process without some spectacular advantages to banks and bank owners. Public entities can be transparent, private entities cannot. Should we have competing currencies and no "official" $AU?

Yes I think we should have competing monies. People would obviously prefer market-supplied sound money to government's paper money, otherwise the government wouldn't need to criminalise the competition in order to keep supplying its fiat rubbish.

I don’t think the process of going from Mint to market would involve spectacular advantages for banks – to the contrary, it would undo the spectacular unfair advantages they have now, of a cosy cartel enjoying enormous profits arising not from better service but only from government regulation of money, credit and banking. The more competition you have, the harder it is for any group to maintain any collusion. The status quo is one big collusion between government and banks.

And of course there is no competition whatsoever for legal tender, which is the instrument of enormous fraud, only you can’t send the Feds to arrest them – it is the Feds!

What did anyone expect with socialist like Greenspan in charge of the US Fed and Goldman-Sacks socialist running the US treasury? But there is one good thing tom come out of this and that is socialist governments are holding most of the banks harmless and guarantying their depositors. The inventors and manufacturers of trillions of dollars worth of liar mortgages, collateralized debt obligations and credit default swaps will be assured of their continued success, no matter how much the socialist like Obama try to interfere.
The banks must be completely liberated from all government control as they are the only ones that can rationally evaluate risks.

So called free money markets are neither free nor are they markets.

A market is a system where price regulates supply and demand. A free market is one where new suppliers can enter the market place to meet demand.

Money is today created through the monetisation of assets. That is, supply is increased by monetising an asset. Money itself is treated as an asset hence more money can be created if future money (loans) is monetised. This happens all the time in the banking system so that now we have many times more money (loans) than there are non financial assets. This positive feedback mechanism means that the supply of money cannot be regulated through the price of money unless the creation of money is divorced from the possession of money. The system is inherently unstable and no amount of deregulation (or regulation) can fix it.

Price is not regulator of supply because the availability of assets to monetise is the regulator. (This is why we get asset bubbles)

The system is not free because only those with existing money can increase supply.

The only way to fix the system is to stop the money supply being increased through loans on loans. Other mechanisms need to be deployed.