Web of Nonsense

Doug Henwood in the Left Business Observer:

Financial crises always spark interest in marginal critics of the system. One that’s attracted interest on the left is Ellen Brown, who’s got a book and a website called Web of Debt. She and her kind should be given wide berth.

Brown is a fine example of a mode of thinking that sees the problems of capitalism—like the polarization of rich and poor and the system’s vulnerability to periodic crises—as primarily financial in origin. She writes on her website:

Our money system is not what we have been led to believe. The creation of money has been “privatized,” or taken over by a private money cartel. Except for coins, all of our money is now created as loans advanced by private banking institutions—including the private Federal Reserve. Banks create the principal but not the interest to service their loans. To find the interest, new loans must continually be taken out, expanding the money supply, inflating prices—and robbing you of the value of your money.

How people can spend the time it takes to write a book and still get so much wrong? For much of the 19th century, our money system was largely private. Individual banks issued notes of varying reliability, with limited geographic acceptance. And the national and international monetary system was based on gold, an entirely private and stateless standard.

The Federal Reserve is a public–private hybrid, but it’s a lot more public than the system that preceded it. And it’s also brought a measure of stability to the system that was badly lacking in the 19th century. Almost half of the last decades of the 19th century were times of recession or depression. Commodity prices declined steadily, putting great strain on farmers in particular. There is absolutely nothing about the monetary system of the late 19th century that offers a model, unless you’re a wacko libertarian.

Brown’s critique of the Fed as an inflationary force is deeply odd. The standard populist critique of the Fed is that it’s too adamant about keeping down inflation—and to drive the economy into recession to do so. That’s not really been true of the Fed for more than twenty years, but it was true of how Paul Volcker ran the institution in the 1980s. The last thing we need to worry about right now is inflation—and the Fed is busily pumping money into the system to keep things from going down completely down the drain. There’s a lot wrong with they way they’re doing it, but it’s better than letting it all go, 19th-century style.

To argue that the only way that interest can be paid is by issuing more new loans is also deeply odd. Presumably businesses borrow from banks to invest and expand. Higher profits from those expanded activities should more than cover the interest. If not, then you’ve got a problem, but that’s how things work when an economy is functioning more or less normally.