Leithner’s goal is simple: to challenge conventional wisdom in the field of monetary economics. Along the way, he also demolishes a variety of other fallacies surrounding the State and its interventions. Harvard-educated academics – the same people who did not foresee the crisis – have blamed the crisis on capitalism and greed, but Leithner is here to defend the free-market perspective against the Keynesian onslaught.
According to Leithner, government intervention, not market failure, is the underlying cause of recessions and depressions. Government’s interventions are manifested through such measures as fractional reserve banking (FRB), legal tender laws, and central banking. Leithner argues that these forms of meddling in monetary affairs create economic turmoil. Though few people discuss the merits or otherwise of FRB and legal tender laws, central banking is already prominent in mainstream debates.
Central banks are a relatively recent phenomenon. For many years, Australians prospered without a central bank in an environment where private banks issued paper currencies. The pre-1901 era in Australia was a time of free banking, i.e. a situation where government gave no special privileges to banks. ‘Australian banking was relatively free for almost a century from the establishment of the first banks until well into the twentieth,’ explains Kevin Dowd in Laissez Faire Banking, ‘and fully fledged central banking arrived only with the establishment of the Reserve Bank of Australia at the comparatively late date of 1959’.
Nowadays, central bankers are highly praised and government intervention is taken for granted. Leithner questions this naïve faith:
In Australia, economists, investors and journalists babble endlessly about the level at which the Reserve Bank should “set” the “official interest rate”…Alas, almost nobody bothers to ask why it should be set, or whether it actually can be fixed…[F]or reasons rarely discussed and never justified, virtually nobody baulks at the notion that a short-term money market rate of interest must be “set” by a committee of price-fixers and central planners in Martin Place, Sydney.