Sunday, January 27, 2008

Setting Interest Rates

The responsibility of governments to set interest rates is just taken for granted. All modern countries have a central bank that sets the base rate of interest. What most people do not realise is that this is a very modern practice. For most of history, central banks did not exist, so do we need them now? (During medieval times, the church tried to control interest rates by prohibiting usury, but that was a disaster).

The more important question (normative economics) is whether it is morally right for the government to set interest rates. The answer to this question is obvious, if we think about other things we own. If the government tried to make me sell my house for $70,000, I would be very upset. If they set the price at which I could sell my car at $1000, I would be sure that was wrong.

Most people would prefer to put their house or car on the market and see what they could get. By forcing me to sell at a set price, the government is robbing me of the difference between that price and what I could get on the market. By setting the price higher than I could get on the market, it is robbing the purchaser of the difference between the set price and what I would be prepared to sell it for.

The ability to set prices, allows the government to rob one person for the benefit of another. Setting prices is a form of theft.

By setting the price of money, the government is stealing from some people, for the benefit of others. By setting the price of the future, the government is robbing some people of part of their future to benefit others. Those who benefit are the bankers and financiers who get access to cheap money. Those who suffer are the people on fixed incomes who cannot adjust for the resulting inflation. Government controlled interest rates are just another form of theft.

The modern practice of authorising a central bank to set interests is morally wrong, so it should be opposed by Christians.

Don't cry Ben, but you are overseeing a sysstem of theft.

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