Professor De Soto does not appear to refer to the important, but ill-documented, role of trade credit in economies. The eminently pragmatic Swiss have been demonstrating since 1934 that it is quite possible for trade credit to be provided and cleared within a credit clearing union – the Swiss WIR.

In the WIR model – for those unfamiliar with it – goods and services change hands on credit terms not IN EXCHANGE FOR Swiss Francs as a fiat unit of currency, but BY REFERENCE TO Swiss Francs as a unit of measure or value standard. Discipline in relation to WIR debit balances derives from the requirement for participants to give security over their property, and this use of property backing as a framework of trust probably accounts for the sustainability of the WIR.

It would be quite possible for a unit of gold to be used as such a reference point or ‘gold standard’, but it will be seen that there is not in fact on the face of it in the WIR architecture any need for physical gold at all. Equally, a unit of energy could be used as an ‘energy standard’, which some users might find more relevant to their everyday experience than gold as a pricing reference.

Such a credit clearing system is therefore demonstrably capable of providing the credit necessary for the circulation of goods and services and the creation of productive assets, but in order to extend it from businesses to individuals, then some form of currency unit (s) would be necessary which would be acceptable by businesses in settlement of credit extended to individuals.

As Robert points out, we would need to look elsewhere for the medium and long term financing of productive assets, and I believe that this may be achieved through a new approach to equity, rather than the creation by credit intermediaries of credit ex nihilo.

I am assuming the business of financial intermediation will continue along the lines of providing longer term loans (particularly for business) against the availability of shorter term deposits, but with 100% reserves this becomes impossible, surely?

If on the other hand, we assume that loan terms should equal deposit terms, then surely only a very small part of the available savings will be available for lending/investment and then only on shorter term production regardless of the rate of interest which could have asked for a longer term production structure? Or we end up with a very steep yield curve (to encourage longer term deposits), which discourages longer term production, despite the level of aggregate savings. This still does not, however, solve the problem that savings that people prefer to hold on demand (even over long periods of time) is never available for investment under a 100% reserve standard.

Is there really a fullproof practical solution, or do we not need to understand all the implications, then make a decision and then live with that decision being aware of the potential ramifications?

This is like saying, “Leopards must change their spots.” Human beings are genetically programmed to do whatever is good for themselves, in any given situation. For politicians, wrecking the economy is good for them. More financial chaos means more power for them and more power will mean more money and more privileges. And for their inner core of supporters, the major political donors, organizers, money men and family members. Appealing to politicians’ better side is ridiculous because bad policies are how they expand their business and increase their incomes.

The real prescription for this crisis is:

The people must reject political control of their money and their lives.

“We must allow the market to detect and rectify its own errors.”

How revolutionary is this simple statement! To the ill-educated who cannot fathom the market as the means of communication but who comes to partially understand the role of entrepreneurs, the solution will be to try to create pseudo-entrepreneurs. In fact that is very similar to what exists already with the empiricists and ego-driven interventionists trying to perceive what is going on in the economy and then imposing some contrived scheme.

The essence then is that the ill-educated cannot fathom the market. The fact of the matter is that no one can; but that the Austrian economists understand that the market is a process in disequilibrium that reflects human action, making it a wellspring of information.