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The Future of US Capitalism

Davide Accomazzo
Davide Accomazzo, MBA

The financial turmoil of the last eighteen months has brought to everyone’s attention the problems and dichotomy of our present monetary and financial systems. While we are now dealing with the consequences of too much credit, it is also important to note that a system without credit (and—much to the delight of the populists—without bankers) would be a much poorer and less innovative social system.

So far, the attempted solutions suggested have varied from more leveraged credit to the substitution of the fiat currency system and the central bank with a gold-linked scheme.

The problem with most of these suggestions is a massive confusion about how the U.S. system really works, how it should work, and how we would like it to work (and here it gets really problematic as every individual interest invariably jockeys for a better position).

The issue with a fiat currency system is that it is backed by the credibility of the government and the central bank, which should be acting independently as a guardian of the currency. Governments have inherent conflicts of interest and may feel pressured to regularly weaken the currency as a means of veiled taxation; other sectors of the population will also look favorably on consistent inflation to reduce the burden of borrowing. The central bank is supposed to act independently to counterbalance these inherent social and political dynamics. Unfortunately, in the case of the U.S. and many other countries, the central bank, is hardly independent or focused on one true objective of financial stability. In reality, a central bank’s independence is very limited; true independence would require practically no accountability and a large degree of secrecy, which comes, of course, with its own problems.

The fine balance between a government’s and a society’s pull toward credit excesses and the countervailing force of the central bank is the key to successful economies.

One way for the U.S. to begin heading back in that direction would be to simplify the objectives of the central bank (i.e., the Federal Reserve) and eradicate its current internal conflicts between credit management, currency management, growth management, price stability and banking supervision. In other forums, I have advocated that system supervision and price stability (including currency) should be the only focus of any central bank.

The Federal Reserve’s obsession with uninterrupted growth and constant business cycle management is a political objective completely inconsistent with its true existential mandate.

Recent populist calls for the dismantling of central banks around the world as a solution to this problem are very disingenuous and they miss the level of complexity our system has reached over decades. A potential return to some sort of gold standard and the eradication of the central bank will accomplish nothing positive. A financial system built on credit is far superior to no credit at all, but because of the system’s inherent instability, there is a great need for fiscal management and strict regulatory supervision.

The answer is a better, more functional and less sclerotic central bank—not a system left to its own devices.

The unfortunate truth (and yes I do believe in free markets and in maximum rational levels of freedom in every aspects of society) is that full free markets have never existed and cannot exist for two reasons: the natural tendency of humans to jockey for personal (or group) interests and the reflexivity of market action, which distorts self-adjusting dynamics.

As far as having a gold-linked currency goes, the shiny metal has had its chances over history and has invariably failed to function in the best interest of society at large.

The fact is that gold is subject to the same credibility issues of governments and central banks (that is, the idea of its value is still based on collective faith). Gold failed during the times of the Spanish empire, which drowned in a sea of inflation, during the California gold rush, and during the Great Depression. Gold is certainly not the answer at a systemic level, but it is an accepted temporary hedge, and until better checks and balances are found in our present system, it is an asset that deserves a small place in most portfolios.

Socialism (and certainly communism) in classic terms were concerned with gaining control of the means of production; nowadays that is a trivial issue and quite impossible to accomplish when most means of production are held offshore and a larger percentage of the economy is represented by services. The key to today’s socialism is control of capital creation—the unholy union of governments and central banks. Gov-centralbank-ism?

The future of capitalism will depend on our ability to clarify the objectives of central banks as well as America’s ability to create modern institutional checks and balances.

Note: The current fiat monetary system is based on a currency that is backed simply by faith and trust in the government. In other words, the currency is not at the present time convertible into anything—it is just a piece of paper that tracks relative interest rates and rates of growth among countries. Ultimately, currency value rests on the faith investors have in the government that the real value will not be debased. In the past, currencies have been linked to commodities (usually gold or silver) with a conversion ratio—this served to limit government actions to inflate the money supply and debase real purchasing power. During this economic mess there have been many voices that have invoked a return to some sort of gold standard. And as the everyday business of economic life is being thrown into question, calls for a move to some kind of socialism and away from the supposedly free markets are being made.


  • George Cooper, The Origin of Financial Crises, Vintage Books, New York, 2008
  • Niall Ferguson, The Ascent of Money, Penguin Press, New York, 2008

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Davide Accomazzo, Adjunct Professor of Finance
Davide Accomazzo, Adjunct Professor of Finance
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