Friday, May 8, 2009

The Fed as regulator/protector of its kin

Sheldon Richman's The Bankers' Bank provides a clear explanation of what the Fed is, along with how and why it was created.

Drawing on Murray Rothbard's The Mystery of Banking, Richman writes:

The problem, Rothbard explained, was that when an inflationary boom went bust, the banks “were forced to contract and deflate to save themselves.” This was a problem of “inelasticity” of the money supply. “Translated into plain English, ‘inelasticity’ meant the inability of the banking system to inflate money and credit, especially during recessions.”

So, concerned about “inelasticity” and the rivalry of state and private banks and private trust companies, the national banks (Wall Street), led by J. P Morgan, turned their attention at the end of the nineteenth century to the establishment of a central bank.

To make a long story short, Rothbard writes in The Mystery of Banking: “The growing consensus among the bankers was to transform the American banking system by establishing a central bank. That bank would have an absolute monopoly of note issue and reserve requirements and would then insure a multilayered pyramiding on top of its notes. The Central Bank could bail out banks in trouble and inflate the currency in a smooth, controlled, and uniform manner throughout the nation.”

Essentially it would be a cartel that would allow concerted action free from competition. A cartel unsupported by government is vulnerable to independent competitors. To succeed in defiance of market forces, a cartel needs government help, either to force everyone into it or to hamper outsiders.

My emphasis.

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