Saturday, July 11, 2015

Why central banking persists

Only a few people care whether central banking persists, and they're the ones who profit from it.  In some cases they profit enormously.  The average Joe or Jill doesn't know about central banks and doesn't care to know.  To the ones at the top of the political - economic heap, this is how they want it.

A central bank comes about through political favors -- favors to big bankers and to politicians intent on buying votes and making war.  Where you find a country with a central bank, you have laws establishing it.  It requires political force to make them work.  A central bank is not an agreement among bankers.  It is an agreement backed by the monopoly force of government between bankers and politicians.  They are not free market entities, though they usually posture as one.

Central banks are often described as inflation fighters.  As monopoly producers of money, they are instead the sole source of inflation.

Central banks are said to be responsible for making capitalism work.  By making honest price discovery impossible and raging war against savers, they are in fact anti-capitalistic.  If you want to kill capitalism and replace it with cronyism and instability turn the market over to central bankers.

Almost every textbook that discusses the history of the U.S. central bank, the Federal Reserve, will say it came about as a solution to the various Panics of the 19th century and the Panic of 1907.  What the textbooks don't discuss is why the Panics came about: the common practice of fractional reserve banking.  In simplest terms fractional reserve banking consists of a bank giving two people equal claim to the same monetary unit at the same time.  This is standard operating procedure for banks.  Except among Austrian economists, it is noncontroversial.

As central banks were called on to play a major role in funding World War I, European belligerents suspended payment in gold -- in other words, they outlawed inflation-resistant money.   Doing so prolonged the war and resulted in casualty figures never before seen in mankind's history.  In the U.S. the public was strongly discouraged from attempting to redeem paper money for the gold it represented.  As historian Ralph Raico writes in Great Wars and Great Leaders: A Libertarian Rebuttal,
Had the war not occurred, the Prussian Hohenzollerns would most probably have remained heads of Germany, with their panoply of subordinate kings and nobility in charge of the lesser German states. Whatever gains Hitler might have scored in the Reichstag elections, could he have erected his totalitarian, exterminationist dictatorship in the midst of this powerful aristocratic superstructure? Highly unlikely. In Russia, Lenin’s few thousand Communist revolutionaries confronted the immense Imperial Russian Army, the largest in the world. For Lenin to have any chance to succeed, that great army had first to be pulverized, which is what the Germans did. So, a twentieth century without the Great War might well have meant a century without Nazis or Communists. Imagine that. [pp. 1-2]
No Great War, no Nazis or Communists.  No central banks, no Great War.

Central bank funding inflates the wars -- makes them bloodier and longer -- as it produces money for the belligerent governments to spend.  Central banking is very profitable for people on the receiving end of the new money.  They see to it that central banks stick around.

Central bank money today is not restricted by anything tangible.  Individuals can purchase gold or silver coins but the coins are not money proper.  Only central bank digits and paper are money in the sense of serving as a widely-accepted medium of exchange.  This was established by government fiat, not the free market.  Where you find fiat money -- whether it's gold, silver, paper, or digits -- you don't have a free market.

People don't care about monetary issues as long as their money buys things.  When it doesn't then they care, but they rarely understand it.  They know they're being cheated, but exactly how is a mystery.  They don't know about fractional reserve banking, and if they did most economists would tell them it's perfectly okay.  Even the gold-loving maestro inferred it was a legitimate practice, as he describes credit expansion under the government-controlled gold standard:
Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves.  This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits).
Do you see anything wrong with this picture?

Central banking will persist as long as fractional reserve banking remains unchallenged.

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