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.
