Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Fed's Ultimate Lie Exposed, Central Banks Are Not Banks

Politics / Central Banks Sep 24, 2011 - 11:50 AM GMT

By: Michael_S_Rozeff

Politics

Best Financial Markets Analysis ArticleI am going to make a number of obvious statements that we all can agree are true, but what they add up to is a startling conclusion. What we call "central banks" are not banks at all.

What is a bank? I refer the reader to a straightforward but reasonably detailed answer here. A bank is a financial organization in which people deposit their money, we are told. This is true. A bank is a business, we are told. This is true. We are also told in this little essay that "each bank tries to make THEIR bank look better than all of the other banks by offering services that some other banks might not have". That is to say, banks compete in a market. This is true, conceptually at least, and also true to some extent in reality, although numerous banking laws seriously alter the market and the competition. But it is the pure idea we are after here, and in the pure idea a bank is a business that competes in a market.


I won’t analyze every "central bank" in the world. I don’t have to because their setup is more or less the same everywhere. I’ll use the Federal Reserve System (the FED) to represent all of them.

Historically, the FED and other "central banks" came to be called "central banks" for several reasons. First, they are financial organizations. Second, they hold deposits of other banks and governments. Third, their assets are largely financial assets. Fourth, they make advances or loans to other banks on collateral. Fifth, the government has made them to be at the heart or center of the banking industry and the monetary system. Sixth, government power is itself centralized or national. All of these statements are factual.

Now this is an imposing array of reasons why "central banks" are called "central banks". But the most important of these reasons is the fifth reason, which is that the government has used its power to make the "central bank" central. And because the government has used its power to create the "central bank" and make it central, we know that the "central bank" is not a free market institution.

This is the main ground upon which I challenge the notion that a "central bank" is a bank. The concept of "central bank" fails to distinguish a free market business and a bureau created by government power. The term "central bank" undermines this distinction between free market and government. Indeed, it erases it altogether.

The FED is not a business. It has powers that no ordinary bank has. It has privileges that no ordinary banks have. It doesn’t compete with other banks. The government created the FED. The government gave it power to create fiat money. The government can alter the FED’s organization and powers at any time. The FED’s so-called independence from the government is mythological. It is that of a dog on a long leash. The only independence the FED has is from the public.

Let’s go back for a moment to the essay on banks that I just cited because it displays this erasing of any distinction between the free market and government. After defining the term bank, it lists the kinds of banks. Quite suddenly it introduces the term "central bank" in the same breath as ordinary banks that have national or state charters. It says

"There are different kinds of banks. There are national banks, state banks, and central banks. The Federal Reserve Bank is the United States government’s central bank. The Bank of England is England’s central bank."

Suddenly, what this essay told us earlier disappears. We were told that a bank was a business that competed with other banks. But now we are told that the FED "decides how much money is in circulation" and that it "may tell the [ordinary] banks to charge more interest or keep more money in ‘reserve’".

Obviously, if the "central bank" has such powers, it gets them from the government. Just as obviously, the "central bank" is not a business and not in competition with other banks if it exercises these and other powers over ordinary banks.

Furthermore, distinctions between monies that ordinary free market banks deal in and the fiat money that central banks produce are completely glossed over and erased.

This essay is representative of the usual thought in the field of economics. Banks are businesses. But then all of a sudden there is another so-called "bank" that has an array of powers that business-banks do not have. This "bank" is actually a government bureau. Its fiat money is made into legal tender by the government. The government states that it stands behind this money. This "bank" has powers to control and organize the ordinary banks into a cartel.

The facts I’ve pointed out are widely recognized. There is a Wikipedia article titled "central bank" that confirms this:

"A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation's legal tender".

This too makes it very clear that a "central bank" is not a bank, but a powerful Monetary Authority and Fiat Money Administration.

However, the same Wikipedia article almost immediately contradicts itself when it states:

"Central banks in most developed nations are independent in that they operate under rules designed to render them free from political interference."

How can a bureau that is established by the government and possesses extraordinary powers be independent and free from political interference? The "central bank" embodies political interference!

And to the extent that a Monetary Authority such as the FED has been granted powers that it can exercise free of political interference, how can such an institution be held accountable? How can it operate without being responsible to the government and indirectly to the people?

"Central bank" independence is to a large extent a myth, that is, in the essence of the institution; and in those activities in which it is not mythical, it is an unaccountable power.

It may seem as if I am splitting hairs, but what I see is that the common explanations of central banking confuse banking as might occur in free markets with so-called banking as executed by a "central bank" that is empowered by government. They are two entirely different kinds of operations. A thoughtful or questioning reader is bound to feel a degree of discomfort when he encounters these explanations that blur important distinctions.

A "central bank" is a government department. It is a government bureau. It is the government’s fiat money bureau. The "central bank" is the government’s money-printing machinery or money-printing organization or money-printing bureau or money-printing agency. As contrasted with monies produced in a free market, the FED’s money is state-produced "money". In the sense of comparing the FED’s money to free-market money, it is counterfeit. It is held up by the force of government law and power. It is imposed on the public.

A more accurate term for the FED might be the Fiat Money Administration. Perhaps the term Monetary Authority would be more accurate. It would be more accurate if the latter were the official name. In the U.S. Constitution, at least, it is clear that there is no power to create a Monetary Authority, and, if there were such a power, it could not possibly be delegated in such a way as to make that Monetary Authority independent.

The "central bank" is not a real bank. Everything about it is permeated with government power.

At the heart of the financial and monetary system of a nation that is supposed to be an exemplar of free markets is a government money-bureau.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

http://www.lewrockwell.com

    © 2011 Copyright Michael S. Rozeff - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in