Economics Questions

Re: Why have a Central Bank?

Bostwick — Tue, 16 Sep 2008 03:54:42 GMT

Ron:

Hi Jon,

Thanks for responding. If the Fed is part of the government why is it owned and controlled by major private financial instutions and why does the Fed purchase government securities. It makes no sense to me for the government to borrow from itself money created out of thin air when it has the power to create money the same way without becoming indebted.

These are all formalities.

The Fed may have nominal "private owners" but do not control it. The federal government does.

The Fed is valuable to the banksters because it administers the nationalized banking system.

Re: Why have a Central Bank?

Bogart — Tue, 16 Sep 2008 03:43:55 GMT

It isn't a smoke screen for inflation, central banking is the cause. The reason for central banking is too fold:

1. The friends of the central bank get the benefits of Seniorage-Money created from thin air whose value comes from reducing the value of the current money outstanding.

2. The central bank steals money from the current money holders (Wage Earners) by reducing the value of their money holdings.

Re: Why have a Central Bank?

Juan — Tue, 16 Sep 2008 01:44:09 GMT

PhCrawford:
A banking system - any banking system - creates money in the form of checking accounts. This money arises from debt.

Only fractional reserve banking does that. And it's debatable whether such 'money' really deserves to be called money.

A 100% reserve system would not permit banks to lend out any money at all from deposits;

False. As a matter of fact, the only way a bank can properly work is by lending 'real' money that it borrows from some of its clients. In a full reserve system timed deposits would be a different kind of contract from deposits available on demand.

It is not at all clear that this would be a better system,

Well if property rights, sound money and no business cycle are bad things then full reserve banking is probably a bad idea...

all loans would have to be funded by money raised in capital markets.

All loans would certainly have to be funded by real wealth, not by funny papers. This funding loans through real savings is a key feature of capitalism, you know.

Using gold for the 100% percent reserve would create its own problems, since the supply of gold rarely matches the growth in the economy.

Why should the supply of gold 'match' the growth of the economy ? Oh wait, we can't have 'deflation' can we ?

Re: Why have a Central Bank?

liberty student — Tue, 16 Sep 2008 00:57:15 GMT

PhCrawford,

Your post has a lot of inaccuracies. I recommend you research banking threads here, and get acclimated to the where the conversation is at. A lot of your post could end up being very misleading to Ron in his quest for understanding.

Re: Why have a Central Bank?

Jon Irenicus — Tue, 16 Sep 2008 00:04:14 GMT

Churchill was, no offense, full of ***. The statement is all the more wrong when taken with regard to the Fed. Really? Central banking is the best we've ever tried? Relative to what? In terms of what? Oh right. "Stability" and "liquidity". There is only one correct answer wrt money: let the market decide. We've had enough of idiotic blowhards and their econometric models.

-Jon

Re: Why have a Central Bank?

liberty student — Mon, 15 Sep 2008 23:45:27 GMT

PhCrawford:
There are indeed people exploiting our banking and investment systems today; not the dead hand of J.P. Morgan or Amshel Rothschild, but rather George Soros, Michael Milken, and their brethren who have been looting the wealth of America through junk bonds, subprime mortgages, structured investment vehicles, collaterized debt obligations, etc.

Wow. Somebodys gunna get a hurt real bad.

PhCrawford:
Is the Federal Reserve system a good system? As Churchill said about democracy "It's the worst possible system, except for all of those other systems."

1. This is false. 2. Churchill was a statist warmonger. You may as well quote Adolf Hitler here, he's got as much cachet with this crowd.

Re: Why have a Central Bank?

PhCrawford — Mon, 15 Sep 2008 23:26:17 GMT

Ron,

You are quite right about both Rothschild's quote and your statement that Britain does not have a 100% reserve system.

Private banks played an extremely important role in financing nations and issuing their currencies in the 19th Century, and the Rothschild's among others profited greatly from this. During the 20th Century governments took more of this responsibility themselves; the American formation of the Federal Reserve system was part of that trend. If you look at the politcal rhetoric at the time, gaining control over such parties as Morgan and the Rothschilds was one of the main objectives of the creation of the system. As late as World War I the British govenment allowed a Morgan - Rothschild syndicate to monopolize the issuance of government debt. Winston Churchill marveled in his history of World War II that he was able to finance the whole of WWII with directly issued bonds at 2% interest, when the WWI bonds had required 6% interest. There were other reasons for the difference, but the profits of the Morgan - Rothschild syndicate were surely among them.

Time was not kind to the Rothschilds. Their American affiliate, LF Rothschild, failed in the savings and loan crisis in the 80's, and the French Government - at that time in the hands of the Socialists - nationalized all French banks, including Rothschild, and paid the stockholders almost nothing. The Rothschilds complained at the time that the price paid was less than the market value of only one of their bank's holdings, the metals firm Le Nickel. Today the Rothschilds mainly make the finest wines in the world - Lafitte Rothschild and Mouton Rothschild.

The Morgan firm survived and prospered. It was split in three in the 1930's - Morgan Bank, Morgan Stanley Securities, and Morgan Grenfell in London - by the Glass Steagall Act. Morgan bank over time absorbed most of the other New York banks except Citibank, and Morgan Stanley is still a bulge bracket Wall Street firm. Now that Morgan Chase has taken over Bear Stearns, J.P. Morgan's old universal bank has now regained all the functions it used to have. And of course the Chase in the title means it has taken over the old Rockefeller interests as well. Morgan's son, J.P. Morgan, Jr. decided to go with the Morgan Stanley rather than the bank. The Morgan and Rockefeller interests have been so diluted over the years by acquisitions and the effect of inheritance taxes that neither family plays a significant role in any of the successor companies today.

Britain does NOT have a 100% reserve system. It has no explicit reserve requirements at all. That is why it is considered the mother of all debt creation. In practice, British banks do keep some reserves, but that usually amounts at most to a few percent, rather than the 10% US banks must keep, or the 17% that Chinese banks must currently keep. (China has been raising its reserve requirement in a failing attempt to contain inflation).

The real issue here is the money supply. The money supply consist of currency in circulation and the value of bank checking deposits. Economists call this M1. If the money supply keeps pace with economic growth, the economy's overall price level tends to be stable. If the money supply fails to keep up with economic growth, there is a deflation in the general level of prices, and if the money supply grows faster than ecconomic growth, there is inflation in the general level of prices. Keynesian economics exploits a loophole in this general rule, but that's really beyond this discussion. Economists have spent their whole careers arguing about the proper definition of the money supply, but the best research shows that M1 is the most usable measure. So there are two ways in which an inflation can occur - the government can print too much money (currency in circulation) or banks can create too many checking deposits.

A banking system - any banking system - creates money in the form of checking accounts. This money arises from debt. When a bank makes a loan, it deposits the proceeds in the customer checking account. This loan is self-funding i.e. the deposit that the bank is lending comes from the customers own money. Now this money doesn't stay in the bank very long because the customer will spend it, but at the end of the day, it will wind up in some bank. Hence the total money supply has been increased. The bank just needs to be sure that it has enough money coming in from new deposits to fund the loan. In a certain sense this is free money to the banking system as a whole, and that is what the critics find objectionable.

A 100% reserve system would not permit banks to lend out any money at all from deposits; they would have to maintain 100% of the deposit in currency, so that the money supply would consist totally of currency in circulation. It is not at all clear that this would be a better system, for one thing bank service charges would increase dramatically, since banks would get no economic benefit from the deposits, and for another loan rates would rise signigicantly, since all loans would have to be funded by money raised in capital markets. The bottom line is that this would represent a huge free loan from the public to the government (because after all that is what currency is, a piece of paper which cost the government almost nothing but by legal tender statutes must be accepted in payment).

Using gold for the 100% percent reserve would create its own problems, since the supply of gold rarely matches the growth in the economy. The US has some history in this policy; when the country was on a gold standard in the 19th Century, it experienced an inflation when the discovery of gold in California increased the money supply significantly, and it experienced a deflation from about 1870 - 1900, as the economy grew faster than the gold supply. That deflation was fairly severe - the general price level dropped about 30%. Hence William Jennings Brian's famous declamation "Thou shalt not crucify mankind upon a cross of gold!". The economy experienced regular depressions and panics.

We've really had only one depression since the formation of the Federal Reserve system, and that was caused by the failure of the Federal Reserve chairman, Eugene Meyer, and the Treasury Secretary, Andrew Mellon, to use the system to prevent the banking failures of the early thirties, which led to the Bank Holiday declared by Franklyn Roosevelt, which really crashed the economy already weakened by the stock market decline in 1929.

There are indeed people exploiting our banking and investment systems today; not the dead hand of J.P. Morgan or Amshel Rothschild, but rather George Soros, Michael Milken, and their brethren who have been looting the wealth of America through junk bonds, subprime mortgages, structured investment vehicles, collaterized debt obligations, etc.

Is the Federal Reserve system a good system? As Churchill said about democracy "It's the worst possible system, except for all of those other systems."

Re: Why have a Central Bank?

Juan — Mon, 15 Sep 2008 16:40:08 GMT

Ron:
You are saying that the purpose of the central bank is to prevent a free banking system from opperating?

Yes.

So who benefits from this?

Bankers, the government and people whose business are subsidized through inflation - among others.

Re: Why have a Central Bank?

MacFall — Mon, 15 Sep 2008 14:23:52 GMT

Really though, everyone in high finance benefits from an inflationary system. They get the new money as it is issued, and they get the benefit of it before the prices rise in response to the increase in the quantity of money. By the time it trickles down to us regular jerks, the prices have already risen. They get more money; the only effect we get is money that buys less.

Re: Why have a Central Bank?

liberty student — Mon, 15 Sep 2008 13:57:30 GMT

Ron:
So you feel that there is no truth to these conspiracy theories. That there is no one profitting from the central banking ststem.

I totally disagree with this. There are obvious winners and losers, particularly multi-generational families of winners and losers who benefit from statism and it's institutions. One has to look no further than Franklin Roosevelt, whose bloodline was tied to many previous Presidents, or the Bush family, which has been active and successful in politics and banking for at least a century.

To deny that there are not groups that profit, would be to deny the Morgans and the Rockefellers, which Rothbard seemed to believe were real forces in the creation of the Federal Reserve system (Case Against the FED)

Re: Why have a Central Bank?

Ron — Mon, 15 Sep 2008 13:54:38 GMT

Let me be sure I understand. You are saying that the purpose of the central bank is to prevent a free banking system from opperating? So who benefits from this? certainly not the people who would benefit from a sound money system controlled by the free market.

Re: Why have a Central Bank?

Ron — Mon, 15 Sep 2008 13:43:52 GMT

Thanks for your response.

My confusion comes from reading some of the conspiracy theory books such as The Creature from Jekyll Island and viewing the Money Master Video. I don't know if you have been exposed to these works. They give strong arguments that control of central banks by private investors enable a small elite to have a powerful influence and are moving the world toward a one world government controlled by them. Based on the old Amshel Rothschild quote: "Permit me to issue and control the money of a nations, and I care not who makes the laws."

So you feel that there is no truth to these conspiracy theories. That there is no one profitting from the central banking ststem.

I had never knew that there was a 100% banking system in Britain. I always thought the Bank of England was the mother of debt money creation. Are you sure that the creation of the Fed wasn't really an attempt to create the illusion of government control over a banking cartel created for the benefit of private banking concerns.

Re: Why have a Central Bank?

liberty student — Sat, 13 Sep 2008 19:23:55 GMT

Indeed Juan, I can't believe I missed that. Afaik, there are no full reserve central banks left in the world.

Re: Why have a Central Bank?

Juan — Sat, 13 Sep 2008 19:18:51 GMT

PhCrawford:
But central banks also exist in countries that don't use a fractional reserve system, such as Britain.

Re: Why have a Central Bank?

liberty student — Sat, 13 Sep 2008 19:06:27 GMT

Except as DiLorenzo has recently pointed out, the FED is incredibly wasteful and prone to abuse.

http://www.lewrockwell.com/dilorenzo/dilorenzo147.html

I think the issue of the FED being private is a huge deal. It's another layer of obfuscation.