Comment: Central Banking...

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Central Banking...

...is about creating a banking cartel. "Cartel" evokes images of a bunch of evil schemers smoking cigars somewhere, and while that's true enough, there's a more precise economic meaning to the term, which I'd like to explain.

A cartel is a set of firms in some industry, which agree not to compete with one another. They fix an above-market price at which they all agree to sell. The cartels must not only eliminate competition between its members, but also prevent non-members from competing with the cartel - otherwise they will not be able to maintain their above-market price. Voluntary cartels have been attempted historically. They all collapsed quickly, without exception. Voluntary cartels inevitably collapse because the members cannot resist competing with one another, and they have no really effective means of preventing non-members firms from competing with the cartel. When voluntary cartels failed, the would-be cartelists turned to the government. They wanted the government to use its power to forcibly prevent the members of the cartel from competing with one another, and forcibly prevent non-members from competing with the cartel. They succeeded. The entire regulatory apparatus is designed to cartelize the system: e.g. the FDA and DoA cartelize the food and drug industries.

The move toward central banking in the US, culminating in the creation of the Fed in 1913, is just another example of this. Wealthy business interests wanted to form a cartel, and needed the government to support it. A banking cartel works a bit differently from any other kind of cartel, because banking is a rather unique business. The goal of banking cartels is to coordinate inflation. That is, to make sure that all the banks are creating credit at approximately the same rate. The reason is this. If the banks aren't coordinating their inflation, the banks inflating the most start to lose reserves to the bank inflating the least, until eventually they run out of reserves and go bankrupt. This is what occurs in a free market in banking, there is a natural check on the extent to which any bank can expand credit. Of course the banks don't like this check - they want to expand as much as possible. So they must coordinate, then there is no net loss of reserves from one bank to another, and no bankruptcies interrupting the credit expansion. So how does a banking cartel coordinate inflation? Reserve requirements. The central bank forces the cartel members to maintain certain reserve requirements, which means they are all inflating at the same rate. The central bank also standardizes bank notes. Before central banking, each bank issued its own notes. When you made a withdraw, you didn't get Federal Reserve Notes, you got ABC Bank Notes. Standardizing notes means that any one bank's notes are viewed as being the same as any other's, which helps spread the risk around the system and reduce the risk of a bank run on any one bank. Finally, the central bank acts of "lender of last resort," available to create credit to keep any one bank solvent in the event of a crisis. What a deal! Now the banks can basically inflate at their hearts content, much more than before, and if anything does go wrong, their pals at the central bank have unlimited funds to bail them out.

So that's what central banking is about. It is about maintaining a banking cartel, which increases bank profits at the expense of the consumer and the public at large - as with all cartels. And, of course, central banks have an extra-close relationship with governments, as do banks in general, since they play a role in funding them. In a sense the banking cartel, the system of central banking, is the dominant cartel of the many cartels which constitute this huge fascist system.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."