In a thread maybe a month ago, I think Sam Stone commented that at the beginning of the 20th Century there had been more than one central bank and that this had been reduced down to just the Federal Reserve.
Seeing as how the desire to get the economy kick started again has led to a state of what is essentially printing money by the barrel, I’d wonder if having more central banks would have provided a better chance to allay this problem. Even if one bank head goes Darth Inflationist, not all of them will and this limits the issue.
But on the other hand, I’d want to know why central banks were shrunk down into a single entity before pining for the good old days.
Without a commodity-based currency such as one based on the gold standard (which was nominally in place at the beginning of the 20th century) I don’t see how this makes any sense.
Yes, that’s true. Between the Civil War and 1913, there were multiple, private central banks in the United States.
They performed many of the same functions that the Fed does today. They served as lenders of last resort for smaller commercial banks, and in return audited the smaller banks and required them to maintain reserves.
However they didn’t perform one function that the Fed does today–they didn’t control the base money supply. We were on the gold standard, and base money was specie. If you wanted more, you had to dig it up out of the ground.
No, now that we have fiat money, some single entity somewhere has to control it. The only alternative would be to have multiple currencies in circulation, which would make commerce more difficult.
We could privatize the other functions of the Fed, but don’t hold your breath.
Because Progressive-era reformers decided, after the Panic of 1907, that central banking was too important to be left in private hands and converted central banking into a government monopoly.
Why not adopt a Charter system? You’ll have fewer banks, but they’ll have to demonstrate sound practices to Congress or get kicked out of the business.
That doesn’t seem particularly hard to solve. If you have three central banks, you tell each of them that they can’t create more than 5%* more money in a year than either of the other two or something.
Creating base money is insanely profitable. (Hence the phrase “a license to print money”.) The Fed has accumulated an asset hoard of $800 billion via its power of money creation. Any private entity granted such a power would have only one incentive–to create the maximum that the law allowed.
You don’t make money if you’re devaluing the currency. And if you’re one of three entities creating the total money supply and have to be within 5% of one another, you can only create a maximum of ~37% of the money supply, so you could only have gotten 37% of $800 billion profit over the same time period. The other two banks would have gotten ~32% each.
I assume you must be joking. Putting control of the money supply in political hands (Congress) would be a recipe for disaster. It’s one of the reasons that central banks, from the US to Kazahkstan, try to be independent entities…it’s in order for them to have even a shred of inflation-fighting credibility.
If you are on a true gold standard with the lawful ability to mint coinage, coupled with a repeal of fractional-banking laws (that essentially allow today’s banks to operate as technically bankrupt at all times) , you can have two central banks, or 200, or none. It doesn’t really matter. Banks can mint their own coins, or draw up little pieces of paper that say ‘This is worth 1 ounce of gold’, or do whatever they want.
It doesn’t matter because the moment the depository public loses confidence in the little pieces of paper, or the coins, or whatever scrip or tender the bank uses, they can walk up to window and say ‘No Thanks, I’ll take xxx ounces of gold instead’. That provides a natural and inviolate constraint on how much money can be printed and limits the ability of a central bank to inflate it’s way out of governmental overspending and overborrowing.
Countries go off the gold standard when they have borrowed too much from their own citizens or other countries (usually to finance a war) and then look in the till a few years later and say ‘Whoops. We don’t have enough to pay for all of that!’
At that point, there are usually all sorts of arguments thrown about how a gold standard ‘is inefficient’, or ‘restricts commerce’ or some such thing. But none of that is really true. It’s because the gubmint borrowed too much and now cannot repay it. At that point, it could do a couple of things:
Inform it’s citizens that they will still be on the gold standard, but those $20 bills they have in their wallets that used to be worth 1 ounce of gold, are now only worth 0.5 ounces of gold. Essentially, a massive devaluation. And a rush to convert paper money into gold as the public loses confidence in the value of the little green pieces of paper. This is the reality of a gold-based constraint on currency coming home to roost.
Stay on the gold standard. But just forbid anybody from actually having any, making the whole thing sort of moot. This has happened too.
Go off the gold standard, citing a whole bunch of reasons (a few elicited above) other than ‘we borrowed too much and can’t pay it back’.
Without a gold standard, you are left to the whims of the central bank to decide how much money to print and to allow to remain in circulation. Gold used to be $20 per ounce pre-WWI. Now it’s going for about $800 per ounce. Try and figure out why that is.
Sustained deflation is not a bad thing. The United States went through several decades of deflating prices in the 19th and early 20th centuries accompanied by robust growth in GDP, employment and living standards.
When an expectation of continued declining prices is baked into the minds of consumers and investors, they will adjust their behavior accordingly. Just as they do in environments of mild but stable inflation.
Interest rates and debt levels will also adjust. For example, you don’t need to borrow huge amounts of money at high interest rates to acquire an asset if you have high confidence that the asset’s price will be lower in the future.
It’s the transition from an inflationary environment, and especially one where there are large debt levels, to a deflationary environment that will cause problems. Some of which you cited above. But a deflationary environment in itself is not a bad thing.
Why not? The only thing that really matters is the purchasing power of those wages, not the nominal or numerical value of the wage itself.
If wages decline 1% per year, but the price of a basket of goods that the wage-earner buys declines by 3% per year, the wage-earner comes out ahead and realizes an increased standard of living. The increased purchasing power of the wage-earner comes via his/her productivity, not by a nominal value attached to the units of currency in which he/her is paid.
That’s the way it more-or-less works today, only the -1% and -3% above are usually replaced by numbers like +4% and +2%.
I meant inflation in the sense of “devaluing the currency”. Keeping the price of things constant as the market deflates by devaluing the currency is just making confidence levels go even worse.
Deflation was a symptom of the Depression. The causes are still debated. Point being, if cholera gives you a high fever, that alone is grounds for doubting that a high fever is a healthy thing (even though fevers happen as a means for the body to kill off the invading microorganisms).
I haven’t mentioned congress or the government at any point.