'Central Banks' Are Not Banks
Michael S. Rozeff
by Michael S. Rozeff: We
I 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
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 wonít analyze
every "central bank" in the world. I donít have to because
their setup is more or less the same everywhere. Iíll use the Federal
Reserve System (the FED) to represent all of them.
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
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 doesnít compete with
other banks. The government created the FED. The government gave
it power to create fiat money. The government can alter the FEDís
organization and powers at any time. The FEDís 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.
Letís 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
are different kinds of banks. There are national banks, state
banks, and central banks. The Federal Reserve Bank is the United
States governmentís central bank. The Bank of England is Englandís
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 Ďreserveí".
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.
distinctions between monies that ordinary free market banks deal
in and the fiat money that central banks produce are completely
glossed over and erased.
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 Iíve
pointed out are widely recognized. There is a Wikipedia article
bank" that confirms this:
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.
same Wikipedia article almost immediately contradicts itself when
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
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.
bank" is a government department. It is a government bureau.
It is the governmentís fiat money bureau. The "central bank"
is the governmentís 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 FEDís money is state-produced
"money". In the sense of comparing the FEDís 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.
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
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.
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: Liberty vs. Domination and the free e-book
The U.S. Constitution
and Money: Corruption and Decline.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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