Cartels: Economists and Central Bankers

A cartel is an organization made up of senior managers or their representatives in an industry. Established members of an industry fear competition from newcomers. Newcomers will cut prices and thereby reduce existing companies’ profit margins. So, cartels seek government protection against newcomers. In this quest, they give lots of money to politicians’ campaigns. Then, having bought access, they seek to persuade politicians to establish legal barriers to entry in their industry. These barriers are imposed in the name of the public interest. Their justification is that they raise standards of production. The sales pitch is this: “Higher standards require higher prices.”

In any textbook on introductory economics, the author includes one or more chapters on the phenomenon of the cartelization of industries and professions. Economists discuss cartels and monopolies in terms of government intervention into the free market.

Cartels are created by legislation which is defended in the name the public interest. Economists generally are suspicious of claims that invoke the public interest. All modern economic theory, beginning with Adam Smith’s Wealth of Nations (1776), begins with this presupposition: “Individuals act in their self-interest, however each individual defines his self-interest.” Smith was hostile to business cartels. He had nothing good to say about such associations.

In general, self-interest is defined as the pursuit of money, although the economist will add a few sentences on self-interest as encompassing more than money. But if you read an economic textbook, it’s mostly about money. It is filled with graphs: price (Y axis) and quantity (X axis).

Economics as a science is seen by its practitioners as having progressed by identifying more and more institutions as governed by personal self-interest. Yet when economists come to banking and education, they refuse to extend this traditional analysis. They either remain silent or invoke the mantra of public interest.

You will search in vain for a chapter on education as an oligopoly within the context of tax-funding, laws mandating education up to age 16, and government licensing of college-accreditation agencies. Somehow, economics textbook authors skip over any analytical discussion of this, the largest sector of the American economy.


There is a chapter on central banking. Here, the entire conceptual apparatus which the author used in the other chapters is quietly abandoned. Yet there is no doubt, analytically speaking, that a central bank is a government-licensed monopoly. Yet the author never uses this word to explain central banking in general or the Federal Reserve System in particular. If there is an exception to this rule, I have not seen it.

In the other chapters, economic textbooks describe how special-interest business groups organize to pressure the government to intervene into market pricing, so that existing businesses are favored at the expense of those kept out by government-created barriers to entry. They show how this restricts the freedom of new producers to offer consumers better deals. It also restricts existing producers from offering discounts or other arrangements to consumers.

Free market economists generally argue that all cartels break down over time because “cheating” — in a non-pejorative sense — takes place. Consumers eventually persuade cartel members to cheat by offering consumers better deals. None of this analysis is applied to central banking. Yet it explains the push toward international central banking and currency unions. The cartel’s member banks need ways to forestall cheating by each other.

Furthermore, textbooks explain the Federal Reserve System as an organization created by politicians and run by disinterested economists and commercial bankers whose goal is to serve the public interest. How does it do this? Through expert scientific economic analysis which the voters do not possess. Because the central bank is legally semi-independent from the government that created it, this hampers voters from influencing monetary policy through the Congress or the President.

As faithful defenders of democracy, the authors would affirm: “Military affairs are too important to be left to the generals.” Yet they mentally affirm this position: “Monetary affairs are too important NOT to be left to central bankers.” (They would do much the same with higher education, if they included a chapter on education, which they don’t.) They refuse to say this openly, because the blatant inconsistency of their position — generals vs. central bankers — would become evident, but this is the operating presupposition which undergirds every college-level economics textbook.

What we never see is the chapter on central banking in the section of the textbook on “Monopoly, Oligopoly, and Cartels.” Yet there is nothing analytically that separates the monopoly of central banking from any other government-licensed monopoly. There is nothing conceptually that distinguishes the cartel of commercial banking from any other cartel.

A few of the authors may have written articles or specialized books on one of these two issues, in which they apply the presumption of self-interest to education or central banking. But when we read their textbooks, we find no such analysis.


An enquiring person might ask this: “What is the economic self-interest of textbook publishers?” The obvious answer: “To sell a lot of textbooks at the normal mark-up of ten to one.” But no economics textbook ever asks this. (Don’t ask. Don’t tell.)

The next question: “How is it that the only segments of the book publishing industry that has a ten-to-one mark-up are the textbook market and the market for academic books bought only by university libraries?” (Don’t ask. Don’t tell.)

There is never a section in the chapter on oligopoly on the textbook industry as an oligopoly within the framework of an academic economic cartel. (Don’t ask. Don’t tell.)

There is never a section on government-licensed regional accreditation agencies as barriers to entry against new universities. (Don’t ask. Don’t tell.)

There is never a chapter on tax-funded education within the context of (1) self-interested politicians in the market for votes and (2) self-interested, university-certified professors seeking above-market salaries. (Don’t ask. Don’t tell.)

There is never a chapter on fractional reserve banking as a form of fraud, in which depositors are promised that they can get their money on demand at any time. (Don’t ask. Don’t tell.)

There is never a chapter on fractional reserve banking as theft, in which holders of money lose purchasing power through monetary inflation’s effect: higher prices. (Don’t ask. Don’t tell.)

There is never a chapter on the Federal Reserve System in terms of the what the textbooks say is the supreme economic issue: the self-interest of the promoters of the Federal Reserve Act. (Don’t ask. Don’t tell.)

There is never a section on the Federal Reserve System as a government-licensed monopoly which was created because of political pressure put on politicians by commercial bankers as a way to protect fractionally reserved commercial banks from bankruptcy resulting from their depositors’ bank runs. (Don’t ask. Don’t tell.)


We are all familiar with such sayings as these: “Don’t bite the hand that feeds you.” “He who pays the piper calls the tune.” “If you take the king’s shilling, you do the king’s bidding.” These are all consistent with the principle of economic self-interest.

The textbook publishing companies do not hand academic economists a form in which they are instructed not to write a chapter on the economics of education. The committees of peers who read submitted manuscripts do not reject manuscripts because authors included such a chapter. The system is more subtle than this.

Textbooks are supposed to cover only what is relevant to first-year students. A textbook cannot cover everything. So, it must skip over topics. The litmus test of orthodoxy is not just how certain topics are covered. It is also which topics are not covered. The economics profession considers the question of tax-funded education and accreditation as beyond the interest of the profession. So, textbooks avoid the topic. Only in monographs and journal articles are such topics ever covered.

If there is a university press monograph written by a Ph.D.-holding economist that attacks all tax-funded education on the basis of the State’s coercion as misallocating resources, I have never come across it. A free market economist’s argument at best recommends vouchers: the economic equivalent of food stamps that are used to pay for pre-collegiate educational services supplied by State-certified schools. Vouchers are the economist’s attempt to provide parental choice in a world of compulsory attendance laws and confiscated tax money. His goal is this: “to gain an increased degree of economic efficiency and personal freedom in a world of universal and unquestionable educational coercion.” In short, the economist wants to improve a system which rests on people in uniforms who stick guns in citizens’ bellies.

You will find no article in a peer-reviewed journal favoring tax money going to churches. You will also find no article in a peer-reviewed journal favoring the closing of all tax-funded schools. Yet, analytically speaking, there is no difference between tax-funded churches and tax-funded schools. It was no accident that Massachusetts in 1833 was the last state to outlaw tax-funded churches, and four years later established America’s first tax-funded public school system.


What about banking? To leave out a discussion of money and banking would be inconceivable in an economics textbook. So, the publishers follow the guidelines of the committees.

Textbook committees are made up of senior academicians who have risen in their fields in terms of a screening process. This screening process begins in college: the introductory course. It extends to upper division, then graduate school, then the tenure-granting process. Certain questions in each academic discipline are not subject to questioning. Examples:

Astronomy: the Big BangBiology: evolution through natural selectionAmerican history: Lincoln and F.D. Roosevelt as visionariesEconomics: the necessity of central banking

Whenever a professor challenges a central presupposition of his academic guild, he will be relegated to the outer darkness: teaching undergraduates, or worse, teaching lower division students.

Such was the fate of Murray Rothbard through most of his career. He not only denied the legitimacy of central banking, he also demonstrated that it was fraudulent, a monopoly protecting a cartel, and the creator of the boom-bust economic cycle. He wrote what no other economist had ever written, an upper division-level textbook on money and banking that demonstrated all of these points. No textbook publishing company would touch it. It was published by a tiny, short-lived company that was owned by a hard money newsletter publisher. Its title was guaranteed to kill college sales: The Mystery of Banking. It went out of print within a year or two. Only because of the web can you obtain it today. It’s offered as a free download. I wrote the Foreword.

So, anyone in a position to write an economics textbook knows what is required before he begins writing. He looks at half a dozen textbooks to see what is covered and what isn’t. Then he begins his outline.

He knows there will be a screening committee hired by the publisher. He knows that a committee will veto any textbook that breaks with what is representative in the profession. He knows that textbooks are not supposed to be creative. They are supposed to be adopted in as many schools as possible. He also knows that the most successful economics textbook in history is Paul Samuelson’s Economics. There is a saying in economics departments: “Nobody ever got fired for assigning Samuelson.”

They all should have been fired for assigning Samuelson. The fact that they weren’t testifies to the nature of the quid pro quo underlying the educational oligopoly: what the State is buying when it creates barriers to entry (accreditation) and funding.


Economists tell us to follow the money. They offer only one exception: the source of the money.

They tell us to beware of claims of actions “in the public interest” regarding industry associations that seek government regulation of their industry. They recommend these investigative strategies. Ask: “Who wins? Who loses?” “Who pays?”

But then, with nary a nod to inconsistency, they cease following the money whenever they get to their discussion of fractional reserve banking.

Anyone who raises the question regarding the beneficiaries of banking regulation is going to see his textbook’s manuscript come back.

Anyone who follows the money from the 1907 panic to the 1913 Federal Reserve Act is unlikely to receive tenure.

It would seem legitimate to ask the question: “Why don’t economists follow the money when it comes to the creation and distribution of money?” There is an answer: economic self-interest.

When, after nine decades, no economist with academic tenure has asked this question in print, let alone suggesting the obvious answer, the young economist who truly believes in economic self-interest should ask himself: “Why is it not in my economic self-interest to investigate the economic self-interest of members of the economics profession?”

If he pursues this logically, he will eventually have to ask this: “What agency is in a position to impose negative sanctions on those who follow the money?” If this were a segment of The Sopranos, the answer would be obvious.

But this is not The Sopranos. The people we are talking about have serious power compared to The Sopranos. There are lots of books and movies exposing the Mafia. There are no movies or books on the Mafia and the public interest.

Power is the ability to operate on your own terms without fear of exposure. It is the ability to persuade shapers of public opinion not to follow the logic of their convictions.

In the 1931 movie, Dracula, the vampire was repelled by three things: a crucifix, a mirror (no reflection), and sunlight. In other words, he was repelled by the symbol of Christianity, self-awareness of his status as half-dead, and exposure.

It is much the same with central banking.


Those few people who understand the inherent moral fraud in all fractional reserve banking find that they are not understood by their peers. They also find that their arguments are not taken seriously by academic economists.

They find it difficult to explain why the entire profession has made a monumental methodological error in not applying the theory of monopoly to central banking. The answer is close at hand: self-interest.

The doctrine of self-interest is the academic economists’ equivalent of the mirror. They want everyone else to look into it. They refuse to look into it themselves.

The doctrine of economic self-interest, when pursued consistently, eventually raises the question of conspiracy. Conspiracy is the economists’ equivalent of the satanist’s crucifix: an inverted Christ. They cry out, “conspiracy theorist!” whenever they find someone who follows the money back to the source of the money. This accusation usually works. Every Ph.D.-holding academic turns aside his face and holds up his cape — or leather elbow patch — to shield himself. Rothbard refused. “Conspiracy theorist? You’ve got it!” he chortled. The economics cartel could never deal with him successfully.

As for sunlight, that would be a comprehensive series of studies on the history and economics of collegiate accreditation. It would also be an analysis equating tax-funded schools with tax-funded churches. With this, the economists would have to go back into their coffins.

If you ever read an economics textbook, think of the author as Bela Lugosi. This will help you to understand the chapters on money and banking, as well as the non-chapters on education.

July11, 2007

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 19-volume series, An Economic Commentary on the Bible.

Copyright © 2007