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Central banks exist for a single reason – to inflate the supply of paper currency. They are a currency-creating and currency-inflating institution. This serves two interest groups in the main. One is the fractional-reserve banks that they regulate. The other is the government that created them.
For the banks, the alternative to a central bank is to be subject to the forces of market competition. This is something they are striving to avoid. Without a central bank to issue paper currency to them at critical times when they become overextended, the fractional-reserve banks would compete for the safety of funds deposited with them. Gold would be an important currency. Banks that overexpanded into unsafe lending would face customer withdrawals that they could not meet. Competition would restrain bank lending. The central bank relaxes the constraints placed upon banks by competition. It organizes the banks into a banking cartel.
For the government, the alternatives are two. Either it must compete for funds in the market along side all other borrowers, or else it can directly (via its treasury department) inflate the supply of paper currency itself. The government does not want to compete in the market. It wants as much power and freedom of action as it can get. So the first alternative is anathema to it. The second alternative has been tried and found wanting many times historically. The problem with it is that most governments cannot control their own currency issues when they have direct control. They inflate too much. Usually, they destroy their currencies altogether.
Neither the fractional-reserve banks nor the government have an alternative to achieve their ends but a central bank. Central banks exist because these two interest groups are behind them. Neither wants market competition. Central banks are an anti-competitive institution.
Central banks exist to inflate paper currencies. That is their mission. That is their reason for being. If the currency in use in a country were gold, a central bank could not inflate. The supply of gold currency would be subject to market forces. It could not be inflated at the will of central bankers. Since neither banks nor the government want to be subject to market forces, they do not want the currency to be gold.
However, it is also not in their interest to have hyperinflation. Neither the banks nor the governments have complete freedom of currency issue, if they wish to survive. Therefore, many central banks still maintain holdings of gold and vary them through time. The reason for this is to restrain the issuance of paper currency to some extent. It is to influence the value of a currency in a direction that the central bank desires. Central banks do not hold gold merely as an historical relic or out of inertia or because they have nothing better to hold or because of time-honored custom. They hold it because it supports or backs the value of a paper currency.
Although central banks exist to inflate paper currencies, they do so within limits. When central bankers decide on how much to inflate, they are optimizing some sort of utility. They have value scales and they are making choices according to these value scales. Although there will be many influences on their choices, varying over time and from case to case, still the reason for their possessing the power to issue currency remains that they are at the helm of an anti-competitive institution designed to serve banks and the government.
If currency were gold, there would be no need for a central bank among those willing to compete in markets. Central bankers owe their livelihoods and power to the replacement of gold by paper currencies that they can issue at will, within limits that they themselves impose so as not utterly to destroy their currencies and their own livelihoods.
Most of the economists that attain positions of power in the central bank of the U.S., which is the Federal Reserve (the FED), have been trained and selected to be stupid, at least publically, when it comes to the central bank. In that way, they can convincingly deliver lies and misconceptions as if they were truths. They can avoid confronting the fact of why their central bank exists.
On October 22, 2011, Federal Reserve Governor Elizabeth A. Duke said
"…the Federal Reserve System’s structure was designed by Congress to give it a broad perspective on the U.S. economy. Most of the Fed’s actions are indeed focused on the whole economy."
The first sentence is myth. The idea that Congress created and designed the FED as a benign institution that might benefit the U.S. economy is myth.
The second sentence is at best a half-truth. Yes, the Fed's employees spend a great deal of time concocting economic models and examining economic data. They believe themselves to be wrestling with all sorts of difficulties and economic issues. Some no doubt see themselves as beleaguered figures and heroes struggling to do right and arrive at policies that benefit or even save the American economy. They realize that their actions will have economic effects, even if they have been trained minutely and in great detail to be stupid as to what these effects are.
But what they believe and mythologize about the FED and themselves pales in comparison with the reality. In the end, they buy and sell securities. They make loans. They intervene on behalf of chosen banks, central banks, and governments. They control the supply of bank reserves and paper currency. In the end, the amorphous and ill-defined thing called "the economy", which to them is only a long and ever-varying list of assorted statistics, is not their focus. They serve the banks and the government.
A recent example of the FED serving the banks is the case of derivatives losses at Bank of America (BAC). BAC wanted to move losses from its Merrill Lynch subsidiary into its banking unit, whose deposits are FDIC insured. The FDIC objected. The FED overruled the FDIC. This loads the risk onto taxpayers rather than the stockholders of Bank of America.
In the 2008 financial difficulties, the FED served (bailed out) certain large investment bankers and insurance companies and assorted others. Preserving certain of these was essential in order to preserve the financial system over which the FED presides. That was its way of saving the banks and the government. It was its way of saving itself too.
Now that the FED exists, it has another major reason for its existence, which is to preserve itself and expand its own powers. It now exists, not only to serve banks and the government, but to serve itself. This means to serve its membership, staff and bureaucracy. It will strive to enhance its jurisdiction among the competing regulatory agencies of government.
The FED is a political and politicized institution. It is not some sort of objective economic policy-implementing institution. For this reason, it can be expected to maneuver in order to deflect criticism and insulate itself from accountability. At times it will release trial balloons so as to influence opinion and place itself in a more favorable light. The FED will attempt to make itself look progressive and open to change and improvement. Do not be fooled. These maneuvers do not change the basic reality. The FED is not a benign institution that has arisen in a free market in order to increase the welfare of Americans. It is a malign, self-serving, bank-serving, government-serving institution designed to thwart competition among banks and enhance the size and powers of government.
Chairman Ben S. Bernanke, in his speech of October 18, 2011, tries to position the FED as an institution beneficially responding to the events of recent years:
"My remarks will focus on how central banks responded to recent challenges related to the conduct of both monetary policy and the promotion of financial stability and how, as a result of that experience, the analysis and execution of these two key functions may change."
We can always expect a self-serving spiel from Bernanke, dressed up in academic language. He doesn't disappoint us. In Bernanke's hands, inflation becomes "innovative". He wraps central banking in the hoary myth of the central banker as cavalry – always riding to the rescue:
"Even as central banks were innovative in the operation of their monetary policies, they were forced to be equally innovative in restoring and maintaining financial stability. Serving as a lender of last resort–standing ready in a crisis to lend to solvent but illiquid financial institutions that have adequate collateral–is, of course, a traditional function of central banks. Indeed, the need for an institution that could serve this function was a primary motivation for the creation of the Federal Reserve in 1913."
Does Bernanke believe that the FED was created to serve as a "lender of last resort"? Yes, he does. He has been trained to be stupid. He has been chosen to head the FED because he exemplifies that stupidity. He has been trained not to understand what this last resort lending actually means and does. Every dollar of currency creation is a theft of value from existing currency holders. It is like splitting a stock 2 for 1, in which case the price of each share falls by half. For Bernanke to understand the Austrian view of business cycles as induced by monetary excess would be far beyond his present capabilities. That has literally been educated out of him by his economics training. The previous chairman, Alan Greenspan, comes across as quite a different case. He understands. As chairman, he seems to have come to the belief that the markets were stupid and could be manipulated indefinitely.
Gary North has advised Occupy Wall Street to Occupy Liberty Street, on which the Federal Reserve Bank of New York is located. This is good advice.
The FED exists as a privileged institution. Those privileges should be terminated. But since the FED serves government as well as banks, the government does not want to end the FED. Can that be done by confronting local police? Such confrontations show that there is a problem. They make politicians take note. But determined and articulate political movements that demand an end to FED privileges are essential. Ron Paul and/or a mere handful of elected officials should not be the sole voices heard in Washington that are demanding an end to the FED.
I think even better advice is to Occupy Capitol Hill. Let it be in peace and non-violently. Is that even possible in this day and age? I think not. Then confrontation has to be in mind and spirit. It has to be in words. It has to be in media of communication. It has to be in formal declarations. It has to be through organizations making formal demands. It has to be in all sorts of ways that people devise. In Estonia in 1987-1991, it was partly through the Singing Revolution. Street protests are all right as far as they go, but confronting police is not a complete solution. Confronting power with demands is essential. What demands? Liberty, liberty, and more liberty. Freedom from the FED is one such demand.