This article continues the plan outlined in the previous article “Central Banks as Banks.” As I described therein, this is projected to become a chapter within my banking primer. I am not going to describe private banking — as that is the job of other chapters — but I will cover the issues of inter-bank transactions. This article is about fundamentals that we normally do not think about.
It’s hard to know what to make of this ramble. First, CB’s have nothing to do with whether a currency is pegged or not. It’s elementary to understand there is no real benefit to restricting the money supply by the amount of something you dig out of the ground. Why would anyone do that?
Then there’s the payments system vs the credit system. In the US, pre FED, banks issued their own money but it didn’t trade at par and if there was no ‘lender of last resort’ there was no protection against runs on a bank. Guaranteeing deposits essentially aligned banking, rigidly, to the USD.
The payments system is essentially communal - every citizen needs a bank account. In fact, many are denied this privilege, hence an opportunity for citizen accounts at a CB or a public sector bank.
On the credit side, banks create money, although, as above, as agents of the state. Does it have to be as agents of the state? No, but then you’re back to money not moving fluidly through the economy. And, at the end of the day, the state will always dominate. The US war of independence was fought with state-issued paper money and the Civil War with Greenbacks. The only alternative to state domination is civil war. And, bear in mind, there is a vast state-contrived legal system supporting payments, without which the economy could not function. The fantasy of a no-government economy seems to me to be entirely infantile.
So there you have the tension. You need state control for times of emergency but private creation of money otherwise. The Bank of England was established, I believe, in 1692, as a way to finance private trade (East India Co, etc) and supplanted a system in which the crown controlled the money supply - mostly ‘worthless’ tokens of hazel wood tally sticks. The purpose of a CB must then be to regulate and control the creation of money but CBs in the west and the FED in particular have done an appalling job. They have allowed our economies to become de-industrialized and financialized for speculation. The result is immiserating inequality.
Finally, Steve Keen has convincingly demonstrated that far from stabilizing the economy, rampant credit creation by private-sector banks is the genesis of financial instability through the Minsky Instability Hypothesis. The caveat is that government debt, which economists obsess about is more or less irrelevant while private (credit) debt is the root of all evil and is entirely ignored by CBs.
You have to pick your way through whether and on what terms we should keep CBs. But when balance sheets are explained, it should become very obvious that CBs and government Treasuries can be merged at the stoke of a pen.
Might be worth adding just for understanding? That deposit-holders' accounts at banks are "for benefit of" (FBO) accounts? So while the depositor/bank relationship can be viewed as a credit relationship, deposit bank can also be viewed as just a service provider who owes duty of providing competent services to depositors. FWIW...
(Probably not useful to view banks'/CBs' relationship re: "reserve" accounts in that light. More like a franchise/franchisee relationship.)
It’s hard to know what to make of this ramble. First, CB’s have nothing to do with whether a currency is pegged or not. It’s elementary to understand there is no real benefit to restricting the money supply by the amount of something you dig out of the ground. Why would anyone do that?
Then there’s the payments system vs the credit system. In the US, pre FED, banks issued their own money but it didn’t trade at par and if there was no ‘lender of last resort’ there was no protection against runs on a bank. Guaranteeing deposits essentially aligned banking, rigidly, to the USD.
The payments system is essentially communal - every citizen needs a bank account. In fact, many are denied this privilege, hence an opportunity for citizen accounts at a CB or a public sector bank.
On the credit side, banks create money, although, as above, as agents of the state. Does it have to be as agents of the state? No, but then you’re back to money not moving fluidly through the economy. And, at the end of the day, the state will always dominate. The US war of independence was fought with state-issued paper money and the Civil War with Greenbacks. The only alternative to state domination is civil war. And, bear in mind, there is a vast state-contrived legal system supporting payments, without which the economy could not function. The fantasy of a no-government economy seems to me to be entirely infantile.
So there you have the tension. You need state control for times of emergency but private creation of money otherwise. The Bank of England was established, I believe, in 1692, as a way to finance private trade (East India Co, etc) and supplanted a system in which the crown controlled the money supply - mostly ‘worthless’ tokens of hazel wood tally sticks. The purpose of a CB must then be to regulate and control the creation of money but CBs in the west and the FED in particular have done an appalling job. They have allowed our economies to become de-industrialized and financialized for speculation. The result is immiserating inequality.
Finally, Steve Keen has convincingly demonstrated that far from stabilizing the economy, rampant credit creation by private-sector banks is the genesis of financial instability through the Minsky Instability Hypothesis. The caveat is that government debt, which economists obsess about is more or less irrelevant while private (credit) debt is the root of all evil and is entirely ignored by CBs.
You have to pick your way through whether and on what terms we should keep CBs. But when balance sheets are explained, it should become very obvious that CBs and government Treasuries can be merged at the stoke of a pen.
Might be worth adding just for understanding? That deposit-holders' accounts at banks are "for benefit of" (FBO) accounts? So while the depositor/bank relationship can be viewed as a credit relationship, deposit bank can also be viewed as just a service provider who owes duty of providing competent services to depositors. FWIW...
(Probably not useful to view banks'/CBs' relationship re: "reserve" accounts in that light. More like a franchise/franchisee relationship.)