Thursday, March 17, 2016

Do We Need the Rich?, IX: Rally at the Fed

Yesterday we looked at the role of the central bank and discovered that, far from being a conspiracy, central banks fill an essential role in a sound financial and economic order, particularly in providing an adequate, stable, and elastic reserve currency for economic growth and private sector development.

Webster's Dictionary of Undefined Terms
You can rail and shriek about “the banksters” all you like, and it might make you feel good and virtuous (or, more likely, smug and self-righteous), but you won’t understand what banks do or why they’re important.
And, just for fun, ask the next person who uses the term “bankster” to define it, and — if he or she can — then demand a definition of “bank.”  Then watch the sparks fly when the individual can’t identify the three types of banks, much less define them:
Bank of Deposit: A financial institution that takes deposits and makes loans.  (Examples are credit unions, savings and loans, and investment banks.)
Bank of Issue (Bank of Circulation): A financial institution that accepts deposits of assets (either the actual asset or a mortgage backed by the asset), makes loans, and issues promissory notes that circulate in the community as a medium of exchange (or that back media of exchange, such as smaller denomination promissory notes called “banknotes” and demand deposits).  (An example is the cheese banks of Parma, that accept deposits of parmesan cheese and issue negotiable promissory notes.)
Banks have always dealt more with future, not past savings.
Bank of Discount: A financial institution that discounts (accepts) bills of exchange, makes loans, and issues promissory notes.  (The only relatively recent example we can think of was the Reichsloanbank of the Second Reich, and it wasn’t a pure bank of discount as it issued large denomination promissory notes that circulated to some extent.)
Today’s commercial, mercantile, and central banks are a combination of a bank of issue and a bank of discount.  They also usually add features of a bank of deposit since it’s a pain for a customer to have to use a different institution for accumulating savings than for commercial services.
Not understanding this rather esoteric stuff, chances are that the individual excoriating banks and bankers without knowing what he or she is talking about will go off in a huff (or, with apologies to Groucho, a minute and a huff), declaring you just don’t understand, there’s no talking to you, you’re stupid, you’re ugly, and your mother dresses you funny.
Another meme on the same historically inaccurate theme.
Especially when it comes to banking, particularly central banking, most people are simply clueless.  This was illustrated recently by a meme we came across with the caption, “How well do you know history?” which had pictures of Lincoln and Kennedy, and posed the question, “These are the only 2 presidents who ever attempted to end the Federal Reserve banking cartel.  What else do they have in common?”
How well do we know history?  Well enough to know that Lincoln died in 1865 and the Federal Reserve didn't even exist on paper until 1913. . . .
Anyway, the meme poster (one who posted the meme, that is) responded to our historical correction by asking, “Wasn't there a Central Bank prior to the Federal Reserve?”
Just one?  There were four:
Bank of North America $1 banknote from 1862.
·      The Bank of North America was chartered in 1781 and lasted until Congress revoked its charter in 1786 and Pennsylvania rechartered it as a state institution (it still exists today, sort of, having been sucked into Wells Fargo).
·      The (First) Bank of the United States was from 1791 to 1811.  Congress let the charter lapse until they realized again they needed a central bank and chartered —
·      The Second Bank of the United States in 1816, which lasted until Jackson got angry at the president of the Bank because one of his friends didn't get a job, 1836, although Jackson withdrew government funds earlier.  Things got pretty chaotic, financially speaking, and in desperation Salmon P. Chase instituted —
·      The National Bank system in 1863 that served as a (grossly inadequate substitute for a) central bank until 1913.  The National Bank system ensured that only the rich could get credit by forcing farmers and small businesses to rely on existing savings and an inelastic, debt-backed reserve currency.
Another commentator then weighed in with, “If we could just use them with humanity rather than centralizing their power.”  We weren’t exactly sure what that meant, but we gave it a shot:
It’s actually quite simple — although not easy.
Rally at the Fed
·      First, get the world's central banks out of financing government. That was never their job. Both for political and financial reasons, governments must be limited to what they raise by taxation with the consent of the governed.
·      Second, restrict central banks to providing liquidity for private sector growth, not government growth. The purpose of the (re)discount window is to monetize the present value of future increases in production. The purpose of open market operations is to monetize existing inventories. Restricting the central bank to these operations and everything else being equal, there will always be exactly enough money in the economy to transact business.
·      Third — and key to the whole thing — only create money to finance future increases in production in ways that create new owners of the capital that produces the marketable goods and services. In accordance with Say's Law of Markets, this brings production and consumption back into balance — and vests the new owners with the political power essential to keep government from spending its head off.
·      Finally, turn the central bank into a democratically owned private corporation, with every citizen having a voting, participating share as a right of citizenship.
These are a few of the reforms we'll be advocating when we demonstrate outside the Federal Reserve in Washington, DC on Friday, April 22, 2016, sometime around noon.  You might want to consider joining us there.  We’ll make speeches, sing songs, make speeches, carry signs, make speeches, hand out literature, make speeches . . . .
Or you can sit around making snide comments about “the banksters” and blaming the rich for a situation that is within your power to fix.

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