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.
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| 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.)
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| 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.
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| 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:
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| 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.
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| 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.
#30#