Wednesday, April 20, 2016

Why a Central Bank: The Problem


Before we begin, we repeat that the annual Rally at the Federal Reserve and the CESJ gathering scheduled for this coming weekend, April 22-23, have been postponed due to predicted inclement weather and other factors.  All is not lost, however, as several things are in motion that may help us draw a larger crowd, and not come into conflict with various other events on the DC Mall.
Not quite this enjoyable.
Yesterday we had a most interesting discussion with a CESJ Fellow who has been visiting an African country (we'll call it "Country Y" because we want to know Y they're doing what they're doing . . . and Africa has no country's name that starts with "y" and "x" has been overused).  Among the things on which she reported was a Just Third Way perspective on the local financial and banking system . . . which, to be generous, is approximately three or four hundred years out of date.
Specifically, Country Y’s central bank is, to all intents and purposes, the government’s private money machine.  Since all but the very highest levels of government are corrupt, this means that Country Y's central bank is being used to create money to ship Country Y’s wealth to Switzerland, Panama, and the Cayman Islands.  This problem is inherent in the global misuse of the world’s central banks, but it has reached epidemic proportions in Country Y.
"No, no, NO!! I said there were too many CHEATERS."
Thus, the main purpose of a central bank, to provide an “elastic,” uniform, stable, asset-backed currency to meet the needs of the private sector (NOT finance government), is being completely ignored in favor of siphoning off Country Y’s resources by anyone who gets away with taking enough bribes and getting enough kickbacks to feather his or her nest.
Nor is that all.  Two other key functions of a central bank do not even exist, i.e., serving as a lender of last resort to commercial banks, and overseeing clearinghouse operations.
Strictly speaking, Country Y's central bank is not a true central bank, for it does not function as a “bank for banks.”  Instead, anyone who can come up with the bribe money can get a bank charter and go into business without being a member of the central banking system.
As a result, Country Y has what is called a “wildcat” banking system.  Private banks operate with no tie to the central bank, which has no member banks.  Fortunately, private banks in Country Y cannot issue banknotes, or there would be complete chaos, for each bank’s notes would have a different value for its currency.
Calm down, banana breath. It was a stage name, anyway.
Of course, that also means that there is no real commercial banking system in Country Y, for people do not trust checks or private promissory notes, only cash.  Loans can therefore only be made out of cash deposits . . . which means few loans are made because few people trust the banks sufficiently to deposit their cash.  Fewer than 3% of the people have bank accounts.
As for clearinghouse operations . . . there aren’t any clearinghouses.  This means that a check drawn on one bank will not be honored or even accepted for collection at any other bank — banks don’t “talk” to each other, and can’t offset balances . . . thereby ensuring inadequate reserves and no way to increase them except by accepting more deposits . . . which people aren’t making because they don’t trust the banks. . . .
"Just your money. Your life stinks."
The commercial banks in Country Y have virtually no foreign currency reserves — all that is taken in is shipped out of the country into someone’s offshore bank account.  If a traveler wants money changed, he or she goes out in the street and starts asking if someone will buy his or her currency.  You can imagine how safe someone feels going around asking people, “Say, can you change U.S. $100.00?”  (To which the answer on occasion is very likely, “Yes.  From yours to mine.  Hand it over.”)
Is there a solution?  There is always a solution.  Tune in tomorrow.
#30#

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