I am going to make a number of obvious statements
that we all can agree are true, but what they add up to is a startling
conclusion. What we call "central banks" are not banks at all.
What is a bank? I refer the reader to a
straightforward but reasonably detailed answer here. A bank is a financial organization in which people
deposit their money, we are told. This is true. A bank is a business, we are
told. This is true. We are also told in this little essay that "each
bank tries to make THEIR bank look better than all of the other banks by
offering services that some other banks might not have". That is to say,
banks compete in a market. This is true, conceptually at least, and also true
to some extent in reality, although numerous banking laws seriously alter the
market and the competition. But it is the pure idea we are after here, and in
the pure idea a bank is a business that competes in a market.
I won’t analyze every "central bank"
in the world. I don’t have to because their setup is more or less the
same everywhere. I’ll use the Federal Reserve System (the FED) to
represent all of them.
Historically, the FED and other "central
banks" came to be called "central banks" for several reasons.
First, they are financial organizations. Second, they hold deposits of other
banks and governments. Third, their assets are largely financial assets.
Fourth, they make advances or loans to other banks on collateral. Fifth, the
government has made them to be at the heart or center of the banking industry
and the monetary system. Sixth, government power is itself centralized or
national. All of these statements are factual.
Now this is an imposing array of reasons why
"central banks" are called "central banks". But the most
important of these reasons is the fifth reason, which is that the government
has used its power to make the "central bank" central. And
because the government has used its power to create the "central
bank" and make it central, we know that the "central bank" is
not a free market institution.
This is the main ground upon which I challenge the
notion that a "central bank" is a bank. The concept of
"central bank" fails to distinguish a free market business and a
bureau created by government power. The term "central bank"
undermines this distinction between free market and government. Indeed, it
erases it altogether.
The FED is not a business. It has powers that no
ordinary bank has. It has privileges that no ordinary banks have. It
doesn’t compete with other banks. The government created the FED. The
government gave it power to create fiat money. The government can alter the
FED’s organization and powers at any time. The FED’s so-called
independence from the government is mythological. It is that of a dog on a
long leash. The only independence the FED has is from the public.
Let’s go back for a moment to the essay on
banks that I just cited because it displays this erasing of any distinction
between the free market and government. After defining the term bank, it
lists the kinds of banks. Quite suddenly it introduces the term "central
bank" in the same breath as ordinary banks that have national or state
charters. It says
"There are different kinds of banks. There are
national banks, state banks, and central banks. The Federal Reserve Bank is
the United States government’s central bank. The Bank of England is
England’s central bank."
Suddenly, what this essay told us earlier
disappears. We were told that a bank was a business that competed with other
banks. But now we are told that the FED "decides how much money is in
circulation" and that it "may tell the [ordinary] banks to charge
more interest or keep more money in ‘reserve’".
Obviously, if the "central bank" has such
powers, it gets them from the government. Just as obviously, the
"central bank" is not a business and not in competition with other
banks if it exercises these and other powers over ordinary banks.
Furthermore, distinctions between monies that
ordinary free market banks deal in and the fiat money that central banks
produce are completely glossed over and erased.
This essay is representative of the usual thought in
the field of economics. Banks are businesses. But then all of a sudden there
is another so-called "bank" that has an array of powers that
business-banks do not have. This "bank" is actually a government
bureau. Its fiat money is made into legal tender by the government. The
government states that it stands behind this money. This "bank" has
powers to control and organize the ordinary banks into a cartel.
The facts I’ve pointed out are widely
recognized. There is a Wikipedia article titled "central bank" that confirms this:
"A central bank, reserve bank, or monetary
authority is a public institution that usually issues the currency, regulates
the money supply, and controls the interest rates in a country. Central banks
often also oversee the commercial banking system of their respective
countries. In contrast to a commercial bank, a central bank possesses a
monopoly on printing the national currency, which usually serves as the
nation's legal tender".
This too makes it very clear that a "central
bank" is not a bank, but a powerful Monetary Authority and Fiat Money
However, the same Wikipedia article almost
immediately contradicts itself when it states:
"Central banks in most developed nations are
independent in that they operate under rules designed to render them free
from political interference."
How can a bureau that is established by the
government and possesses extraordinary powers be independent and free from
political interference? The "central bank" embodies political
And to the extent that a Monetary Authority such as
the FED has been granted powers that it can exercise free of political
interference, how can such an institution be held accountable? How can it
operate without being responsible to the government and indirectly to the
"Central bank" independence is to a large
extent a myth, that is, in the essence of the institution; and in those
activities in which it is not mythical, it is an unaccountable power.
It may seem as if I am splitting hairs, but what I
see is that the common explanations of central banking confuse banking as
might occur in free markets with so-called banking as executed by a
"central bank" that is empowered by government. They are two
entirely different kinds of operations. A thoughtful or questioning reader is
bound to feel a degree of discomfort when he encounters these explanations
that blur important distinctions.
A "central bank" is a government
department. It is a government bureau. It is the government’s fiat
money bureau. The "central bank" is the government’s
money-printing machinery or money-printing organization or money-printing
bureau or money-printing agency. As contrasted with monies produced in a free
market, the FED’s money is state-produced "money". In the
sense of comparing the FED’s money to free-market money, it is
counterfeit. It is held up by the force of government law and power. It is
imposed on the public.
A more accurate term for the FED might be the Fiat
Money Administration. Perhaps the term Monetary Authority would be more
accurate. It would be more accurate if the latter were the official name. In
the U.S. Constitution, at least, it is clear that there is no power to create
a Monetary Authority, and, if there were such a power, it could not possibly
be delegated in such a way as to make that Monetary Authority independent.
The "central bank" is not a real bank.
Everything about it is permeated with government power.
At the heart of the financial and monetary system of
a nation that is supposed to be an exemplar of free markets is a government
Michael S. Rozeff