Trivia questions: 1. Name countries today without a central bank. Even North Korea has one. 2. Count the market crashes in the 1800s. Extra bonus if you can approximate how many different currencies/notes were legal tender during the 1800s in the USA.
I find it an interesting to observe the difference in knowledge of the Central Bank between most citizens and those relatively few actively engaged in trading financial instruments. Very few people you might randomly meet on the street have any knowledge whatsoever about their Central Bank, what it does, who regulates it and it's inseparable relation to the Treasury. In fact, it is they themselves that regulate the Central Bank, quite indirectly through their representatives in Congress. In stark contrast to typical citizens' total lack of knowledge, traders in financial instruments -- particularly those who trade stocks and options, and to a lesser extent bonds -- appear to me to have a predilection to harbor, with unaccountable certainty, a mountain of misinformation concerning their Central Bank. It's a clear case of some knowledge being worse than none at all. Those that fall in the latter group are often stuck in a distant pre-1930s past with regard to central bank operation. They have no idea that the fed is regularly audited both internally and externally, that is is actually an independent branch of the Treasury -- which can only be fully appreciated by examining the consolidated books of both agencies -- that Central Bank profits flow directly back to the Treasury, that the books of both agencies are part of the public record accessible to all -- often in nearly real time, but sometimes with a delay. Some even believe the central bank is privately owned for private profit! They will point to the Branch banks being run by representatives of the private banking system and to the "stock" that member banks must buy -- a relic of the old fed. They ignore that that "stock" is very different from their own Google stock. In reality, the Branch fed banks are the working banks that handle the day to day operations of the Central Bank. They are the bankers for the private banks in their district. They provide for daily check clearing through both Treasury and Private Bank reserve accounts, the bond trading operations via which aggregate reserve balances are adjusted to target the Fed Funds rate, i.e., the wholesale price of money, and the other day to day functioning needed to regulate, support, coordinate and oversee the nations private, for profit banks. They also assist the Treasury in seeing that the nation's economy has neither too much nor to little money to carry on commerce . They have dot-org internet addresses. These branch banks also support vast amounts of published, economic research via the many Ph.D. Economists they hire. A valuable, but non-remunerative activity, that most private banks would be reluctant to fund. The U.S. Central Bank is a model for much of the world. Because of it, none of us will ever have to worry whether the bank we use is solvent. As long as we have deposited enough to cover the checks we write, our checks will always clear, regardless of whether the bank we write them on is solvent. The U.S. Treasury, and by extension the Central Bank, can never run out of money, because the Government is the source of money, although not the complete source of its value. The Government has unlimited ability to both add and subtract money from the private sector economy. Through mismanagement by the legislative and executive branches of government, money could lose its purchasing value, but government can not go bankrupt. There is little, realistic danger of your grand children being saddled with unconscionable debt, or social security being unable to pay your pension. The future dangers lie in something more fundamental. Money is worth what it can be exchanged for. In the past, there was a more direct link between labor and productivity, therefore it was reasonable after 1971, to regard the U.S. monetary system as on a labor standard. With technological advances, labor and productivity have become increasing detached through automation. Our decreasing labor force and increasing productivity is telling us that. Today's reality is that our fiat money is on a productivity standard. The critical factors are both the amount and distribution of money in society relative to the amount of goods and services to be purchased with that money. The former is what the Treasury and fed working together must wisely manage; the latter what the people, Congress and the President are jointly responsible for. Our individual, state's, and local government's finances have nothing to do with federal finances. We make a mistake whenever we conflate these and say for example, "Social Security is never going to be there when I need it," or my grand children are going to be saddled with unconscionable debt, etc. These sentiments and worries are not justified by what we know of modern fiat money and its management by government. It's worry based on our experiences with personal finances. But these experiences don't apply to government finances. What does matter is how adroitly the government supplies money into the economy when it is needed and how adroitly it removes it, or redistributes it, for example between reserve accounts and bonds, when there is too much. To accomplish these things, we have given our government the responsibility of supplying and removing money to and from our economy without causing either untoward inflation or hardship and depression. And, importantly, we have also given our government, whether we think about it our not, the power to influence the distribution of money in our society. The latter is something I expect to be the subject of much active political debate going forward.
Friedman and Schwartz have their place. As a fellow U of Chicago alum it pains me to say that Friedman was wrong about certain things. And leaving capitalism up to the “free market” unencumbered machinations (Avarice) of Investment Banks clearly isn’t a great idea.
Your argument is good so I threw you a like. I'm not against the concept of a central bank as long as it's controlled by the people they elected. A public central bank has some utility - in fact the exact utility you described - a guarantee checks will clear despite bank insolvency. But do not mix up a public, government-owned, central bank with what we have now a privately owned central bank with a subset of elected officials ranked below the decision makers. The people at the top are not elected - this is the premise of my entire end the fed argument. The representing body of the fed is composed of banks, a small set of people who represent "commerce", and a small handful of people appointed by the president. An institution of it's magnitude should be able to be audited by anyone at any time. Every single formula they use should face the scrutiny of highly trained economists across the country. The vast majority of the fed is private. Whereas the "fed members get rich on fed stock" is false prima facie due the 6% cap on profit, this does not negate the political rivalries and secondary loyalties these non-elected officials may or may not possess. Yes that is a fair counter point. The avarice of investment banks, and really corporations in general, are a reason the libertarian free market cannot manifest itself totally. I believe in the free market in it's true definition. The problem is I also know the fallibility of humans.
Milton Friedman had it right. let the money supply grow automatically 3% per year. This will lead to price stability. That the Fed has two mandates to maintain price stability and full employment can only lead to political interference as current events now show. The mandate for price stability is forgotten. That the Fed can predict the future better than millions of market participants only proves that Phds are lousy forecasters. That the Fed can repeal the business cycle is one of the biggest crock of nonsense ever perpetuated on the public. The piper will be paid when current Fed actions lead to high inflation and instability in the economy. When inflation comes business and people are not interested in increasing productivity but in gaming the system to maintain the value of their assets and purchasing power of their money.