The History (And Rising Power) Of Central Banks

Authored by Alex Deluce via GoldTelegraph.com,

Until the early twentieth century, the purpose of central banks was to stabilize and control the value of the currency. When currency was backed by gold, that was reasonably easy to do. The amount of money placed into circulation was limited to the amount of gold held in reserve. By the early twentieth century, however, countries, including the U.S. shifted away from a gold-backed currency to fiat money. This changed the functions of central banks from stabilizing currency to actively affecting global economic decisions.

When Great Britain gave the Bank of England the power to determine interest rates twenty-one years ago, a questionable and dangerous trend was confirmed. The role of central bankers changed from bit players in the economic realm to all-powerful stars on the global stage. This trend has continued as central banks are buying up billions of dollars in assets and determining and managing policies far beyond economics. The Reserve Bank of India has opined on religious tolerance, while the Bank of England has been vocal on the subject of climate change. As a result, central banks have been criticized for overstepping their role as a monetary stabilizer to determining economic policies, as they widely did during and after the 2008 financial crisis.

Since the 17th century, the powers of central banks have fluctuated. Much of these powers were given or restricted by the needs of governments, who demanded stabilization of currency, protection against inflation, and manipulation of global policies. Bankers have been seen as experts, and governments have happily used them when it suited their needs. The relationship between government and central banks has become so symbiotic, it is frequently difficult to determine which entity holds the real power.

Since the Federal Reserve was established in 1913, it has had its hands in manipulating the Great Depression, the inflation of the 1960s, and the financial crisis of 2008. Instead of allowing market forces to stabilize the economy, the Federal Reserve has become an active participant, working hand in glove with the government to achieve its ever-changing goals.

Perhaps William III of England (and the Netherlands) opened the floodgates. When King William, who desperately needed funds after invading England at the request of Parliament, he created his own bank, the Bank of England, which was then a private organization. In return, he allowed the bank to issue banknotes and trade in bonds.

A few decades later, John Law persuaded the then child-king Louis V to establish a central bank in France and had all revenues paid from a bank. John Law convinced the hapless monarch that this would fill empty coffers and help alleviate financial difficulties.

The bank took over the country’s debts, while its investors traded bank bonds for shares in what was known as the Missouri Company. John Law’s financial scheme caused the financial ruin of many French citizens, and currency became gold-backed. A lesson learned the hard way.

While John Law’s and King Louie V’s plans came to naught, it did demonstrate the usefulness of paper money in a trade vs. gold. Paper was easier to use and carry. While less reliable than gold, when the paper currency was issued by a central bank, it was deemed as trustworthy. From the government’s perspective, issuing money at an inflated value was a nice benefit when it came time to pay off its debts since the debt to be paid off automatically decreased in value. As someone might have said, it’s good to be king.

America’s first Secretary of the Treasury, Alexander Hamilton, looked to Europe for guidance as he faced unchartered financial territory. He supported a powerful central bank to stabilize the currency and help the new U.S. economy to thrive. His was a minority view. Hamilton’s opponents saw any centralized power as a new danger. In the current popular musical “Hamilton,” Thomas Jefferson says derisively, “But Hamilton forgets/His plan would have the government assume state’s debts/Now, place your bets as to who that benefits/The very seat of government where Hamilton sits.” Hamilton won the fight, but his central bank lasted for only 20 years.

Jefferson was not the only one suspicious of central banks. It was believed that such government banks would favor lenders over debtors. The Bank of England moved to the gold standard, which allowed bank notes to be exchanged for the precious metal. This policy ensured that currency remained stable and could be not manipulated. This lasted until 1825.

In France, gold-backed currency was abolished during the chaos of the Napoleonic wars. As a result, inflation was out-of-control and debt spiraled. France learned its lesson the hard way and restored the gold standard in 1819. Financial stability was restored for decades, although the central bank was forced to raise interest to attract foreign investors. This hurt the working poor more than the wealthy, but only property owners had the right to vote. France set its priorities accordingly.

By the 19thcentury, central banks expanded their powers in the area of crisis management. The freedom inherent in capitalism brought with it great financial fluctuations and could lead to panic. In 1825, the British economy crashed following questionable investments in dubious South American enterprises. The Bank of England entered the fray as the “lender of last resort.” It was able to lend money to solvent banks at high interest rates. This involved increasing the supply of money, which was contrary to the purpose of the central bank.

This “lender of last resort” concept caught on. Following the creation of the Federal Reserve, it was quickly placed in crisis mode by WWI. The Bank of England refused to exchange banknotes for gold, a policy which still partially exist to the current day.  Most other countries simply printed money at an alarming rate, only to experience inflation and hyperinflation, as in the Weimar Republic.

If central banks mismanaged money during the post WWI era, it continued its manipulations in the 1930s. During the Great Depression, almost half of American banks collapsed, along with their customers’ assets.

Following WWII, the Federal Reserve continued its easy monetary policy, despite the resultant inflation. President Truman wanted Fed Chairman Martin to maintain low rates, but Martin had no such intension, thereby causing further inflation. President Johnson resorted to bullying Martin. President Nixon used the power of the press to leak false rumors about Martin’s successor, Arthur Burns. President Nixon proved to be the champion bully of the three heads of state and won that round. Interest rates were kept low. The post-WWII era saw the power of central banks increase as they went head to head with their own governments.

Many central banks have become more independent of their governments. This has led to increased power, and economic chaos, global debt and inflation continues almost unabated. The central banks’ response of the 2008 financial crisis, which was to create new fiat currency as fast as the printing presses would allow, placed the recovery emphasis on bailing out banks rather than helping the economy, as a policy labeled, “favoring Wall Street over Main Street.”

The initial purpose of central banks has clearly changed as their powers and responsibilities have broadened. They have become crisis managers, but have not always proven effective in that role. What their future role will be is uncertain. But once power is acquired, it is rarely given up easily.

Since the 2008 financial crisis, the Federal Reserve’s balance sheet, consisting of assets, liabilities, and equity, has come under closer scrutiny.

As indicated in the chart above, central banks have increased their assets considerably since 2008. At $4.476 trillion, the Federal Reserve assets comprise 23 percent of GDP. That number is actually low when compared to the 93 percent held by the Bank of Japan.

The big question is, who will bail out the central banks this time around in the “everything bubble?” 

Comments

Quantify Mon, 06/11/2018 - 18:18 Permalink

Overpopulation causes these issues. A fake currency is required as humans outstrip resources. You can't assign real assets to a currency as there just isn't enough to go around. The population HAS to be reduced, and starting with the bankers.

J S Bach gigadeath Mon, 06/11/2018 - 18:51 Permalink

"In the last few decades, the role of central bankers changed from bit players in the economic realm to all-powerful stars on the global stage."

What's this author been smoking?!  Uh, sorry fella, but central banksters - ala Rothschild and company - have been the MAJOR LEAGUE players in the economic realm for 3 centuries.  They have fomented and directed all wars and caused recessions, depressions and booms at their own personal whims by contracting and expanding credit.

To say that they have been "bit players" is sheer stupidity.

In reply to by gigadeath

Rapunzal 1 Alabama Mon, 06/11/2018 - 19:17 Permalink

All central banks are owned by the Rothschilds, they bleed out the people of this planet. The Rockefellers are controlling the oil, to this day. They are bleeding out the people as well. All politicians are puppets to those families. Everything that happens in politics is planned decades ahead. Nothing is a coincidence. All just a muppet show to control the sheeple 

In reply to by 1 Alabama

Escrava Isaura Rapunzal Mon, 06/11/2018 - 19:39 Permalink

The sheeple can fix these.

The problem is not the Central Bank(s).

The problem are the PRIVATE financial institutions ‘Wall Street/investment bankers’ and PRIVATE MONEY that carries INTEREST RATE.

America needs INTEREST FREE money and DEFICIT SPENDING supported by reserves and not bonds.

 

Stubborn conservatives need to get this over their heads, stop their flawed think: Sovereign money is the only alternative left to avoid a depression and starvation.

 

People to learn from:

Warren Mosler

 

In reply to by Rapunzal

CriticalUser Escrava Isaura Mon, 06/11/2018 - 20:32 Permalink

That's silly, without interest borrowers would want to borrow as much as possible, whereas lenders wouldn't want to lend their money, if that doesn't generate more than when sitting idle but secure in a vault/account without default risk. Total disconnect.

Ow and Rapunzel, your claims that "central banks are owned by the Rothschilds" and that "the Rockefellers are controlling the oil" are underlining your shameless and profound lack of understanding of the subject. Try to learn about these interesting matters through credible books and scholars, instead of shady blogz and youtube vidz. I've seen some of them out of curiousity, they're an insult to intelligence and critical thought, it's not even funny any more.

 

In reply to by Escrava Isaura

Escrava Isaura CriticalUser Mon, 06/11/2018 - 20:58 Permalink

I guess you never read the bible that usury is sin.

Second, Sovereign money you won’t need bank lending even less interest rates that drains money from the economy. Banks will be allowed just to collect a monthly fee to hold the deposits and cash checks. No more getting rich of securities/stocks/bonds schemes.

Because there’s no bond issuance, there’s no drainage, meaning no recession. Excessive money, inflation, if needed, can be drained through taxation.

 

Again, people to learn form:

Warren Mosler

Richard Werner

 

In reply to by CriticalUser

daemon CriticalUser Tue, 06/12/2018 - 00:05 Permalink

"That's silly, without interest borrowers would want to borrow as much as possible, whereas lenders wouldn't want to lend their money, if that doesn't generate more than when sitting idle but secure in a vault/account without default risk. "

But, if I understand correctly ( I'm not too sure about that, by the way ), you are saying that the current system, where the US government borrow money from the Federal reserve at some interest rate,   .... is a good system ? :-)

In reply to by CriticalUser

Quantify indygo55 Tue, 06/12/2018 - 08:08 Permalink

A Zionist is merely a Jew who believes they have the right to their own country. I don't disagree with that.

Definition: a supporter of Zionism; a person who believes in the development and protection of a Jewish nation in what is now Israel. Just as I think Europe should remain European. Russia - Russian, Asia - Asian and Africa - African..etc.  The world is better off with different cultures and those culture's keeping their own identities.  

In reply to by indygo55

Raging Debate Quantify Mon, 06/11/2018 - 18:54 Permalink

NO. Birth control is changing this dynamic and is proven fact. Even poor.can afford the pill and do so. When better politics (never perfect) raise incomes so does the birth rate and subsequent consumption. People have limited needs but unlimited wants consume and drive intellectual advancements based on need and want. Fuck off with your uneducated or disingenuous ass. Central banking is a fig leaf for the political system. The government has the guns. Congress can and should end central bankinv and stop being so lazy and greedy being bought. They need to learn basic economics they do not need to learn algrebra, trig or other math involved. Computing nowadays can do that for them and some grad students. Yes, end the private Federal Reserve bank. Treasury can step up and also stop being so lazy and greedy. 

In reply to by Quantify

Endgame Napoleon Quantify Mon, 06/11/2018 - 18:58 Permalink

How about the less evil choice of removing the ever-expanding taxpayer-financed fiat infusions that increase per child born to compete with robots for scarce jobs? It is like politicians took Milton Friedman’s advice about throwing money at the banks in a crisis, applying it instead to the delivery room. In a financial crisis, throw money at the productive wombs.

It is not working.

This was an informative article, though. It is time to do the reactionary thing, returning to the gold standard, but just dividing up the blocks of gold differently since there is a bigger population. Why couldn’t less physical gold represent more units of value? 

In reply to by Quantify

Pollygotacracker Quantify Mon, 06/11/2018 - 18:57 Permalink

If you can't feed 'em, don't breed 'em.

If you reward people for a certain action or behavior you will get more of the same.

Population used to be controlled by natural selection and such.

Now, the government supports everybody, no matter how useless or worthless. You get more and more useless worthless people.

Not hard to wrap your mind around.

In reply to by Quantify

LawsofPhysics Mon, 06/11/2018 - 18:20 Permalink

Absolute power corrupts, absolutely...

Don't like bankers and financiers who give themselves access to all the money they want with no real work, no real risk, and no real collateral requirements?

Stop accepting their fiat currency in exchange for the products of your labor you dumb fuck!

Ms No Mon, 06/11/2018 - 18:23 Permalink

People can keep repeating that their intention was to stabilize all they want and it will still never be true.  Control yes, stabilize no.  

They are taking everybody to ruin.  That's all they have ever done.  They seize more power with every cycle. 

t0mmyBerg Mon, 06/11/2018 - 18:24 Permalink

Look I hate the Fed and the other CBs.  But you have to do things like spell correctly (intensions), get your logic right (same sentence makes no sense) and your facts (Louis V [5th], really?).  Fairly sophomoric article.  End the central banks and their outdated price control boards setting the price of overnight reserves.

Endgame Napoleon t0mmyBerg Mon, 06/11/2018 - 19:33 Permalink

Content is more important than typos. It was not the “do-nothing” king. These kings were too young to assume power for years, but it was under the broader historical umbrella of the ruler with the best furniture, the XV, assuming you prefer curvilinear styles. Some prefer the simpler, more geometrical look of the XVI, but we all know what happened to him, poor thing. As an individual just born into that situation, he really did not deserve what he got. He was not even unsympathetic to the common Frenchmen. But even back then, the math guys behind the scenes apparently had all the real control, as this article was pointing out. Strangely, this guy was a goldsmith’s son. 

https://en.m.wikipedia.org/wiki/John_Law_(economist)

 

 

In reply to by t0mmyBerg

Hubbs venturen Mon, 06/11/2018 - 18:44 Permalink

One thing for sure, the list of people who wished they had guns is growing:

Rioters in London trying to free Tommy

Terrified citizens of other countries where MENA invasion has established sharia law cities with assaults on citizens: Sweden, Germany ,etc.

White South African  farmers facing brutal muder and land confiscation

Venezuela where army has degenerated into thugs and looters taking from the people.

 

 

 

In reply to by venturen

overmedicatedu… Mon, 06/11/2018 - 18:33 Permalink

funny how the CB's have saved the elite wealthy time and time again..just coincidence I am sure.

modern economics based on the simple crime..concentration of wealth into fewer and fewer hands..

thats why economist's theory is  like  old propaganda ..the lies have become so obvious there is no way to make a logical case.