If there are arguments by one of the sides for the Fed, I would love to hear them. Rothbard mentions one of them: the Federal Reserve is our main weapon in the fight against inflation. Such an argument is dashed as Rothbard points out that the Federal Reserve is THE CAUSE for inflation.
Really? Is it that simple? What other causes of inflation might there be? I'm pretty sure the elementary definition of inflation is "the increase in the money supply." If that's the case, I know I'm not allowed to increase the money supply, at least not paper money. That power is reserved for the Fed, you know, the one engaged in the fight against "the increase in the money supply." Seems contradictory, no matter how many times I say it.
A lot of the money out there exists as digital numbers. How does that change things...?
Gee, that is the exact argument that I was hoping to post on, but I totally disagreed with Rothbard's simplified description of the creation of money.
ReplyDeletePrinted currency is such a small percentage of the actual money supply, less than a 1/10th (see graph below). Much more is created through digital numbers and fractional lending. When a bank makes a loan with only 5% reserves, they are creating money much more quickly than the FED can print bills.
So, there is indeed a need for an entity that can change interest rates and decide the reserves banks must hold. You could argue that banks may be able to control this themselves, but each bank working independently and focusing on maximizing their own profits would not be concerned about the overall money supply.
Here is a link to our money supply graph:
http://en.wikipedia.org/wiki/File:Components_of_the_United_States_money_supply2.svg
I find the reserve rate altogether fascinating. Remove all the current day complexities of banks, maybe like it would have been in Butch Cassidy days, did they look anything the same as what we have now? Just curious. After using such finance mechanisms as lendingclub.com to loan and get loans, I really like seeing money flow in ways that are very conceptual to anyone.
ReplyDeleteI’ll be the first to raise my fist and resist - there are flaws in the system. However, I can’t agree with the statement Rothbard makes “what we need is no fed at all”. Yes, too much government interference does hurt capital markets. Capital markets do find balance naturally through supply and demand. However, simply to strip the central banking system, would be a mistake. Questions arise on how a national/global economy would function. One of the largest in my mind, what would we use as a medium of exchange? The barter system? How would we hold a dollar at constant value? Each bank may have its own standard right, gold standard, silver standard, maybe oil standard? With the amount of trade today, you need a regulated medium of exchange. An institution is needed to regulate the flow and control of money – hence we have the federal reserve.
ReplyDeleteAdditionally, the federal reserve attempts to regulate the private banking industry –reserve requirements, discount rate, etc . 1) Without such regulation, each bank would expand or contract credit based on their immediate business needs, not requirements set by an organization “the fed” attempting to maximize public wellbeing. 2) Smaller banks would be dependent on larger banks for credit extensions, currency, etc. History has shown that larger banks often consider smaller banks as competition and don't care if they fail. 3) There would be no elasticity to the currency. Hence, you would see increased cycles of inflation/deflation, and boom/busts… only it would be real difficult to pull out of the busts. 4) Banks would return to being audited soley by themselves in their shareholders interest. I can’t imagine the number of rising bank failures with no regulation. Greed runs high enough with regulation. If anything, I’d argue for more regulation of private banks -increase reserve requirements, no off-balance sheet repo 105 transactions, etc.
With no attempt at regulation, where would my money safe? That’s right, we don’t have money.
http://fee.org/media/audio/why-fractional-reserve-banking-is-more-libertarian-than-the-gold-standard/
ReplyDeleteJeff says, "Printed currency is such a small percentage of the actual money supply, less than a 1/10th (see graph below). Much more is created through digital numbers and fractional lending. When a bank makes a loan with only 5% reserves, they are creating money much more quickly than the FED can print bills.
ReplyDeleteSo, there is indeed a need for an entity that can change interest rates and decide the reserves banks must hold."
Sounds to me like the issue would be the ability to create money via fractional reserve banking. Then, indeed, there would be no need for a price-controlling institution such as the Fed, that tries to fix the price of lending, or interest rates.
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ReplyDeleteHow would you regulate currency without a central bank? Why would banks use the same currency? What gaurantee would they have that the dollar they use is legit? Prior to a central bank, hundreds of currency existed just in the US.
ReplyDelete2nd w/o a central bank WHO would set reserve requirements. Fractional banking aside, why would a private bank hold any reserves? I think they would over leverage.
To strip regulation is an ignorant mistake.