Paul Zarembka wrote: > Libertarians make a case the controllers of economies are the Central Banks > which becomes the sole source of making money payments, that they create > money and lend AT INTEREST, that the requirements to paying debt with > interest creates the need for more money, more debt and even more control > of the economy by the Central Bank. The magnifying debt enslaves the > economy to the Central Bank's desires. ... > > Has anyone seen a good analysis of such an argument? It is true that the > Federal Reserve, after printing money, places it on the market at interest > (if it is more than the replacement of worn-out currency).
I don't know of a good analysis, but here's an attempt. The Fed increases the country's (and world's) supply of money in two main ways. First, it lends money to banks at the "discount window." It earns interest on these loans (at the discount rate). Second, it buys government bonds from the banks (as part of an open market operation), replacing them in the banks' coffers with bank reserves. Less commonly, it can increase the money supply by reducing the amount of reserves that banks are required to hold to back up their deposits. Then, the banks can create more money in circulation. Both of the first two tools increase the banks' reserves, which are essentially entries in the banks' books (on the asset side). (Discount loans also add to the banks' liability side, while the banks' sales of government bonds reduce the asset side at the same time that the reserves add to it.) It's only when these reserves are lent to people and companies that money will be "printed." Bank reserves represent liabilities of the Fed and banks can cash them in, turning them into currency. The Fed isn't required to balance its check-book, so it can just print money if the banks do a lot of this cashing. The Fed earns income mostly from its ownership of government bonds and (to a lesser extent) its discount loans. These earnings are lavish (or at least they told me they were when I worked -- as a clerk! -- at the Chicago Fed). A big chunk of that interest is then paid to _the Federal government_. I don't have the data here, but I'm sure the Fed's web-site has them. The libertarians are right that Central Banks replace the gold standard or a pure specie-based economy with fiat money. This, I think, is what the libertarians are pissed about: they'd prefer a system where the entire economy was guided by the invisible hand of the market. Do the CBs "create money and lend AT INTEREST"? some of the money creation involves lending in return for interest, but not all. Do "the requirements to paying debt with interest creates the need for more money, more debt and even more control of the economy by the Central Bank"? Having a growing economy with a financial system of any sort requires borrowing and payment of interest (unless we switch over to "Islamic banking," under which bankers are supposed to get ownership of part of the equity of their clients and thus receive dividends). Any growth of production requires the issuance of more fiat money unless (1) we want to have deflation or (2) the velocity of money is increasing fast enough (due to financial innovation). The last part of the quote tells us that the Fed is getting more and more control over the economy (as the "magnifying debt enslaves the economy to the Central Bank's desires"). But the Fed doesn't really control the economy. Instead, it controls short-term interest rates, which have an indirect effect on the economy, being better at fighting inflation than at ending recessions. and what are the Central Bank's desires? my impression is that it responds to the wants and needs of the biggest financial capitalists and to smaller financiers when they are well-organized, and even to the working class when they are militant. The financial capitalists are quite opposed to inflation. (It's only a small group who profit from inflation and want it to be increased or extended.) So the libertarians should be quite happy: the folks in power share one of their goals. I am sorry if the above seems a tad patronizing. As usual, I aim my missives at the general reader rather than at professonal economists. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
