Le Québécois Libre, March 15, 2010, No 276.
A good start to understanding the real nature of central banking is the libertarian bumper sticker saying "Don't steal! The government hates competition." The whole purpose of the bureaucratic machine called central bank is indeed to steal from us.
How does it do this? By constantly printing money (or, nowadays, creating it out of electronic bits on computers) and increasing the money supply, thereby creating inflation.
When you get to the Bank of Canada's Web site, it says "We are Canada's central bank. We work to preserve the value of money by keeping inflation low and stable." Do a little search on the same Web site, however, and you discover that since the Bank started its operations in 1935, the dollar has lost about 94% of its value. A basket of goods and services that cost $100 in 1935 would cost $1600 today. That's some preservation!
Counterfeiting is understandably illegal and punishable by law. But central bankers do it all the time, the only difference being that they have a legal stick―their dollars are the only permitted legal tender―and they deploy a huge propaganda machine to force us to accept their funny money.
There are big stakes involved. Inflation is a way for governments to spend more without having to directly impose taxes. A central bank is an essential part of big government.
Central banking operations also serve as a permanent bailout for debtors. Interest rates are usually kept lower than they would be in a free financial market. And by reducing the value of the money being owed, they make life easier for debtors. So the modern era of central banking is one where debt, public and private, inexorably grows, to the point where the whole monetary edifice now threatens to collapse.
Finally, central banks protect the reckless practices of financial institutions, who lend money that they don't have under the fraudulent fractional reserve system. With government acting as a lender of last resort, financial institutions are prone to taking greater and greater risks. As we've seen recently, wads of cheap cash are always at their disposal to keep them solvent and profitable.
It's interesting to read (in A History of the Canadian Dollar, a little book produced by the Bank) that the reason Canada went off the gold standard in 1914 was to rescue insolvent commercial banks. "On 3 August 1914, an emergency meeting was held in Ottawa between the government and the Canadian Bankers Association to discuss the crisis. Later that day, an Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender." Take my money, or else.
That 1914 move off the gold standard became one of the major steps towards creation of the Bank of Canada in 1935 and the full nationalization of money in Canada.
All the gobbledegook that passes for monetary economics nowadays aims to obscure the basic economic fact that central banks make us poorer. The Bank of Canada's archives contain endless studies about ways to calculate money supply, fancy rules on how to manipulate interest rates, etc. This scholarship is supposed to help central bank bureaucrats better "preserve the value of money" when, in fact, the very existence of the Bank is the reason why money gets devalued.
For decades now, anyone raising issues about this has been tagged as a crank. Debates about monetary policy are monopolized by a handful of economists speaking in unintelligible jargon, almost all of them working at central or commercial banks or related one way or another to the network of central bank beneficiaries, as research in the U.S. has shown.
What is most amazing is that even most economists who claim to support free markets―apart from a small group who adhere to the Austrian School―approve of central banking, especially in times of crisis. But even if it were true that "flooding markets with liquidities" could kick-start the economy, this logically implies a fundamental violation of property rights and should be unacceptable to them.
Previous eras understood this much better than today, as the heated debates surrounding the creation and abolition of the two first banks of the United States attest. In a sane world, central banking would be considered an act of expropriation and would be abolished. Let's hope that carrying an explanation to its logical conclusions will one day become part of the economics curriculum.
* This article was first published on March 11, 2010, in the Financial Post. **Martin Masse is publisher of QL.