The Money Bubble by Turk James & Rubino John

Author:Turk, James & Rubino, John [Turk, James]
Language: eng
Format: epub
Publisher: DollarCollapse Press
Published: 2013-12-14T23:00:00+00:00

CHAPTER 16

CENTRAL BANKS TAKE OVER THE WORLD

“The only viable solution for monetary stability is to get government out of the money business permanently. The way to bring this about is through currency competition: allowing parallel currencies to circulate without any one currency receiving any special recognition or favor from the government.”

– Ron Paul

Early in the development of fractional reserve banking, the system’s inherent instability became apparent to the goldsmiths cum bankers, who after all were personally threatened by bank runs. They convinced governments to create a new kind of bank, called a central bank, to act as a lender of last resort to prevent bank runs from spreading. The Bank of England, for example, was founded in 1694 when London bankers enticed the British monarchy, then near bankruptcy because of endless wars with France and rebellious Scots, to finance its military adventures with borrowed money. But from a banker’s point of view the central bank’s real job was to prevent individual lenders’ bad decisions from threatening the rest of the financial community.

The central bank concept soon spread to the rest of Europe, and by the end of the 19th century every major country except the United States had some form of central bank. And the US was not far behind. Though the 19th century was a period of exceptionally high, non-inflationary growth for America, it was also a time of periodic bank panics which both bankers and governments found disquieting. So after a contentious debate and considerable behind-the-scenes maneuvering3, the Federal Reserve was created in 1913.

By today’s standards these original central banks were limited in both power and objective; their main goal was to moderate the inherent instability of fractional reserve banking. But like commercial banks, over the years they’ve evolved into something different and much more dangerous. The main themes of their evolution:

Replacement of Gold with Paper

During the Classical Gold Standard, which ran from 1700 to 1914, banknotes circulating as currency were, in effect, warehouse receipts for a nation’s precious metal reserves. Put another way, the dollar, pound, and franc were simply names for different weights of gold or silver. The central bank’s other job (besides intervening to keep bank failures from spreading) was to issue the paper that circulated as a “money substitute” and to stand ready to exchange metal for paper at the discretion of currency holders.

Countries, meanwhile, were required to ship gold from their reserves to their trading partners to make up for trade deficits. These flows moderated differences in national economic growth rates by moving gold from fast-growing countries to slow-growing, thus lowering the money supply of the former while increasing it for the latter. This constant circulation of central bank reserves didn’t prevent booms and busts but did limit their damage. Consumer prices actually fell a bit each year, mainly as a result of technological developments that enhanced production, meaning that money was becoming more and more valuable – it was gaining rather than losing purchasing power. Thus encouraged, savers saved and investors invested,

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