Can you imagine a world without a central bank? A world where money is free and not controlled by the government. A world where everyone can choose the currency that suits them best and does not have to depend on inflation, taxes and regulations. A world where the market regulates itself and there is no state intervention.
Well, that is the dream of many libertarians and conservatives who want to abolish the Federal Reserve of the United States, the central bank of that country. They believe that the creation of the central bank has been detrimental and that “Keynesian liberalism” has been detrimental because of the statism it imposes.. They are reactionaries who want to preserve an order that no longer exists. They basically think that the future must be a return to the past.
What was the past like? Well, in the past it certainly wasn’t all bad. However, we cannot say that it was an earthly paradise either. It was a past of crisis, poverty, inequality, instability, war and exploitation. It was a past in which money was scarce, volatile and manipulable. It was a past in which the market was chaotic, unfair and violent.
What about the youth of today? They always want to change things. And they believe they are great fighters for justice. And in the process they are willing to destroy everything. They don’t have much respect for past struggles. They think that history began with them. But it’s not true. Time is older than a couple of generations.
Who’s in charge of money? This is a question that has caused many headaches throughout history. Because money is not only a means of payment, but also a symbol of power. And power attracts many and corrupts others.
There are two extreme ways to organize money: leave it totally in the hands of the private sector or totally in the hands of the state.. But neither of them works very well. Private companies can abuse their position and create bubbles or crises. The state can print money out of control and generate inflation or debt. Therefore, it is best to look for a middle ground: a hybrid system.
The hybrid system consists of an alliance between the private and the public. Private banks create money through loans, but they are supervised by the central bank, which is the one that sets the rules of the game. The central bank, in turn, is regulated by the government, which is the one that represents the people. And the government, well, the government does what it can.
And is the central bank private or public? For neither the one nor the other. It’s kind of a hybrid too. We learned that from the English. The central bank has some autonomy to make technical decisions, but it must also be accountable to society. It’s like a referee who has to be impartial, but sometimes makes a mistake or lets himself be influenced.
Before its creation in 1913, the country had a gold-based banking system, which was highly unstable and suffered from bank runs. The Federal Reserve was created to provide stability and supervision to the system, but it also generated opposition and criticism from some groups that saw it as a threat or a privilege.
The United States has been founded on money and commerce, rather than its military, government, or social elite. Not having European feudalism, their society was based on monetary relations. Before, money was issued by state and private banks, backed by gold. However, this system was highly vulnerable to manipulation and abuse, leading to frequent crises of confidence as some banks were fraudulent.
Before 1863, at the time of “free banking” or “wildcat banking”, as its detractors called it. Each bank printed its own banknotes with the design it wanted. Some were pretty, some were ugly, and some were fake. Customers had to trust that the bank would not run out of gold to back their notes. It was the dream of classical liberalism: the market took care of everything.
But that dream ended in 1863, when the federal government decided to create a monopoly on money and used it to finance the Civil War. He began printing greenbacks that had no intrinsic value, just the promise that one day they could be exchanged for gold. People reluctantly accepted them, hoping that day would come soon. But he didn’t arrive until 1879, and by then no one wanted to part with his beloved greenbacks. They had gotten used to them.
The Federal Reserve was created to prevent extremism. As I already said, in the United States there were two very different eras in terms of the monetary system. On the one hand, there was the civil war, where the government issued banknotes without a backing and caused great inflation. On the other hand, there was wild banking, where private banks did what they wanted with money and caused financial crises and panics. What to do in the face of these abuses? Well, find a middle ground, of course. This is how the Federal Reserve was born, an entity that regulates money and avoids extremes. No more fake bills or crazy banks. Well, that’s what it’s supposed to be, because sometimes he messes up too. But that is another story…
What happens when an institution does not fulfill its function? Well, people get angry and look for alternatives. That is what happens with the central banks, which are in charge of controlling money and avoiding crises. But sometimes they go too far and create more problems than solutions.. So some think that the solution is to go back in time, when private banks did whatever they wanted with money. But that’s not good either, because we already know how things ended: with panics, bankruptcies and chaos. Isn’t there a middle ground?
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