tokyo
12-28-2001, 10:16 AM
Who needs salt that is not salty? Who needs a doctor who does not want to heal patients? And who needs the Bank of Japan?
Like salt that never tastes salty, the central bank has for the past two decades consistently failed to do its job. Like a doctor who always makes his patients sicker than they already were, the central bank has consistently worsened the economic situation and the general standard of living. It is time to disband this useless institution.
But can an economy do without a central bank? Not so long ago, very few countries even had a central bank. The United States, for instance, did not have a central bank for much of its history. The U.S. Federal Reserve, now the most famous central bank in the world, also is one of the youngest: It was introduced only in 1913.
Who created the United States' money until then? The same institutions who still create the bulk of money worldwide today: the commercial banks. Before the arrival of central banks, private banks issued the paper money, which is why we still call the stuff "banknotes."
When did banks create the new paper money? For a long time, and in many countries, the paper money had an inscription saying that it was something like a certificate of deposit.
So, surely, the banks issued new paper money when money was deposited with them? Actually, no. When a deposit was made, the amount of banknotes did not increase. The banks only issued new paper slips when someone borrowed money from them. That was the beauty of paper money: The banks then simply pretended that the borrower had deposited money with the banks and the customer got a newly made deposit slip--although they had not actually made a deposit. Banks create money out of nothing when someone takes out a loan.
So who needs central banks? Strictly speaking, they are not necessary for the credit mechanism to work and for economic growth to take place. However, the problem with a system based on private banks printing money was that inevitably they would print too many paper slips. Depending on who got the new cash for what transactions, this would either push up the price of land and real estate--and thus deliver an asset inflation-based economic boom--or it would drive up consumer prices and hence create general inflation.
In either case, a boom would be followed by a slump, with a bust banking system. This is precisely what happened with a great deal of regularity over the past centuries in virtually all countries. The credit cycle of boom and bust was repeated over and over. And each time when the bust happened, banks wondered how one could avoid the downturn or end it faster.
Then the bankers came up with the idea to create a special bank. They told the politicians that its job was to prevent such excessive lending booms by controlling bank lending. In case a boom occurred, the central bank could prevent a major crisis and create a fast recovery.
The politicians and rulers were quickly convinced by the advantages, and so central banks were introduced in most countries about a hundred years or so ago. Now central banks have a monopoly on the creation of paper money, and the banks lost this ability. But this does not mean that banks do not create money any more. As before the introduction of central banks, paper money makes up only a small fraction of all money--today about 5 percent. The rest is still produced by the banks--just as before the arrival of central banks. Banks still do what they have always done: create the majority of the money in an economy. They do this when they extend new loans.
How could a central bank help, when a lending boom had once again produced a banking bust and a major economic recession? Without a central bank it would take a long time--usually a decade or so--for an economy to recover. Banks, burdened with bad debts, would not be able to extend new loans. As bank lending shrinks, overall demand falls. This produces more bankruptcies and unemployment, which in turn increases bad debts and makes banks even less able and willing to lend. As they reduce lending further, the economy moves down the deflationary spiral by another notch.
All this, the founders of central banks argued, could be avoided if there is a central bank. It could simply step in, bail out the banks by printing money and buying the bad debts and create a vigorous economic recovery within a year or so, by buying other assets and thus increasing the money circulating in the economy. There would be no need for large-scale unemployment.
This could be done by the central bank without incurring any costs or without using any tax money. It is possible, because the central bank's money has been made legal tender. Thus it can create as much of it as it wants without ever getting into financial difficulties. A central bank is a bank that cannot go bankrupt.
How about inflation? As every primary school kid knows, too much money leads to inflation. The existence of deflation is evidence that there is too little money. It is the job of the central bank to make sure that there is just enough money so that there is growth, without inflation or deflation.
Like salt that never tastes salty, the central bank has for the past two decades consistently failed to do its job. Like a doctor who always makes his patients sicker than they already were, the central bank has consistently worsened the economic situation and the general standard of living. It is time to disband this useless institution.
But can an economy do without a central bank? Not so long ago, very few countries even had a central bank. The United States, for instance, did not have a central bank for much of its history. The U.S. Federal Reserve, now the most famous central bank in the world, also is one of the youngest: It was introduced only in 1913.
Who created the United States' money until then? The same institutions who still create the bulk of money worldwide today: the commercial banks. Before the arrival of central banks, private banks issued the paper money, which is why we still call the stuff "banknotes."
When did banks create the new paper money? For a long time, and in many countries, the paper money had an inscription saying that it was something like a certificate of deposit.
So, surely, the banks issued new paper money when money was deposited with them? Actually, no. When a deposit was made, the amount of banknotes did not increase. The banks only issued new paper slips when someone borrowed money from them. That was the beauty of paper money: The banks then simply pretended that the borrower had deposited money with the banks and the customer got a newly made deposit slip--although they had not actually made a deposit. Banks create money out of nothing when someone takes out a loan.
So who needs central banks? Strictly speaking, they are not necessary for the credit mechanism to work and for economic growth to take place. However, the problem with a system based on private banks printing money was that inevitably they would print too many paper slips. Depending on who got the new cash for what transactions, this would either push up the price of land and real estate--and thus deliver an asset inflation-based economic boom--or it would drive up consumer prices and hence create general inflation.
In either case, a boom would be followed by a slump, with a bust banking system. This is precisely what happened with a great deal of regularity over the past centuries in virtually all countries. The credit cycle of boom and bust was repeated over and over. And each time when the bust happened, banks wondered how one could avoid the downturn or end it faster.
Then the bankers came up with the idea to create a special bank. They told the politicians that its job was to prevent such excessive lending booms by controlling bank lending. In case a boom occurred, the central bank could prevent a major crisis and create a fast recovery.
The politicians and rulers were quickly convinced by the advantages, and so central banks were introduced in most countries about a hundred years or so ago. Now central banks have a monopoly on the creation of paper money, and the banks lost this ability. But this does not mean that banks do not create money any more. As before the introduction of central banks, paper money makes up only a small fraction of all money--today about 5 percent. The rest is still produced by the banks--just as before the arrival of central banks. Banks still do what they have always done: create the majority of the money in an economy. They do this when they extend new loans.
How could a central bank help, when a lending boom had once again produced a banking bust and a major economic recession? Without a central bank it would take a long time--usually a decade or so--for an economy to recover. Banks, burdened with bad debts, would not be able to extend new loans. As bank lending shrinks, overall demand falls. This produces more bankruptcies and unemployment, which in turn increases bad debts and makes banks even less able and willing to lend. As they reduce lending further, the economy moves down the deflationary spiral by another notch.
All this, the founders of central banks argued, could be avoided if there is a central bank. It could simply step in, bail out the banks by printing money and buying the bad debts and create a vigorous economic recovery within a year or so, by buying other assets and thus increasing the money circulating in the economy. There would be no need for large-scale unemployment.
This could be done by the central bank without incurring any costs or without using any tax money. It is possible, because the central bank's money has been made legal tender. Thus it can create as much of it as it wants without ever getting into financial difficulties. A central bank is a bank that cannot go bankrupt.
How about inflation? As every primary school kid knows, too much money leads to inflation. The existence of deflation is evidence that there is too little money. It is the job of the central bank to make sure that there is just enough money so that there is growth, without inflation or deflation.