Wednesday’s (April 27) press conference marks a first for Federal Reserve Chairman Ben Bernanke, a move being called “a high stakes gamble” that could compromise the Fed’s “allure or mystique.” Against a background of an ailing economy and growing criticism of Fed policies such as the last round of quantitative easing purchases, Bernanke is coming out from under the cover of planned interviews and press releases.
As noted by the Huffington Post’s William Alden, “A carefully managed PR strategy, marked by outright secrecy, has long been an inherent feature of the Fed.” Most Americans likely pay little attention to America’s central bank, to what it actually does, and to the rationales given for its role within the economic system.
Understanding the implications of phrases like “monetary policy” and “reserve requirements” seems to require special expertise, and the Fed is typically regarded with the kind of deference we might give physicists discussing the properties of black holes. Even where its specific policies are, at a given time, called into question, it is generally assumed that there is some scientific or technical need for a central bank, for some overarching body to tinker with, for instance, interest rates. And since the corporate media brume around the Fed is so thick and so opaque, the important functions it performs for the state capitalist ruling class remain largely shrouded.
“[T]he essential purpose of central banking,” taught economist Murray Rothbard, “is to use government privilege to remove the limitations placed by free banking on monetary and bank credit inflation.” “[E]xercising its legal monopoly of counterfeiting money,” the Fed allows the big banks — “those who get the money early” — to profit through the dilution of the money in your bank account and wallet; this kind of barefaced forgery wouldn’t be so harmful if you were able to switch to a new currency, to denominate your wealth using another bank’s notes, but naturally the state rules that option out. Laws prevent any potential competitor from issuing its own currency, media of exchange that could rival and undermine the power of the state over economic activity.
Without the state, then, the much-deprecated practice of fractional reserve banking, whereby banks don’t house enough specie to redeem all of their accounts, wouldn’t in itself pose a problem. If the clients of a bank lost confidence in it due to its risky or fraudulent practices, a “bank run” with clients pulling their money of the bank would soon follow.
Banks need not agonize over such free market mechanisms of enforcement where the state’s central bank removes the incentives for discipline. Similarly, where the natural tendencies of a genuine free market would discourage and frustrate every attempt by the banks to form an effective voluntary cartel, central banking allows the banks to cartelize not through explicit agreement, but by allowing them to identically engage in inflationary behavior.
In a free market without grants of state privilege, banks that refused to partake in active fraud against their clients would defect from any supposed cartel by calling for inflating banks to redeem their commercial paper in gold, silver or anything else of objectively verifiable value to consumers. Today’s powerful banking giants, their market dominance resting on nothing but air, wouldn’t last a week in a market defined by free and voluntary exchange and an absence of manufactured barriers to entry.
All that the Fed is supposedly in place to accomplish — from creating liquidity in the credit market to regulating the banks for the protection of the consumer — is exactly that set of objectives that would best be served by the mutually-beneficial workings of a free market. Those very legitimate goals are indeed made impossible by the Fed’s coercive protection of the system we have today.