Economics Dictionary of ArgumentsHome
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| Central bank: A central bank is a government-appointed independend institution responsible for overseeing a country's monetary system and financial stability. It manages the currency supply, regulates commercial banks, and sets interest rates to achieve economic objectives such as price stability and full employment._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Central Bank - Dictionary of Arguments
Rothbard II 159 Central Bank/Rothbard: The Bank of England had been the bulwark of the English (and, by serving as bankers' bank, of the Scottish) banking system since its founding in 1694. The bank was the recipient of an enormous amount of monopoly privilege from the British government. Not only was it the receiver of all public funds, but no other corporate banks were allowed to exist, and no partnerships of more than six partners were allowed to issue bank notes. As a result, by the late eighteenth century, the Bank of England was serving as an inflationary engine of bank deposits and especially of paper money, on top of which a flood of small partnership banks (‘country banks’) were able to pyramid their own notes, using Bank of England notes as their reserve. (…) when the bank got into trouble by overinflating, it was permitted to suspend specie payment, that is, refuse to meet its obligation to redeem its notes and deposits in specie. This privilege was granted to the bank several times during the century after it opened its doors. However, each time the suspension, or ‘restriction’ of specie payment lasted only a few years. >Bullionism, >Gold standard. Rothbard II 160 Before 1800, decades of inconvertible paper money in England would have been considered unthinkable, and so previous monetary theorists had scarcely contemplated or analysed such an economy. But now writers were forced to come to grips with fiat paper, and to propose policies to cope with an unwelcome new era. >Currency, >Demand for Money/Rothbard. Rothbard II 238 Central bank/Rothbard: Along with the increase in the number of banks came an expansion in bank money. Thus the circulation of country bank notes rose (…) in mid-1836. Of this growth, almost all came from the issue of the new joint-stock banks (…) Although the Bank of England and the private country banks complained at the new competition, the expansion of credit by the bank fuelled this new burgeoning ofbanks and bank notes. Rothbard II 239 (…) the bank credit expansion led, in what was becoming the usual way, to a financial crisis and panic at the end of 1836 and the beginning of 1837, replete with bank runs, especially in Ireland. There followed the typical signs of recession: contraction ofbank credit, decline ofproduction, collapse of stock prices, numerous bankruptcies ofbanks and other businesses, and a swelling of unemployment. (…) more than 40 pamphlets were published on the banking system in 1837 alone, and a large number continued the following year. The pamphlet war was touched off by a remarkable pamphlet by Colonel Robert Torrens, (…) Robert Torrens: (…) inconsistently enunciated the currency principle in Clear form: Extensive and calamitous experience had established the fact, that a currency, consisting of precious metals, and ofpaper convertible into these metals on demand, was liable to sudden and very considerable fluctuation, between the extremes of excess and of deficiency... A mixed currency... would suffer a much more considerable contraction... than a purely metallic...(1) Rothbard II 246 Laissez-faire/Richard Cobden/Rothbard: (…) Richard Cobden [was] the shining prince of the Manchester laissez-faire movement. Attacking the Bank of England, and any idea of discretionary control over the currency, Cobden fervently declared: I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency and managing the currency I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks to have what is called the management of the currency... >Gold standard/Rothbard, >Currency/Rothbard. Rothbard II 249 Central Bank/Robert Peel/Rothbard: Robert Peel's proudest achievement, (…) was his banking reform, his Act of 1844. In essence, Peel's Act established the currency principle. It divided the Bank of England into an issue department, issuing bank notes, and a banking department, lending and issuing demand deposits. True to the rigid currency school separation ofnotes and deposits, deposits would be totally free and unregulated, while notes would be limited to a ceiling of E 14 million matched by assets of government securities (roughly the extent of existing note issue). Any further notes could only be issued on the basis of 100 per cent reserve in gold. The second main provision was to grant the Bank of England its long-sought monopoly of the note issue. This was not done immediately, but to be phased in over a period of time. Specifically: no new banks were to issue any bank notes, existing banks were to issue no further notes, and the Bank of England might contract with bankers to buy out their existing notes and replace them with the bank's own. 1. Cited in Lionel Robbins, Robert Torrens and the Evolution of Classical Economics (London: Macmillan, 19 58), p. 89. Robbins, Torrens's biographer, admits his inability to explain Torrens's complete about-face on money and inflationism. Ibid., pp. 73-4. - - - Rothbard III 1013 Central banks/Rothbard: In the late nineteenth century, the principle became accepted that the central bank must act as the "lender of last resort," which will lend money freely to banks threatened With failure. Deposit insurance: Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance," whereby the government guarantees to furnish paper money to redeem the banks' demand liabilities. These and similar devices remove the market brakes on rampant credit expansion. Central bank: A second device, now so legitimized that any country lacking it is considered hopelessly "backward", is the central bank. The central bank, while often nominally owned by private individuals or banks, is run directly by the national government. Its purpose, not always stated explicitly, is to remove the competitive check on bank credit provided by a multiplicity of independent banks. Its aim is to make sure that all the banks in the country are co-ordinated and will therefore expand or contract together - at the will of the government. And we have seen that co-ordination of expansion greatly weakens the market's limits. >Credit expansion/Rothbard. Bank notes: The crucial way by which governments have established central bank control over the commercial banking system is by granting the bank a monopoly of the note issue in the country. Money-substitutes: (…) money-substitutes may be issued in the form of notes or book deposits. Economically, the two forms are identical. The state has found it convenient, however, to distinguish between the two and to outlaw all note issue by private banks. Such nationalizing of the note-issue business forces the commercial banks to go to the central bank whenever their customers desire to exchange demand deposits for paper notes. Private banks: To obtain notes to furnish their clients, commercial banks must buy them from the central bank. Such purchases can be made only by selling their gold coin or other standard money or by drawing on the banks' deposit accounts With the central bank. Since the public always wishes to hold some of its money in the form of notes and some in demand deposits, the banks must establish a continuing relationship with the central bank to be assured a supply of notes. Their most convenient procedure is to establish demand deposit accounts with the central bank, which thereby becomes the "bankers' bank." Bank reserve: These demand deposits (added to the gold in their vaults) become the reserves of the banks. The central bank can also more freely create demand liabilities not backed 100 percent by gold, and these increased liabilities add to the reserves and demand deposits held by banks or else increase central bank notes outstanding. The rise in reserves of banks throughout the country will spur them to expand credit, while any decrease in these reserves will induce a general contraction in credit. >Bank reserve/Rothbard. Rothbard III 1015 The central bank can increase the reserves of a country's banks in three ways: (a) by simply lending them reserves; (b) by purchasing their assets, thereby adding directly to the banks' deposit accounts with the central bank; or (c) by purchasing the I.0.U.'s of the public, which will then deposit the drafts on the central bank in the various banks that serve the public directly, thereby enabling them to use the credits on the central bank to add to their own reserves. Discounting: The second process is known as discounting; the latter as open market purchase. A lapse in discounts as the Ioans mature will Iower reserves, as will open market sales. In open market sales, the people will pay the central bank for its assets, purchased with checks drawn on their accounts at the banks; and the central bank exacts payment by reducing bank reserves on its books. In most cases, the assets purchased or sold on the open market are government I.0.U.'s.(1) 1. There is a fourth way by which a central bank may increase bank reserves: in countries, such as the United States, where banks must keep a legally required minimum ratio of reserves to deposits, the bank may simply Iower the required ratio._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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