Exploring the Alternatives: Why Private Central Banks Loan Money at Interest Instead of Printing Our Own
Our monetary system revolves around the concept of loans from private central banks, with the distribution of money through complex financial structures. But why do we endure this system? Why not allow the government to print its own money? This article delves into the reasons behind the existence of private central banks and the potential risks if a government were to directly print and control the flow of money.
How Currency and Bank Deposits Are Created and Distributed
The term "money" encompasses more than just physical currency. It includes both currency and deposit liabilities of depository institutions, mainly commercial banks. In the United States, this process is managed by two key institutions: the Treasury and the Federal Reserve (the Fed). The Treasury handles the creation of currency, which is subsequently distributed through the banking system. However, the Fed plays a crucial role in the creation of bank reserves, which form the basis for loans and, eventually, bank deposit liabilities. This includes checking accounts, savings accounts, and certificates of deposit (CDs).
Why a Separation Between the Treasury and the Fed?
The separation between the Treasury and the Fed is rooted in ensuring a conflict of interest is minimized. If the Treasury were to directly control the money supply, it could manipulate the economy for immediate political gain. For instance, in times of government deficits, the Treasury might force the Fed to issue more money to pay for government spending. This could inflate the economy, causing significant harm to the overall financial stability.
Monetary Policies and Political Influence
The Fed is often referred to as a quasi-public entity, managed by a board appointed by the President. This structure allows for a degree of independence in monetary policy, helping to maintain stability and confidence in financial markets. Critics argue that running a central bank as a purely public entity, managed directly by the Treasury or through private banks like JPMorgan, could lead to political interference. Each approach has its merits and drawbacks, reflecting the complexity of the monetary system.
Risks of Monetizing Government Debt
Another key question is whether the US should issue treasury securities that must be paid interest or directly create the money needed for spending. The answer lies in the potential risks of such actions. While the government often spends without borrowing, promises like social security and Medicare require financial backing. Issuing debt serves as a buffer to prevent excessive inflation. However, if the government were to print money directly, it would face significant risks.
For instance, if the gross federal debt of 17 trillion dollars were added to the 22 trillion money supply, people might not willingly hold excess dollars. This would lead to higher interest rates, increased spending, and falling prices. The erosion of faith in the dollar could accelerate the process of inflation, ultimately diminishing the value of the currency.
While these scenarios are uncertain, the current system is in place to avoid them. The government and Fed have structured the monetary system to prevent such issues, ensuring that the flow of money remains stable and controlled. This structure helps create an illusion that the government is not overspending and can transfer blame to the Fed if inflation occurs due to policy decisions.
Conclusion
The existence of private central banks and the complex monetary system is rooted in balancing economic stability, political independence, and the prevention of inflation. While direct monetary control by the government might seem appealing, it comes with significant risks. The current system, while imperfect, provides a degree of stability and control that is crucial for maintaining economic health.