Why does Everyone Worship the Central Bank?

My friend Jim wrote me and asked a question I have been fascinated with since my days in Washington, DC. My reply is below.

First, Jim’s request:

On Thu, Mar 5, 2020 at 8:39 AM Jim Babka <jimbabka@downsizedc.org> wrote:

I could use some insight.

There’s an irrational narrative within the body politic. I would benefit from your take as to how it got there. Here’s the context…

Many Americans believe that a government-central bank partnership is needed to protect the value of the dollar.

The Federal Reserve has, as part of its powers, control of the money supply. That is, they can arbitrarily issue more currency to expand the economy – to create jobs and stave off recessionary shocks. But they also have a mandate to minimize inflation.

The voting public worries about the increased cost of goods and services. They errantly call these price increases “inflation.” But what really happened? The Fed had turned up the supply and velocity of money – more money was chasing the same amount of goods. By increasing demand, without increasing supply, the price naturally went up. To “whip inflation,” they turn the dial back. The public rejoices that they made this hard decision. After all, someone had to protect the purchasing power of wage earners and those on a fixed-income!

Essentially, the voting public wants The Fed to flatten the peaks and valleys of economic growth.

If the economy isn’t growing and creating jobs, they want the Fed to increase the flow of new money. They enjoy the apparent (but not real) increase in the value of their home or their brokerage account balance.
But when it starts to crunch their purchasing power, they cry Uncle and demand action.  

My questions for you, Joe…

1) What historically motivates people to believe we need a system that flattens the curves and does these two things?

2) Why, all of these years later, do the living STILL want these things? What events, since 1913, have caused the Fed to be so impervious to even reform, let alone abolishment? 
Any feedback you can supply would be helpful.

Thank you, 
Jim Babka, President  DownsizeDC.org, Inc. & The Zero Aggression Project

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My reply to Jim’s question:

Can you see the message to which this a procrastinated reply?You asked why people believe in the necessity of a State-Central Bank relationship.
I have worried how to make my reply terse and on-point without invoking any historical forces.

I believe it is part of how a human mind works, to consider the question of Value – particularly “Relative Value” as in a binary choice, a pure trade-off like any human action.

Then we wonder “How Much?”  The impulse to impute a “Size” and to assign that size some “Unit of Accounting” becomes imperative to a thinker of this Value question.

There is a desire for a “Standard.”  We have the System International d’Unites which define the Meter, the Kilogram, Second, Ampere, Kelvin, Candela, and Mole.To establish a Standard requires an Authority with Legitimacy.  Government?  The King?  Moses?  

At least the System International d’Unites is not a government agency with any policy pressures from interest groups.  Agree?

When it comes to the Central Bank, we come to the issue of what any State will want:  (i) a leader; (ii) a flag; (iii) a “national Currency” as its sign of Being in the community of States.  The National Currency is the poison in the idea of a State (and/or a currency union with subsidiary traditional governments).

Thus, a State wants a Central Bank to operate a monopoly process for Payments using the Units of Accounting specified by the State as its “national currency.”  This is also necessary to “close the circle” of spending.  As the government spends its new bank credit to pay bills and salaries, it also needs to collect it back again when it assesses taxes on those who have received payments.  Maintaining such a vast accounting system to manage this government Unit of Account and Payment System is a full job for a monopoly company (which is why it is franchised out to “commercial banks.”)

Besides, as Hayek taught us, the private economy will latch onto any financial innovation and make it competitive.  If the King creates a “shilling” every banker in the realm will offer “shilling loans” and take “shilling deposits.”  Regardless of what “One Shilling” might be.  The con game works best if introduced gradually “through tradition” of solid copper, silver, and gold coins.  Then debasing them over time.  It has worked for thousands of years. The Name of the monetary Unit persists intact.

But the general public must “believe” in this Unit of Value, and it must believe that the certification of government is sufficient to prove Value in that Unit.

Thus the general public (and many special interests) worship at the altar of a Central Bank that keeps the shrine of Value.

Thanks, Joe Cobb
Glendale, Arizona
November 8, 2020