Why a Central Bank: Some Practical Considerations

Last week we looked at some of the basic theory of central and commercial banking in connection with examining the problem of rampant corruption in Country Y.  We discovered that the problems Country Y is having are inherent in any economy in which government controls money and credit, whether directly by issuing currency, or indirectly by emitting bills of credit and going through the central bank.  It’s a matter of degree, not of kind.

We also realized that “Gresham’s Law” — bad money drives out good money — only operates when the government controls money and credit, not allowing other forms of money to be used.  That sets up a monopoly over money and credit, a financial dictatorship.  As Pope Pius XI put it in Quadragesimo Anno,

Pius XI: "A dictatorship of money"

106. This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.

107. This concentration of power and might, the characteristic mark, as it were, of contemporary economic life, is the fruit that the unlimited freedom of struggle among competitors has of its own nature produced, and which lets only the strongest survive; and this is often the same as saying, those who fight the most violently, those who give least heed to their conscience.

Notice that Pius XI didn’t say that the dictators of money are necessarily in the private sector (as many people suppose), just that it was the result of “the unlimited freedom of struggle among competitors” in the private sector — which is perfectly true.  Thinking that it will eliminate the private sector dictatorship over money and credit, people then hand over total power over money and credit to the State.

Having the State control money and credit doesn’t solve the problem of cutthroat competition in the private sector, however.  It just hands the power over to the worst possible agency, and even good competition is crushed by the modern authoritarian State, which cannot tolerate any challenge to its power, whether from individuals, families, or organized religion.

The issue then becomes, How do you implement a sound currency and take away government control of the economy without having to start a revolution?

Francis: A "prime mover"

The answer is in the “prime mover” strategy.  You need a leader in the country with the power and prestige to convince the government that the Just Third Way is a good idea and a viable vision for the future — and who wants “the people” to have genuine power, not just a token vote periodically to elect another dictator.

It can start small, with a single project in one town or city.  The project can begin with a single enterprise and a single financial institution.

The enterprise is no problem — all it needs is a viable product and a market.  It can be for domestic use or export.

The financial institution, however, is a problem.  The people in Country Y don’t trust banks; the word “bank” (or whatever it is in the local languages) is a bad word.  There needs to be a new term for something that will be new to the people of Country Y.

Obviously, we want to reform the central bank.  And, in social justice, nothing is impossible (meaning that all possible things are possible, not that you can do something that is nonsense, i.e., contradictory).  But every now and then we run into the Automatic Gainsayer, you know, the guy or gal who Just Won't Agree that you can do anything at all . . . if he or she doesn't understand it, that is.
So, what if you can't reform the central bank?  Huh?  Huh?  The country is ultra corrupt, isn't it?
The answer is that of course we can reform the central bank.  Don't worry.  It can be done with the right leader.
But what if you can't?

Sigh.  Heavy sigh.  We won't say that the Automatic Gainsayer doesn't understand social justice.  No, we won't SAY it. . . .
In any event, we got your back, Jack.  Let's assume that which we don't believe is going to happen, i.e., that the right leader can't or won't reform the central bank.  What do you do?  Organize in social justice and go around him.

Don’t think that the people of Country Y are ignorant or stupid for having a kneejerk reaction against banks.  The central bank of the United States, the Federal Reserve System, also had to avoid the word “bank” due to people having a kneejerk reaction against it.  To this day people who can’t define a bank to save their souls or sanity snarl and rage against “the banksters” when the real problem is how government has hijacked the banking system for State purposes.

Let’s call the financial institution “The Industrial-Commercial-Agricultural Financing System,” or “ICA.”  Its purpose is to provide “accommodation” for the pilot enterprise, meaning it will accept (discount and rediscount) qualified commercial paper from the pilot enterprise and others that enter the system, make open market purchases of qualified securities (mortgages and bills of exchange) issued by individuals and businesses not in the system, issue promissory notes to purchase qualified securities that are used to back demand deposits and notes denominated in “ICA Vouchers.”

The ICA would also oversee clearinghouse operations, which will be essential as existing banks enter into agreements with the ICA to accept ICA Vouchers and checks.

Are we saying to do this?  No.  Just reform the central bank.  Don't go reinventing the wheel.  This exercise in speculation is to prove that in social justice nothing is impossible, not that we're recommending an alternative to what we've always said.

Tomorrow we’ll look at a few more practical considerations.

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