Wednesday, March 30, 2011

History/Education stuff...

Why Economists Love the Federal Reserve
by Gary North

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

The paragraph (italicized) introduces a booklet published by the Federal Reserve, The Federal Reserve System: Purposes and Functions (9th edition, 2005). It has been in print continuously since 1939.

This paragraph is universally believed among the intellectual elite in the United States. It is believed by virtually all academics, in every social science. You cannot find a college textbook published by any major publishing firm in either introductory economics or American history that does not rest on the acceptance of the truth of this paragraph.

One of the difficulties that critics of central banking have, all over the world, is that academic economists are almost universally supportive of central banking.

To understand why this is the case, we must understand the economics of banking as an aspect of the economics of cartels.

All modern banking systems are based on government licensing and regulation.
All licensing and regulation systems create barriers to entry.
All government-created barriers to entry create cartels.
All central banks are enforcement agents of the national banking cartel.

No chapter on central banking in any introductory or upper division economics textbook published by a mainstream publisher discusses central banking in this light. The chapter on central banking is kept several chapters away from the chapter on money and banking. The two chapters are not cross-referenced.

This has gone on ever since the end of World War II. It may have gone on before, but the textbooks of that era are difficult to locate. University libraries throw out old textbooks. This makes it difficult for historians of thought in any field to write histories of college-level opinion.

[Note: libraries also do not bind popular journals. It would be impossible to write an accurate history of American social thought without access to the "Reader's Digest," the "Saturday Evening Post," the "Ladies Home Journal," and "Cosmopolitan." Yet there is no easy access to any of them. This is why books on American social thought are mostly histories of what academics have written about what they perceive as important trends marked by best-selling books, movies, and a few public opinion polls.]


All schools of economic opinion have much the same criticism of cartels. Read the chapter on cartels in any college-level introductory economics textbook. The analyses in all of them will be about the same. Cartels are presented as organized groups of self-interested producers who use government intervention to keep more efficient producers out of the market. These associations oppose price cutting by individual firms. They seek to create agreements within the industry to refrain from price cutting. All schools of economic opinion regard this as being against the interests of consumers. Cartels promote actions in restraint of trade.

The standard chapter on cartels identifies the cartel as an aspect of monopoly. A monopoly is defined as a single seller that extracts an economic surplus by restricting production, thereby enabling it to charge a price higher than that which it would charge if it sold all that it could produce. A cartel is a monopoly system based on more than one producer.

Economists recognize that few if any monopolies can exist without government intervention. (The perennial exception, Arm & Hammer's baking soda, is never discussed. It deserves at least a master's thesis.)

No cartel comes to legislatures with this message:

We want you to pass laws against companies that offer lower-priced goods to buyers. Such offers reduce our profit margins. We want to maximize our net profit by keeping retail prices high. We cannot keep innovative forms out of the market, but you can. We want you to pass laws against the sale of goods unless these firms agree not to sell at prices lower than those set by our organization.

Instead, it comes with this message:

The public is being exposed to low-quality goods that put people in danger. If the legislature stands idly by, allowing inexperienced and unqualified producers to exploit the ignorance of the public, the common man will be exposed to serious risks. The best way to protect the public is to require all products to meet basic standards of quality, and to require all producers to be certified by law. The government should set basic standards and require all producers to meet them.

The cartel then writes the standards, so that new, under-funded competitors are kept out. The legal fees for getting authorization to sell a low-cost product will keep most new firms out of the market.

The chapter on cartels offers a detailed account of how the cartel seeks government intervention in its program to restrain trade by restricting entry into the market. The textbook encourages the student to think through the implications of the cartel's argument in favor of restricting entry. It presents this appeal as a self-interested quest for higher profits at the expense of consumer choice.

None of this analysis is applied to central banking...

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