The Legal Tender Blog: Central banks

Speaker of the House - in the FOMC?! (October 5, 2023)

It happened in the world's first open market committee (1690), which also included two councilors and two private bankers. 

As in the FOMC, bankers were just outnumbered by the executive & legislature. 

It's in America's DNA

The retail Band of England (September 29, 2023)

Funny to see the Band of England returning to its origins as a private, commercial bank. 

Only need to add checking accounts for Nigel Farage and the rest of the debanked. 

Are central bankers economists? (September 25, 2023)

Why isn't the "chief economist" of the ECB leading the ECB? 

Is this an admission that the ECB President is nothing more than a politician?

If so, what happened to the argument that we need an independent, professional central bank to avoid politicizing monetary policy? 

UK debanking (August 14, 2023)

It's such a shame that there's no national bank in which every English person is entitled to deposit money. 

Once upon a time there was one: The private Bank of England (est. 1694).

Bank of Israel Independence Day (July 29, 2023)

On this day in 1985 the Bank of Israel Law was amended: 

"The Bank shall not give the government a loan to finance its expenditures." 

The amendment was forced by US special envoys Herbert Stein (former chairman of the Council of Economic Advisers) and a young Prof. Stanley Fischer (pictured). 

It happened a month after the Stabilization Plan was launched, which lowered inflation from 450% to 20%. The amendment made sure that triple-digit inflation will never again be possible.

The envoys were sent by Secretary of State George Shultz, a former economics professor. The Cold War was still going on and Shultz could not allow the important ally in the Middle East to collapse economically.

Thanks, US.

Did the ECB president ever study economics? (July 22, 2023)

The ECB says she specialized in it at a political science school. 

The school said she specialized in "politics," as opposed to "PR/communication/media" or "other." 

Who should we believe? 

Liar Liar (July 8, 2023)

Milton Friedman, 2006: Central banks are good at justifying their poor performance. 

Politicians, 2017-2019: We'll do this even better with lawyers in charge. 

And maybe that's why we have inflation. 

The Farage case for CBDC (June 29, 2023)

Ironically, this private-sector travesty will strengthen not only the weak case for cash (already nearly extinct in the UK) and bitcoin, but also the case for a properly legislated CBDC option. 

By definition every citizen could open an account, to be revoked rarely and only in a transparent legal process (e.g., conviction of treason). 

The German-run ECB (April 17, 2023)

Apparently Germany officially runs the Frankfurt-based ECB.

Below are a Bing search for "Deutsche Bundesbank" and a Google translation of its Twitter description. 

I thought it was an open secret, not something to declare publicly. 

Other Eurosystem central banks describe their duties only as caring for their own countries.

Bankschluss?

An anniversary of an FOMC antecedent (April 13, 2023)

On this day 100 years ago an important FOMC antecedent held its first meeting in Philadelphia.   

The voluntary committee for open market operations of the 12 Federal Reserve Banks - ran only by the 5 northeastern Federal Reserve Banks - became the Open Market Investment Committee - supervised by a 7-member Board. This was the first time that the Board could veto and amend the decisions of 5 banks in the banks' committee. 

Seems familiar?

The 7:5 ratio was enshrined in a 1935 legislation, with the Board of Governors entering the committee and forming a majority in it. 

The ECB and monetary control (April 8, 2023)

ECB president Christine Lagarde admitted that CBDC will be used for ‘control.’ What a shocker.

Just to remind: The EU is a union of democracies, but is not a democracy itself (Parliament members can't propose laws).

Lagarde's country has led the West in monetary non-freedom since 1793. It's illegal in France to reject state money in spot trade.

The US has 2 central banks! (March 30, 2023)

According to the official website of the US government itself:

1. The Federal Reserve System.

2. The Bureau of Printing and Engraving. 

CBDC: Breaking news (March 30, 2023)

The Fed is more serious than I thought about CBDC.

This is from the Federal Reserve Board's Contact page: 

Will the private sector be eliminated from the Fed? (March 19, 2023)

Is there an emerging political consensus for ending any role for the private sector in the Fed?

Bernie Sanders now wants to oust private bankers from serving as Directors of Federal Reserve Banks (see below).

In December, Republicans wanted appointments of Federal Reserve Bank presidents to be made by the President rather than by representative of the Board of Governors and the local private economy.

As I wrote last month, I think that in the US, this might not work in the long run. 

The ECB targets ... temperatures (March 13, 2023)

The European Central Bank's target is an increase of 2 ... what?

Past: 2% increase in prices per year (central banks' consensus).

Present: 2 degrees increase in temperatures per century (Paris Agreement). 

Central bank independence (March 9, 2023)

That's a Volcker-like behavior.

Well done.

The Federal Reserve Accountability Act in Light of 333 Years of American Experiments (February 17 & 22, 2023)

Nobelist Thomas Sargent wrote in October 2022 that my book was "full of insights about the 21st century brought from carefully interpreting 17th century events." 

How could this be?

It turns out that we can learn from the first open market committee in history (1690) about the December 2022 bill in Senate to amend the Federal Reserve Act. 

See my article for the American Institute for Economic Research.

Friedman's Role of Monetary Policy (December 29, 2022)

55 years ago on this day: Milton Friedman's Presidential address at the annual meeting of the American Economic Association, in Washington, DC, put the Fed in its place.

It was soon turned into one of the most influential papers ever in monetary economics. 

** Oddly, this tweet received 66,000 views, 388 likes, 85 retweets. Perhaps equal to all my previous 1000 tweets combined. Not sure why.

Central bank Digital Currency in China (December 26, 2022)

Mao was sadly born on this day in 1893. 

Later his dead eyes on all paper money couldn't really see and track everyone's transactions in China. 

But the CBDC version does.

For historical accuracy, I propose a correction to some of his bills: 

Why was the Fed created? (November 17, 2022)

Common claim - to stabilize the value of the dollar (see below).

But the Federal Reserve Act says otherwise: "to furnish an elastic currency" - in order to act as a Federal RESERVE for banks in trouble, as a lesson from the 1907 financial panic and numerous other banking crises before that.

And "elastic" is what you got.

Mission accomplished. ;)

Inflation target: 0, 2, or 4 percent? (November 11, 2022)

Finally, someone agrees that the inflation target of 2% should change by 2 percentage points.

But The Economist got the sign wrong. It should be 0, not 4. 

Governments should stop stealing our wealth, feeding the cryptomania, and raising gold bugs. 

The Federal Open Market Committee and the Massachusetts Open Market Committee (August 23, 2022)

The Federal Open Market Committee was created by law on this day in 1935, centralizing monetary policy in the Federal Reserve System. The original Federal Reserve Act of 1913 created a weak Federal Reserve Board in Washington, DC (appointed by the president and confirmed by the Senate), and 12 regional autonomous Reserve Banks owned and controlled by private banks.

In the 1920s these Reserve Banks coordinated their trade of government bonds in the “open market” through a 12-member voluntary committee that did not take orders from the Board. This trade affected interest rates and the quantity of money and thus affected inflation.

Due to the Great Depression, FDR’s numerous reforms included centralizing monetary policy. In the Banking Act of 1935, signed into law on this day, the voluntary open market committee was transformed into a statutory one. The Board took over seven of the twelve seats and left the privately controlled Reserve Banks to man the five remaining seats on rotation. Thus, the Board of presidential appointees, which previously had no authority on the matter, got a 7-5 majority over the private sector’s representatives in policy decisions. It was a dramatic takeover of the federal government over monetary policy, which holds to this day. 

But long before there was the Federal Open Market Committee there was the Massachusetts open market committee. In 1690. Much like the modern committee - created by law on this day in 1935 - the Massachusetts committee also injected new money to the economy by buying government bonds, and it represented the interests of the executive, legislature, and private sector. In fact, the executive and legislature had a 3-2 majority in the committee over the private sector, very similar to the independently invented modern committee with its 7-5 majority. Was it a coincidence that? Not at all!

The 1690 committee's composition was a beautiful act of checks and balances, long before the United States Constitution made the concept famous. You can find details on this aspect of the story in my lectures, in English or Hebrew. Much more in my upcoming book.

Note the shorthand for "Committee" on the currency below. Three of the five committee members had to manually sign each and every bill.