Monday, March 18, 2013

National Bank vs. Central Bank

I recently debated someone about the difference between national banks and central banks; and here is what came about.

National banks act as regulators of individual banks.  This would be similar to the (two) national banks of the United States in which the national banks bought and sold the bank notes of individual banks in order to control the money supply.

Central banks act as regulators of their own bank notes (not someone else's).  This would be similar to the US Federal Reserve, which credits (or debits) the accounts of its member banks (primary dealers and such) in order to control the money supply.  But that ain't exactly the whole truth.

The US Federal Reserve can create money by purchasing US government debt and US government-sponsored enterprise debt through its members (primary dealers).  Government debt ain't exactly bank notes, but as Hyman Minsky observed, credit is money, and big-banks cannot exist without big-government and big-government cannot exist without big-banks.

Even after the 1913 chartering of the US Federal Reserve, it took nearly 60 years for the Federal Reserve Note to achieve monopoly status.  Mortgages appear to have taken the place of bank notes.  Up until our most recent Great Recession, the Federal Reserve ignored the perilous condition of the banks under its regulatory realm, but yet now it repurchases the American dreams used to finance the economy out of the pits of the 2000-2002 stock market crash, on the cheap.

So, do I think there is much of a real difference between national and central banks?  Yes, national banks operate under weak national conditions while central banks operate in a strong national state.

2 comments:

  1. Interesting stuff. The National banks you're talking about are the one that Alexander Hamilton created and the one Andrew Jackson destroyed?

    In those days, corporate charters expired. The good old days.

    I picked up a "Standard Catalog of US Paper Money" from a coin shop ages ago. In addition to all the photos, there were a few pages of history. Not bad.

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    1. Good point, Art. The founding fathers were never as unanimous in their opinions as some media personalities make them to be - there was a big Federalist vs. Anti-Federalist debate.

      I guess I look at mortgages as the "new" bank notes. The US federal government and the GSEs can issue trillions of dollars of debt which the Federal Reserve will insure remain liquid through open-market operations. Essentially, the Fed starts the bidding.

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