We really need central banks?

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1 year ago

Do we really need central banks? If we take a quick look at today's world, it would seem that they are essential, and there is no shortage of articles and reports reminding us of their importance.

Perhaps in these times of inflation you have heard a lot about actions by central banks to control inflation. Something ironic because many times they are the main culprits of it.

Despite the fact that many present them as a necessary evil to maintain economic stability, facilitate international trade and avoid currency crises, they are not so essential. Before they emerged, the world worked perfectly, and no, the current development of humanity and international trade is not due, in my opinion, to the creation of these but to technological advances applied to the monetary system and financial.

Image from Unsplash

The very rise of central banks shows us that their goal was not to benefit ordinary people, but rather to give governments and big bankers more power. If one searches in history, it can be affirmed that the objective of the first (or second depending on the historian) Central Bank of the world was to obtain (create) money to finance wars.

So the statement that money is the origin of all evils does make sense, or at least FIAT. And it is not that if fiat money disappears tomorrow in the modern world all wars will end (that requires a deeper analysis of the human psyche), but at least it will make it more difficult to finance one.

If the power of central banks was already immense, the removal of the gold standard made it almost limitless. The effects in terms of inflation and loss of purchasing power of this event are evident. If from 1954 to 1970 (previous year) inflation had only increased in 16 years by 42.83% for 2.58% per year, from 1971 to 1987 it was 180% for 6.6% per year.

Going further into the past to analyze inflation processes may be a recipe for depression, especially if we think in 50 years from now at the minimum acceptable rates of 2% where we will arrive.

Some claim that without moderate and controlled inflation we would not have the current levels of development, that is debatable, but we will never know. However, when I listen to them I can understand the logic of their arguments, but then I think, what does a big reboot take?

Sorry friends, the creation of money at the request of governments does not seem to me a positive point in any term.

Of course, before FIAT money there was also inflation, but it was much less and healthier and a product of the recirculation of money in the form of loans. This way of generating more money than exists, at least, has economic, productive and risky support that makes it feasible, and no, it is not infinite.

You cannot lend money that you do not have, you cannot collect money from someone who is not capable of generating it. Therefore, one way or another, everything tends to balance.

It is evident that before 2009 it was unthinkable to even think about eliminating the figure of the Central Bank, leaving the monetary system in the hands of commercial banks it would be even worse madness. Why 2009? Well, it is in this year that a tool emerges that shows us that it is possible and serves as an alternative to the reigning hegemony, it is Bitcoin.

Let me be clear, I'm not saying it's a silver bullet and the Bitcoin pattern will be established overnight.

In fact I think that Satoshi created Bitcoin as an experiment to show that it is possible and not as a final result, but that is another story.

However, it is a real alternative to central banks. What is volatile? Yes, but so were all hard currencies in the early days, or do you think humanity went from bartering to gold and silver because one day dawned and everyone agreed that a gold coin would weigh 11 grams and would be equivalent to four cows and a ton of apples?

It is a real alternative because it is a currency whose value is established by people according to supply and demand and not according to government decree. Precisely because of these characteristics, whether it is established as a free global payment currency, as a store of value or as a mere speculative asset is something that people and their exercise of the free market will decide.

Imagine something different from what is established is always difficult, there are those who oppose the abolition of central banks because it is necessary to "create more money if necessary for the economy." It is necessary to analyze this tendency of the human being, mainly those with power regardless of the ideology they have, to want to control everything in excess.

What if inflation or deflation must be prevented, what if controlling money in circulation and interest. Curiously, in those societies where there was less control over the monetary system (devaluation of the weight of gold coins, printing of new banknotes) and where there was less government presence (tax increase), they suffered the least from the feared states of superinflation.
Instead, the greatest nations and empires in history all began their decline the moment they began to apply these policies of devaluation and taxes in order to raise more money. What did they want more money for? To finance their unnecessary war or luxury campaigns mainly.

Today, the largest nation in the world is walking the same path. The Federal Reserve (FED) has created more money out of thin air in the last three years than in the previous 30 years combined. The wild card of having the quintessential international commerce currency is not infinite, but this is something they don't even seem to care about.
And why does a country that raises huge amounts of money need to go into debt or print money out of thin air? Well, mainly to support their unnecessary military spending, that's how all declines begin.

Imagen from Unsplash

So I return to my initial question adding a condition, if we already have a real and effective alternative, do we really need central banks? If you think so, how long will we continue to need them?

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*Originally posted in LeoFinance Alpha

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1 year ago