Writer Beat contributor Face Palm and I have been having some interesting discussions, agreeing on a few things and disagreeing on a lot more. Part of the fun when civil discussion ensues is learning new things from other people whose perspectives differ from mine. Anyways, Face Palm convinced me to take a look at a 1996 documentary called “The Money Masters”. But I was skeptical: I got out my tin foil hat in case any radiation from a whacky conspiracy theory found its way to my computer screen.
Before I begin my review, I shall just provide some background information. I enrolled in a distance MBA program from Heriot-Watt University. Part of that program was an extensive course on economics, which was at a higher level than my previous three economics courses. The course was divided into four parts: (1) Microeconomics, (2) Macroeconomics, (3) Keynesian Economics, and (4) Monetarist Economics. I was able understand the charts and graphs and theories of the first three sections, but the monetarist section had me in a haze. I got 57% as a final mark in the course, probably getting close to 0% on that last section.
But just because I did poorly on the monetarist exam does not mean I didn’t learn anything about it. For starters I learned that governments, with their central banks, have quite a few more tools to handle deficit financing for a long time. As long as the GDP grows in concert with deficit, the deficit is manageable. As well, I learned that the wizards in the central banks were adjusting interest rates and money supply to walk a fine line between a growing economy, inflation, and a little unemployment. Finally, I understood why the central banks operations were distant from the political process. For example, a governing political party could increase its chance of winning the next election by dropping interest rates a half point six months before to stimulate the economy, thereby gaining votes. But the balance on that fine line would be lost, so letting politicians make monetarist decisions is not a good idea. In other words, the central banks were mostly concerned about creating a stable economy for the benefit of society.
However, I did not expect the wizards to be perfect. If you have ever operated a big machine of some kind, you may have reached a point where you felt in concert with this machine. Despite achieving this state of zen between man and machine, sometimes that machine still breaks down without much warning. The economy is a really big machine, so I accepted that the wizards are likely to fail from time to time despite their training and access to data. And sometimes we may not hire the best of wizards.
Within three minutes, William Still (writer/producer/director/narrator) made an astounding claim:
“The truth is that the Federal Reserve [USA’s central bank] is a private bank owned by private stockholders and run purely for their private profit”
WHAT THE HELL?
I was under the impression that central banks were public institutions, albeit quite separated from politicians. I couldn’t see this documentary telling an outright lie. At that point, I had to finish the documentary. Within a half hour, I took off my tin foil hat.
The 3.5-hour documentary is peppered with history vignettes, many of which are well known, but tied each vignette in the construct of the money masters—or the central banks. I’ll just provide a few here.
The European central banks financed both sides of the various wars. For example, they financed Napoleon on his march to Moscow. With French army decimated, the banks then financed the English to defeat Napoleon at Waterloo. All the while, the banks were involved in arms manufacturing, selling to both sides. After the war, French, English, and Prussian citizens were indebted to the banks through the actions of their governments.
According to Mr. Still, the central banks of Europe wanted to see a divided America. So they financed the South to officially start the Civil War. The banks would not support the North, so Mr. Lincoln had to invent his “greenback” strategy to finance his side of the war. When victory for the South was not imminent, the central banks cut off the South’s credit—which probably ended the stalemate.
The first two versions of the American central bank got started with the following structure. The American government went into partnership with several American and European banks. The government put the first 20% of capital required into the central bank. Then the central bank loaned that money out several times to the partners, who then used it to buy their share of the central bank. In other words, the partner banks never put one dollar into a very profitable business arrangement for them, yet they maintained the most of the control.
If each of these stories is standing alone, it would be easy to give each of them its own tin foil hat. But this documentary is 3.5 hours for a good reason: it shows a pattern. The central banks have played an important role in most of the world’s historical turning points. And the banks’ influence was seldom about the welfare of society; it was about profit for the owners of these central banks.
Mr. Still created this documentary in 1996. I suspect if we were to ask him about the 2008 recession, he would say “I told you so.”
To briefly recap the 2008 recession, government regulations were removed from the banking industry circa 1995. Some banks started loaning money to people who couldn’t afford mortgage payment, using the rising value of the property as collateral. These banks then bundled these small “bad” loans and resold them as big packages of “good” loans. The economy boomed, raising the value of residential property to cover the inability of the mortgagees to pay. So this practice was allowed to continue for years. But long before the loans went into foreclosure, the original loaners had shed the inevitable liabilities these loans were carrying.
Why did the central banks allow this practice to happen? In this review, I have alluded to three possible reasons for the central bank’s failure to prevent the 2008 recession: (1) economics is still more of an art than a science—and we should expect mistakes from time to time, (2) the political process put an inept operator in charge, and (3) rules were changed to maximize profit for the central bank’s owners. Which reason is more correct?
One of the more interesting features of this documentary was that the power of the central banks was well known throughout the 1800s. The charter to form central banks were a hot political topic in American and Canadian politics. But today, the public knows so little about the banking industry, so the banks operate with more impunity than they had before. For example, I had the naïve belief that central banks were 100% owned by the governments.
I didn’t agree with Mr. Still on several places, but maybe if I was more versed in monetarist economics, I would have been able to follow him. For example, he suggested removing the fractional banking system altogether. My understanding is that such a move would make it more difficult to operate local bank branches. Without fractional reserves, a branch’s cash flow would be cut so severely as to not justify the expense of the building and its employees. But with internet banking becoming more popular, it just might be feasible to shut many of these branches down without affecting service quality. Then banking rules can be set to make $1 of deposits = $1 of loans, with banks being able to earn a reasonable profit. I can see without the factoring of the money supply, the central banks would be less likely to manipulate the economy—and society—for their own profit.
Mr. Still’s call-to-action is for us to lobby our politicians to put an end to central banks. But the politicians are at least indirectly in cahoots with the central banks. For starters, the banks can fund political opponents if a politician ever gets too successful with his or her rhetoric against the banks, especially in the internal party elections. Second, today’s politicians are too distracted to ever challenge the banks in the same way they did in the 1800s. Finally, the central banks have a proven ability to crash an economy; they can punish a hostile political force, knowing the public will blame the politicians not the banks. In other words, the political process lives in fear of the central banks. So I don’t see politicians from today’s western democracies ever putting up a serious challenge.
And Mr. Still did not offer a reasonable replacement structure for the banking industry.
If we really want to curtail the power of the central banks, we need a new kind of political system to challenge the power of the central banks while creating a more credible and functional central banking structure that serves the people. Right now, the central banks manipulate all political parties. That bond has to be broken before any real change will happen.
Link to "The Money Masters"