Most of the world takes it for granted
that central banks are necessary for the smooth conduct of trade, both foreign
and domestic. Nothing could be further from the truth. Let's be clear. Central
banks are unnecessary barriers to commerce, harmful to economies, and enablers
of war. A world of permanent peace and prosperity is impossible as long as they
exist.
Unnecessary Barriers to Commerce
Through their power to control banking,
central banks are unnecessary barriers to commerce. Even those who have spent
their entire lives in banking, often in positions of great importance and
responsibility, assume that cooperative exchange of goods and services requires
a central bank's oversight. But consider a typical trade, whether foreign or
domestic. Joe Smith in the US produces widgets. Of course he desires to produce
and sell as many as he can at a profit. He has willing buyers in both the US
and overseas. Because he manufactures and ships his widgets from the US he is
required by legal tender laws to conduct his trade in US dollars. In fact were
he to refuse to accept US dollars, by law the buyer could take delivery of Joe
Smith's widgets and not pay him at all. But Joe is concerned that the US dollar
is being systematically debased by the Federal Reserve Bank and that the
dollars he accepts from his sales will depreciate in purchasing power before he
can re-employ them to pay for the factors of production to produce more
widgets. Therefore, Joe must increase his price to compensate for this currency
risk.
But all this changes if the central bank
and legal tender laws are eliminated. Joe can accept any form of payment to
which he and his buyer agree. Since they both desire to trade, they will use
whatever money is the most marketable; i.e., that money that others also will
accept willingly. Gradually, sound money will emerge. It may be gold, silver,
or something else, but it probably will be a commodity, a certificate (bank
note), or account balance that is fully backed by a commodity (one hundred
percent reserved).
The commodity itself may be used in hand-to-hand
exchange for small, local transactions, but probably most exchange would be
conducted no differently than today where electronic tools debit and credit
bank accounts. A government controlled central bank is NOT required to settle
this transaction. Any honest, private bank could do it and would do it. Nothing
more is required than a book entry that increases the gold balance at Joe's
bank and decreases the gold balance at his customer's bank, whether foreign or
domestic. If Joe and his customer do not use the same bank, a third bank may be
involved to settle the transaction. Such a bank is called a "correspondent
bank", meaning that both Joe's and his customer's banks have gold accounts
there for the purpose of settlement. Many private banks perform this service
today, bypassing the Fed.
All three banks--Joe's bank, his
customer's bank, and the private intermediate bank--would be subject to normal
commercial law that prohibits fraud. Joe expects that his bank and his
customer's bank have enough gold either in their own vaults or probably held in
their names at a private, correspondent bank to satisfy their purchases and
receipts. Regular audits by reputable audit firms would ensure against fraud.
These firms would verify that each bank has enough gold on deposit to back
their demand deposits one hundred percent.
Now, please tell me...where does
government come into this transaction except to provide an honest court system
in case of fraud or the occasional contract dispute?
People Trade, Not Nations
All trade is conducted by people. The
statistics that aggregate a nation's companies' foreign purchases and sales are
irrelevant and serve only to perpetuate the fiction that countries trade and not
people. This leads to the completely fallacious claim that a nation whose
companies and people sell more abroad somehow "wins" or benefits from
trade and, likewise, that the nation "loses" if its companies and
people in the aggregate buy more abroad than they sell. This fiction survives
only because each nation has a central bank to control foreign exchange and
legal tender laws that require its captive populace to use its ever depreciating
currency. But if Joe Smith sells widgets to Honda Motors in Japan, each party
benefits or the trade would not have occurred. Honda Motors' bank account
diminishes by the amount of the purchase and Joe Smith's bank account
increases. The reverse would be true if Joe Smith bought raw materials from a
Mexican company. If each party benefits as expected from the trade, wealth is
increased for the parties involved in the trade. Where in this transaction is
the rationale for government control via a central bank and legal tender laws?
Well, we all know the answer--government itself benefits by using the central
bank to divert wealth to itself for wars and welfare.
Political Borders Are Irrelevant to Trade
The irrefutable observation that people
trade and not nations leads to the epiphany that political borders and
politically based trade statistics are irrelevant, meaningless, not necessary,
and ultimately harmful. So-called "trade deficit" statistics lead to
calls for monetary debasement to spur foreign trade and even protectionist
policies to reduce purchases from people and companies in foreign lands. But
such trade is no different than buying produce from a local farmer. You and
your local farmer both benefit, just as Joe and his Mexican supplier of raw
materials benefit. The world is made more prosperous. The truly tragic
consequence of keeping national trade statistics is that such irrelevant yet
seemingly important data can lead to international tensions. Today we witness
our political leaders branding individual nations to be predatory because their
people and companies sell more goods to Americans than Americans buy in return.
But where is the predation if one ignores national borders? Buying raw materials
from Mexico is no different than buying produce from a local farmer.
Misunderstanding International Trade Can Lead to War
As an informative thought experiment
consider what would change if Hawaii were not the nation's fiftieth state and
had remained a sovereign nation. Would the impact on the US trade balance of the
other forty-nine states composing a slightly reduced US have any meaning from
the fact that the US purchased pineapples from Hawaiian farmers who now would
be branded as foreigners? Of course not! The same is true if Alaska had
remained part of Russia and had not been sold to the US during our Civil War.
Would our industries be worse off due to the fact that the oil from Alaska was
produced by Russian citizens and not American citizens? Of course not! The oil
is the same economic benefit, regardless of who produces it. Think this is
unimportant? Consider that there is the potential for military conflict in the
very far north over future oil exploration. Russians, Canadians, Norwegians and
most ominously Americans all claim sovereignty over these heretofore untapped oil
reserves and vow to keep out companies headquartered in foreign lands. This is
reminiscent of the imperial wars that racked the European powers for centuries
as each tried to monopolize world trade. World War II was caused in large part
by the Japanese attempt to control all trade in Asia at the expense of the old
colonial powers. Since 1945 the Japanese economy has benefited immensely from
simple trade without the need to control its trading partners politically. This
should be a lesson to today's world leaders, but don't hold your breath.
Conclusion
A world of peace and increasing
prosperity depends upon strictly limiting the ability of governments to
interfere in international trade through their central banks and legal tender
laws. Eliminating both would expose many economic fallacies that purport to
characterize international trade as a competition between nations with their
own citizens either winners or losers depending upon whether they are net
exporters (winners) or net importers (losers). Central banks not only are
barriers to trade and prosperity, they are fomenters of international tension
and even war. Time to scrap them. Remember, the US did not have a central bank
between the Age of Jackson--after President Andrew Jackson was successful in
preventing the renewal of the charter of the Second Bank of the United States
in 1837--and just prior to the Great War in 1913 when the Federal Reserve
System was founded. During this era, despite fighting a civil war, the US
economy grew probably at the greatest rate of any economy in the history of the
world.
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