The Veil of Deception over Money

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A very interesting paper from Norbert Häring, Economics correspondent of Handelsblatt, which has just been published in the Real World Economics Review.

The veil of deception over money: how central bankers and textbooks distort the nature of banking and central banking:

“This paper will argue that we are being intentionally and systematically mislead about the nature of money and about the role of central banks and commercial banks in the monetary system. We are led to believe by central bankers and by textbooks, like the ones of Krugman and Wells (2009) and Mankiw and Taylor (2011), that central banks have always been government institutions acting in the public interest. In reality, central banks’ historical origin and role had more to do with the desire of private bankers to control and coordinate the process of private sector money creation. That most money is created in the private sector is something that central bankers like to gloss over and textbooks “explain” in a distorted and unnecessarily convoluted way.

While governments have increased their influence over central banks over time, these still fulfill functions which are mostly in the interest of the banking industry. They coordinate private sector money creation and act as lenders of last resort for commercial banks. It is far from clear, whether central banks will side with commercial banks or with the public at large, if their roles as protector and coordinator of the former and their role of promoting the interest of the latter are in conflict. The desire of central bankers to hide the lucrative role of commercial banks in the process of money creation and their distorted account of central bank history give reason to be suspicious in this regard.

This is particularly relevant today, as during the financial crisis central banks have emerged as the most powerful agents in economic policy. An examination of the disclosed calendar of US Treasury Secretary Tim Geithner by the research institute Bruegel revealed that the President of the European Central Bank was the person Geithner called most often in Europe, with a big margin to the runners up. Between January 2010 and June 2012, 58 out of 168 calls of Geithner to European officials went to the president of the ECB (Pisany-Ferry 2012).

In Europe, the ECB is involved as a member of the so called “Troika” (with the EU-Commission and International Monetary Fund) in drawing up and enforcing reform and austerity programs for crisis countries like Greece, Portugal and Ireland. These Memoranda of Understanding go into almost all areas of economic, labor market and social policy and are very detailed. The ECB is taking their decisions in complete independence from governments and parliaments. Other major central banks are also independent from government, even though not in such an extreme way. If there is an important element of central banks serving the interests of the financial industry, this unchecked power should be regarded as highly problematic.”