Now for some trivia! What was the world’s first central bank? The Bank of England. This bank was created in 1694, as a result of an agreement between King William III and a group of bankers and merchants.. The king needed money to finance his wars against France, but he could not get it from taxes or foreign lenders. The bankers and merchants offered him a loan in exchange for two conditions: that the loan become a perpetual public debt, and that they have the right to issue notes that circulate as money. It was forged from an alliance between the public and the private.
Thus was born the Bank of England, which was a private bank, but which acted as the government’s bank. The bank reorganized the king’s debts and provided him with credit, but it also created money by issuing banknotes that were not backed by gold or silver. These bills were accepted as payment because they were a promise from the bank to deliver gold or silver to whoever presented them. However, the bank was issuing more notes than it could support, confident that they would not all be demanded at the same time. That’s how it all started.
That great monetary agreement between the government and bankers established the foundations of the modern financial system, based on public debt and fiduciary money.. The king got the money he needed for wars from him and the bankers and merchants got the power to create money and charge interest. However, it was also a dangerous arrangement, because it involved a transfer of sovereignty from the government to the bank and because it created the risk of a financial crisis if the bank issued more money than it could support or if people lost confidence in the notes. I mean, no one said it would be easy.
Who should issue the money? Who creates it and puts it into circulation? In the past, money was created by private entities or by the State. Both options had serious problems. So, a hybrid system was created, where the State delegates the issuance of money to an independent central bank, which regulates it according to demand and supply. This system combines public and private with checks and balances. It’s not a perfect system, but it’s what has worked best so far. We learned this from the English.
Of course, at the time, not everyone supported the agreement. There was opposition. The leader of the opposition? John Locke. John Locke was the father of liberalism and natural rights. But he also made some mistakes. Locke believed that money was a “thing,” like gold or silver, that had intrinsic value determined by its scarcity and cost of production.. For this reason, he opposed the expansive monetary policy of King William III, who wanted to lower the value of the currency to finance his wars. Locke thought that this was unfair and that it violated the rights of the owners.
Locke did not understand that money is not a “thing” but a social and political convention. The value of money depends on the trust and consensus of the people who use it, not on its material or scarcity. By advocating a rigid and limited currency, Locke caused deflation and an economic recession. People had less money to spend, and economic activity slowed. His narrow and dogmatic view of money has persisted to this day. In fact, many economists and politicians still believe that money must be backed by something tangible or scarce. And, in this world so divided and hostile, each group clings to its “truth” with fervor and fanaticism.
Why not abolish central banks? Some think it would be better to go back to the old systems of the past, where money was backed by gold or silver and there were no central banks. But frankly, that would be a mistake. Central banks, like it or not, are a necessary evil for maintaining economic stability, avoiding financial crises, and facilitating international trade. Without them, the world would be more chaotic and unpredictable.
Why not change everything? Many would like to start from scratch and create a totally different financial system. But that would be a serious mistake. The current system is the result of much effort and learning. There is room for improvement, but history should not be ignored. Imagining utopia is very easy. And build it? Not so much. In this case, you have to think prudently and pragmatically.
What does a central bank do? A central bank is like the guardian of a country’s money. His job is to ensure that money has a stable value and that it does not devalue or become too expensive. Thus, it protects people’s purchasing power and encourages savings and investment. It is also in charge of ensuring that the banks function well and that they do not run out of money or enter into crisis. If there is a problem, you can lend them money to help them. Also, a central bank communicates with other central banks to boost global economic development and avoid trade problems. Abolish them overnight?
What drawbacks does hard money have? It is not a chimera or a panacea. Hard money is the one that is based on scarcity, like gold, silver or Bitcoin. This type of money has some problems, for example: not being able to create more money if it is needed for the economy, which can limit progress and investment; not being able to control the amount of money and interest depending on the economic situation, which can cause inflation or deflation; among other complications.
There is no need to be extremists with hard money or with central banks. That has already brought us many problems in the past. Demonizing is as harmful as idealizing. Historical experience has shown us that imagining utopia from opposition is not the same as building it in reality. Is it so easy to replace the traditional banking system with the support of Bitcoin? Every revolution can degenerate into a tyranny worse than the previous one, if we fall victim to fanaticism, polarization, historical blindness and foolishness. Both a system based on hard money and a system like the current one based on central banks have their pros and cons. There is no perfect solution. I repeat: Demonizing is as harmful as idealizing.
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