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Comment by caudicus | Hacker News Reader

He's saying they should have tried to slow the economy down when it was raging upward...which I think you know, but you were just being overly cynical.

In terms of the Fed wanting to promote the economy and "make money" for the government...not so much. The Fed as an organization is set up to operate independently, and in the long run the government is going to lose more money due to economic fluctuations. The whole point of a central bank is to smooth out the business cycles (to everyone's benefit).

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> The whole point of a central bank is to smooth out the business cycles

That's the cover story. A few centuries of data from source around the world clearly show that central banking destabilizes prices and economies and aggravates the business cycle.

The purpose of central banks is to allow a connected elite to rip off the population at large through seigniorage.

This is NOT conspiracy theory garbage. This has been popularly understood at various times in US history. Tom Paine wrote about it extensively as a best selling author. Andrew Jackson got a mandate to dismantle the national bank.

Well, modern day central banks operate through Keynesian principles of economics which were not developed until the mid 20th century - http://en.wikipedia.org/wiki/Keynesian_economics - so I find it hard to apply the writings of Thomas Paine to them. I do realize the US Federal Reserve was founded before that (1913), but modern fiscal policy decisions are based on Kaynes' work.

Related to that, the historical US National Bank (http://en.wikipedia.org/wiki/First_Bank_of_the_United_States) and Central Bank (Federal Reserve) have very different objectives. Do not confuse the two.

Firstly, fiscal policy pertains to government spending and/or tax policy, none of which a central bank is involved in. Central banks are strictly in the business of monetary policy.

Secondly, most western central banks (though not the Fed) explicitly concentrate on inflation targeting, not "priming the pump" (as Keynes would say). In fact Keynes wasn't really very interested in inflation, which is fair enough given that economists didn't seem to take it all that seriously until the stagflation events of the 70s.

But having said that, I'm more inclined to agree with you than the grandparent. Without a central bank, how is the money supply controlled?

>Without a central bank, how is the money supply controlled?

By natural business cycle of economic expansion/ contraction. Cost of money fluctuates, when it goes up there are recessions that clear up the inefficiencies (i.e. all businesses that produce return below required market rate go bust). That's what lacking today thanks to central banks' intervention. They postpone the cleansing as much as possible, until the disbalances grow up in such a monster as we see today.

The problem of course is that people don't like even mild recessions and politicians are following them. The Fed system was setup in 1913 after the population was fed up with regular boom/busts of late 1800s/early 1900s.

The Federal Reserve was created after the panic of 1907, because J.P. Morgan (ironic, isn't it) single handedly stopped the panic by buying out the second-most-bankrupt bank (he let the worst one fail). He was the only one in the U.S. who could do so; the Federal Government had no mandate to intervene in economic matters. After the crash, a bunch of congressmen decided it probably wasn't a good idea to have the nation's fiscal health in the hands of one man who was looking out for his own interests above those of the nation, and so they created the Fed to serve as the lender of last resort.

A similar situation existed in Europe, where the Rothschilds functioned as the lenders of last resort to the kings and queens of Europe. Because of their special relationship with the rulers, they made obscene profits through superior access to information and special interest rates. European central banking is largely a reaction against the concentration of so much power in private hands.

A connected elite will always rip off the population at large. There seems to be no way around it; if you cut off one government organization, some robber baron will just grow into the role. Nature abhors a vacuum. It's better to know who the demons are and have some semblance of nominal regulation to keep them honest.

BTW, Andrew Jackson and Thomas Paine were demagogues, much like Ron Paul and Pat Buchanan are today. Their goal is to form a new connected elite by preying off the passions and fears of the population. Never underestimate the power of stupid people in large groups, and all that.

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