Four Narratives About Central Banks

The previous post (Three Mega-Events Which Shape Our Minds) explains the importance of history in shaping the world we live in. Historical events (facts) by themselves are not meaningful until they are linked together into a coherent narrative. The mortar which connects the facts must be supplied by our minds, and can never be asserted with certainty. The fact that we can never be certain about the narratives which connect and explain history has led to two polar mistakes. The positivist mistake is to renounce narratives, and focus solely on the facts. This makes it impossible to make sense of history, which deprives us of a rich storehouse of human experience. In effect, it means that we must start afresh every day, since the past makes no sense. The other extreme is the post-modern view that anything goes. Since we can never be certain, all narratives we create to connect and explain historical facts are equally valid. Neither of these extremes is correct. We cannot operate without narratives, because all of our actions are based on goals, and on judgments regarding the relative efficacy of different actions in achieving these goals. The only way to judge efficacy is in in the light of historical experience, interpreted according to some narrative. Even though we can never achieve certainty, some narratives are more, and others are less, plausible. In our lives, we routinely stake our lives on our guesses regarding the intentions of others, about which we can never be certain. As I drive across an intersection, I judge the intentions of the other driver to slow down and stop from the velocity of his car. Mistakes can lead to crashes and death, so there is a wrong and right narrative, even though I can never look into the heart of the driver to be certain that my guess is correct. Our lives are enmeshed in a social fabric constructed out of our guesses about the hearts and minds of others, based on barest hints given by external appearances and behaviors. We are evolutionary equipped to make good guesses in environments where radical uncertainty prevails.

Generally speaking, multiple narratives can be woven around the same set of historical events. As a result, the ‘facts’ by themselves are not of much help in assessing the relative plausibility of different narratives. However, studying the archaeology of knowledge is immensely helpful in this connection. Studying the evolution of ideas in the context of the struggles between classes leads to considerable clarity. This is why it is useful to study the history of Central Banking. It helps us to decide between three major narratives which are currently in vogue regarding our modern financial systems based on private banks and Central Banks.

The Free Market Narrative: According to this narrative, unregulated markets provide best economic results for society. Central Banks regulate private banks, restrict competition, and impose government policies on the macro economy. All of this interference with free markets must be harmful. This narrative looks for way to demonstrate the harms of Central Banks, and to show how removal of regulations and Central Banks would lead to superior financial outcomes.

It is hard to dispute this narrative (and most narratives) using facts, because we are comparing what is with what might have been. One can always fantasize that free markets would result in a better outcome. If we show historical examples of failure of free banking systems, proponents can always find some OTHER factor to blame for the failure and continue to uphold superiority of free banking. Instead, it is helpful to look at the historical origins of this narrative. When did people first start to talk about free markets, and to make efforts to remove regulations? The best source for this story is Karl Polanyi’s The Great Transformation: The Political and Economic Origins of Our Times. For a brief summary see Summary of the Great Transformation by Polanyi . In a nutshell, the industrial transformation led to the possibility of massive overproduction, but this was in conflict with traditional mindsets. The victory of the capitalists – industrialists was a victory of the idea of free markets over the traditional ideas of social responsibility which were in conflict with creation of a labor market based on purchase and sale of human labor and lives for money. Studying the history of the idea of free markets leads to the realization that these ideas are “true” only to the extent that they help to create and consolidate the power of the capitalists.

The Naturalist Narrative: Our financial system has its current shape due to natural evolution. Banking systems were created to meet emerging needs of markets and changes were made to fix problems that arose. As a result, the current system incorporates centuries of wisdom built into it through a natural evolutionary process of trial and error, and learning from mistakes. It would be unwise to tamper with it, to make radical changes to a time-tested and proves system, which continues to evolve in face of changing circumstances and emerging challenges.

This narrative is the closest to the line being taken by Charles Goodhart in his book, the Evolution of Central Banking. Goodhart seeks to counter the free market narrative by showing that Central Banks emerged in response to the needs of private banks, and serve an important function. Briefly, banks are forced to take larger and larger risks in unregulated free markets, leading to increasing probabilities of collapse. Therefore, it is essential for a Central Bank to regulate them, to mitigate this tendency and to bail them out whenever excessive competition leads to collapse (as happens regularly).

Unlike the free market narrative, the naturalist narrative does not directly claim any optimality properties for the existing systems. It just claims that this is a workable and time-tested system which has evolved to serve needs as they emerged, and has built-in fixes to problems that occurred over the centuries. It may be possible to fine tune it and make it better. There is widespread agreement and acknowledgement that the system is prone to repeated crises. The naturalist perspective says that we can make changes to try to prevent or reduce these crises and learn to live with what remains, to the best of our abilities. However, some of the most experienced voices who agree with the naturalist view, do not agree that the end-product of the evolutionary emergence of modern banking is good. Mervyn King, former governor of the Bank of England, writes that: “Of all the many ways of organising banking, the worst is the one we have today.” (See article in Positive Money). The Goodhart narrative, which we plan to study through his book, shows how the Central Banking system evolved in response to emerging challenges. To support the Mervyn King narrative, we need to look at other aspects of this evolution. In particular, we need to focus on the crises in the banking system, and attempts to regulate banking to prevent these crises. This is not the focus of Goodhart. It may be worth naming the Goodhart narrative as a Natural Evolution towards an adequate system – where adequacy is created by the need to survive. As opposed to this, the King narrative would be a Natural Evolution towards a disastrously crisis-prone system, which leads to inequity and injustice.

The Conspiracy Narrative: This narrative has been most ably crafted and recounted by Ellen Brown, whom I greatly admire. In this view, the system is not a natural product of evolutionary forces. Rather, a small group of beneficiaries have engineered the construction of the system to achieve the greatest advantage for themselves. The bankers achieve massive advantages by the ability to create money. They do so deceptively, concealing this creation, and pretending that it does not take place. The power to create money belongs naturally to the sovereign state, but the banks have conspired in many ways to take this power away from the state, and to arrogate it to themselves. Some of her key books are

  1. The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free,
  2. The Public Bank Solution: From Austerity to Prosperity,
  3. Banking on the People: Democratizing Money in the Digital Age

Her work uncovers a lot of hidden historical details which are shocking and surprising, and support her point of view. She continues to study the evolving financial system, and uncover its deep and dark secrets. See for example, her recent article Meet BlackRock, The New Great Vampire Squid.

Personally, I believe the truth lies somewhere between a Natural Evolution towards a Disastrously Crisis Prone System, and the Conspiracy to Capture the Power of Money Creation. My own paper on The Battle for the Control of Money provides evidence in support of the conspiracy narrative. However, as indicated at the start, one can never be sure about the truth of narratives. Since we can rarely learn the truth about the hidden forces which drive history, it is useful to maintain a pluralistic perspective which allows for the possibility that different and conflicting narratives may be equally plausible.



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