The Mises “Cuban-ism” of the Federal Reserve

All to often the supporters of stateless capitalism, the Ron Paul so-called revolutionaries, always claim with such certainty that a central bank is socialism. “That’s not capitalism” they all yell triumphantly as they declare victory over reality. Their position is of course is that capitalism doesn’t have a central bank and the concept of such is so anti-capitalist it causes one pause to chuckle, smile and just a quickly shake their head and walk away.

Of course we must always keep in mind that anything that does not jive with their tremendously abstract conception of capitalism, by definition, simply cannot be capitalism. Everything works out in real life just as it does on paper does it not? One would think that they would realize this. After all it is they who say communism supposedly can’t work because its good on paper but not in practice. So I;’m sure on some level they must be familiar with the concept. Perhaps it is my error then to assume that they would hold themselves up to the same standard.

Their criticisms of the Federal Reserve, the central bank, are simple to the point and easily absorbed by someone who doesn’t understand economics at all. It goes as follows, “its all government’s fault.” All problems can be found in the government, no matter the source of a problem or any other contributing factors. It is quite juvenile to merely stamp one’s feet on the ground and claim everything is the government’s fault. As I recall this was the same criticism I was given of Anarchists by my teacher in high school who taught introduction to business.

The premise is as follows, the central bank prints the money and gives it out to the banks. The banks then take that money and increase the supply of money through loans. This causes inflation because its impossible to control the amount of money because each bank just makes their own. The banks have to expand the money supply through the creation of loans, because if they didn’t, they wouldn’t make any money. So by the nature of capitalism itself, the banks are forced to do this.

For some reason which I have not been able to fathom, the followers of the Mises Institute seem to think that this is all the evil government’s fault. Clearly the Federal Reserve has not coerced the privately owned banks to expanding the money supply this way. All they do is hand the money out for free. It is in the mind of the Mises follower that it is the central bank’s fault that the money supply is expanded through loans, in what is called the fractional reserve baking system.

The Mises followers, like many people from the whole spectrum of economic thought, don’t like the fractional reserve banking system. However, the Mises followers are determined to blame the Federal Reserve for the actions of the private banks. The Federal Reserve doesn’t expand the money supply, the banks do that. No one would argue against that point. So why are they so adamant about hating the central bank? Their argument simply makes no sense, fractional reserve is not fault of the central bank.

There are countries that have a central bank where this does not happen. Cuba for example has the Central Bank of Cuba. While the Cubans have their central bank, they have no fractional reserve banking system. The banks in Cuba don’t inflate the supply of currency by making interest bearing loans. How is this possible? The Mises followers are so adamant that it is the evil central bank that causes inflation. What’s the difference? Both economies have central banks so surely they would both be afflicted by the fractional reserve banking system.

The difference is in economic ideology. You see the Cubans are socialists, and contrary to capitalist propaganda, they rather like it that way. One has to look no further than a few WikiLeaks releases too see this is so. The Cubans don’t believe that money exists to justify a childish belief that they are better than other people. They believe that money exists in two of the five forms that Marx described: money as a measure of value and money as a means of exchange.

The banks in Cuba don’t expand the money supply through interest bearing loans. They only give money out when it is ordered. A state enterprise will put forth its budget at the beginning of fiscal year detailing exactly what it plans to do with all the funds it is requesting for operations. The state economic planning board then reviews the plan and judges if it is sound. If it is found to be so, the funds are released to the state enterprise. Instead of their being interest charged, all profits from the enterprise are deposited into the Central Bank.

You see, it is privately held banks that inflate the money supply beyond whatever limit exists. When placed in a socialist economy where interest is not part of a loan, this expansion of the money supply does not take place.

The whole Mises position on the central bank is quite ironic really. They claim that a central bank is socialist and that is why the money supply is expanded through the fractional reserve banking system. However when a central bank is placed in operation in an actual socialist economy, it does the opposite, it doesn’t expand the money supply. In a socialist country the central bank does what they claim will happen in a capitalist country, and it does in a capitalist country what the claim will happen in a socialist country.

It is high time they reanalyze their position on the central bank.