The End of the 400-Year-Old Central Bank Model
It became clear during the financial crisis of 2008 that the central bank model of providing liquidity for global growth was coming to an end. This followed on earlier financial and monetary events, such as the Asian currency crisis of 1997, which provided indications of a fundamental and structural problem with the global monetary system.
While some pundits, analysts, and policymakers across the political and economic spheres have been unable to follow the logic behind such a conclusion, the facts and trends are undeniable. The Bank of Amsterdam was the world’s first central bank and was established in 1603. This bank represented the preeminence of the Dutch Empire and was followed with the establishment of the Bank of England, the world’s second central bank, which in turn represented the emergence of the British Empire and expansion of the East India Trading Company around the world.
The East India Trading Company was instrumental in both spreading and enforcing the use of the British pound in all the regions of the world which it established business relationships and trade deals. A modern comparison would be perhaps found in OPEC, which regulated global energy trade and production while ensuring trade arrangements were balanced in USD. The history of such companies being aligned with the interests of its origin nation and the corresponding banking, business, and trade needs is widespread throughout the last 400 years. Such relationships spanned empires and borders as one after another central bank was established in the nations of the world.
The central bank model by design was intended to expand liquidity through the issuance of debt, or credit, which incrementally became the standard used for money creation. So effective was this model that money and debt/credit became interchangeable terms and few in the modern world have a working understanding of the dynamic between money creation and debt.
The core structure of the central bank model is that governments issue bonds or treasury notes and the central bank will purchase those bonds, or debt, and issue the legal tender currency of that nation into circulation. That currency is then borrowed by commercial banks and further utilized through loans, investments, and other asset purchases. Fractional banking policies are embedded within the central bank model and allow for all level of banks to leverage customer deposits as assets which can further be loaned out, requiring the bank issuing the loan to retain a small percentage of the initial deposit as assets. The loans themselves became assets in place of the deposits.
This model of central bank regulation and fractional banking has various manifestations depending on the nation and policy needs of the commercial banking sector in each particular nation. There have also been numerous forms of monetary and financial structures which have been build and embedded within the model. There have been gold standards, semi-gold standards, the Bretton Woods arrangement, which started as a form of gold standard but morphed in 1971 into a full-on fiat/debt based framework. All manifestations have been managed within the central bank model itself.
Over 400 years this model provided the liquidity for global growth, including the Industrial Revolution and the further industrialization and technological advancements of the 20th Century. As the torch of primary reserve currency was passed from nation to nation, empire to empire, the strain on the system became greater and more understood by those economists who paid keen attention to the rumbling and shaking of the monetary ground beneath.
A fundamental fault within the model was the use of domestic currency as the common reserve currency. Reserve currencies were used to balance trade between nations but always made it easy for the wealth to centralize around the host nation. This led to massive imbalances in the worlds wealth and caused some regions and nations to experience economic disparity and a drain of resource wealth. There are other factors which should also be considered when studying the monetary history of the world and the movement of wealth, such as cultural restraints, trade routes, domestic political tyranny, different phases of modernization, amongst others, but the core structural problem has always been the centralization of the liquidity around the host currency and its hunger for ever more capital to keep growing and expanding.
The very basis and structure of the system has reached a tipping point where it needs to evolve or crumble into oblivion. The global demands for liquidity are only increasing as developing nations move toward further modernization. The announcements by the worlds major corporations on decreasing revenues, and banks and institutions on decreasing liquidity, as we move into 2019 provide additional indications that this global growth cycle is coming to an end and a new cycle will need to begin on the back of something new.
Within this 400 year liquidity cycle have been many smaller cycles based on the inhaling and exhaling of the system itself. This contraction and expansion of credit (debt) is fundamentally built around the function of interest rates. The complexity of the system itself runs deep and is challenging to understand for the layman because there is no one place to learn all aspects and historical functions of the system itself. The unintended compartmentalization of the knowledge required to comprehend the financial and monetary architecture has led to a massive lack of educational awareness and ability to accurately analyze and predict the nature of the system itself. It is only now near the end of the life cycle that we are able to observe and trend this nature.
This path of discovery and increased knowledge over the last 20 years has been something akin to walking up mental stairs towards the light. The further up you go the brighter the light gets and the less we are able to see because of the blinding intensity and nature of the light. It’s only when we persevere and enter into the light that our eyes adjust and we can see the totality of what, moments before, we couldn’t see. From within the light we are able to look back upon the path we braved and see the full history of what came before.
There are many international economists, writers, and analysts, who are unable to see the unsustainable nature of the system. Those that do see the challenges are unable to recognize there is a growing solution emerging from the shadowlands of the outer peripheral. This solution was given birth after the financial crisis of 2008 and has since spread around the world while the traditionalist economists and monetarists have continued to deny its existence and fundamental purpose.
The age of the digital asset is upon us, but we will leave that for another article. – JC
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JC Collins can be contacted at email@example.com