The general belief among average citizens is that the purpose of central banks is to help the economy by fighting inflation and mitigating financial crisis. It’s a fairy tale that politicians like to encourage. If there were any truth to it, however, where was the Federal Reserve during the crisis of 2007? Rather than helping, it was widening the crisis with its easy money policies.
While central banks are not a government entity, their primary purpose is to create money for the benefit of the government. By mindlessly printing fiat currency, central banks create a shaky illusion of financial stability. In reality, each central bank is a monopoly that controls the production of distribution of currency and interest rates. Most importantly, it also controls gold reserves. While paper currency allegedly has the backing of the government, it is the central bank that controls the value of the currency at any specific time.
The first central bank, the Central Bank of England, was created in the 17th century as a scheme to enable the king to pay off his debts. As each country established its own central bank, it has been used by its government as a personal bank account.
With the government’s permission, central banks print money for the use of commercial banks to lend out at a specified rate of interest. Together, they work at inflating the money supply through a system called fractional-reserve banking. Commercial banks are required to keep a fraction of their money in reserve. For example, if someone deposits $1,000, the bank has to keep 10 percent in its vaults. That $100 cannot be lent out. It can only lend out $900, thereby creating two separate claims on those funds: the original deposit of $1,000 and the subsequent borrower of the $900. The supply of money in circulation has been artificially increased to $1,900. That is only one of the ways central banks manipulate the fiat money supply.
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