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Originally Posted by milo
I'm trying to find out how/why this is used but i can't find anything beyond 'the bank of england changes to base rate to affect things like inflation'. What exactly does the base rate 'do'? Also id always regarded capitalism as being ultimately about self-perpetuation/regulation, ie without statist control (ideally).
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Perhaps if you have a quick read through
this link, it explains how central banks (in this case, the Reserve Bank of Australia) goes about controling inflation, and why that is neccessary.
To summarise (and thus wade in the glee of simplicity);
Effectively, the "cash rate" is the rate at which the Reserve Bank lends money to all other financial institutions for overnight loans; its a huge huge sum of money and happens every day. Then, whilst private banks are not forced to, they tend to charge a higher rate to customers who borrow from them and a lower rate to customers who deposit with them, thus giving profit margins that (along with other activites) for a large percentage of a private bank's profits.
Because Australian Dollars are the only legal tender in the Commonwealth of Australia and its Territories, the Reserve Bank has a position of power as they are the only legal authority who are permitted to "print money".
The cash rate is determined by a government-independent board of directors at the Reserve Bank, so whilst its a "government institution", its not controlled by "the Government" - appointments of chairman et al aside, the Government cannot intervene and stipulate what the cash rate should be changed to. Anyway, as i understand it, that cash rate is achieved through normal open market operations; if the rate is rising, the Reserve Bank "prints" money to bring the rate down to the (pre-established by the Board) level, else it "destroys" money if the rate is too low, thus bringing it up. However, that's at the theoretical level, i would imagine that in the 'real world' the bank would effectively declare what the rate actually was and then everyone else would follow suit; the wonders of the expectations based economy that nodrog was refering to with regards to what money actually means these days.
Other things that the Reserve Bank does is advise on prudential issues (like having minimum reserves of hard currency) and the like.
So, effectively, the Reserve Bank uses the cash rate to influence the private banks et al to keep inflation within a manageable level to the extent that it is able in order to promote prosperity.
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In a system like anarcho-capitalism i assume central bank control is redundant, so im confused about what the role of central banks actually is. Surely it would be better for every private bank to issue its own currency? (that was affected by consumer confidence in each bank concerned)
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Whilst i cant go into depth regarding anarcho-capitalism as i've only breifly read the wiki article on the issue (having never heard of it), what you are talking about here sounds somewhat similar to the ideals of the
Free Bankers, who argue that the existance of a central bank is either unecessary and/or counterproductive, and that the provision of the Lender of Last Resort does nothing except promote inefficient and unstable financial institutions which will eventually lead to economic collapse. Personally, whilst i think the idea has some merit (you wont take so many risks if you know there is no safety net), it seems that evidence from the 'real world' would suggest that LLRs etc result in less economic damage (eg, the run on american banks, Asian crisis of 1997 etc). Either way, national currencies have power because they are so freely available to everyone and obviously interchangeable with eachother; if you had a huge variety of currencies within a single country, buyers and sellers of goods would have to be aware of the immediate exchange rates between their own currencies in order to make the most economic decisions, and it makes convertability of goods more difficult (eg, only accepting Freedom dollars instead of Independence dollars), both of which should lead to more inefficiencies within an economy (primarily because of opportunity costs, but also due to damage should one or multiple currencies fall).