International Business:
Question 1:
The main reason governments have not fully subscribed to a free market system is because the structural imbalances in the current system benefit a relatively few people in positions of power. Their power may be threatened by allowing the current system to fail. Central Banks allow governments to spend money in excess of their revenues through the issuance of government debt. This debt creates income for the banks and also gives them influence over government policy.
Mayer Amschel Rothschild once said “Give me control of a nation’s money and I care not who makes the laws.”
Both the Euro and the US Dollar are managed and administered by a central bank. In the US the Federal Reserve is the central bank. The European Central Bank administers the Euro.
Central Banks are not government entities nor are they democratically elected and controlled entities. Central Banks are private institutions that are owned by their member banks. The ability to control a currency gives a tremendous financial advantage to private banks that have influence in the Central bank system.
Currency systems that have a Central Bank and legal tender laws are monopolies – there is no competition at all with currencies. Only one currency is recognized by the government as its official currency. Economic activity that takes place within the currency system may have market influence but the currency itself is immune from competitive forces domestically.
Certain currencies are “reserve currencies” meaning that they are held by other governments as foreign exchange reserves. The US Dollar and the Euro are two major reserve currencies. The advantage of having a reserve currency is that a government that issues the currency can spend in excess of their revenues because of outside demands for their currency. This gives those governments artificial