Centralization of Money

Centralization of Money


Transition

The Federal Reserve System belongs to a later wave of central banks, which emerged at the turn of the twentieth century. These banks were created primarily to consolidate the various instruments that people were using for currency and to provide financial stability. Many also were created to manage the gold standard, to which most countries adhered.

The gold standard, which prevailed until 1914, meant that each country defined its currency in terms of a fixed weight of gold. Central banks held large gold reserves to ensure that their notes could be converted into gold, as was required by their charters. When their reserves declined because of a balance of payments deficit or adverse domestic circumstances, they would raise their discount rates (the interest rates at which they would lend money to the other banks). Doing so would raise interest rates more generally, which in turn attracted foreign investment, thereby bringing more gold into the country.

Central banks adhered to the gold standard&rsquos rule of maintaining gold convertibility above all other considerations. Gold convertibility served as the economy&rsquos nominal anchor. That is, the amount of money banks could supply was constrained by the value of the gold they held in reserve, and this in turn determined the prevailing price level. And because the price level was tied to a known commodity whose long-run value was determined by market forces, expectations about the future price level were tied to it as well. In a sense, early central banks were strongly committed to price stability. They did not worry too much about one of the modern goals of central banking&mdashthe stability of the real economy&mdashbecause they were constrained by their obligation to adhere to the gold standard.

Central banks of this era also learned to act as lenders of last resort in times of financial stress&mdashwhen events like bad harvests, defaults by railroads, or wars precipitated a scramble for liquidity (in which depositors ran to their banks and tried to convert their deposits into cash). The lesson began early in the nineteenth century as a consequence of the Bank of England&rsquos routine response to such panics. At the time, the Bank (and other European central banks) would often protect their own gold reserves first, turning away their correspondents in need. Doing so precipitated major panics in 1825, 1837, 1847, and 1857, and led to severe criticism of the Bank. In response, the Bank adopted the &ldquoresponsibility doctrine,&rdquo proposed by the economic writer Walter Bagehot, which required the Bank to subsume its private interest to the public interest of the banking system as a whole. The Bank began to follow Bagehot&rsquos rule, which was to lend freely on the basis of any sound collateral offered&mdashbut at a penalty rate (that is, above market rates) to prevent moral hazard. The bank learned its lesson well. No financial crises occurred in England for nearly 150 years after 1866. It wasn&rsquot until August 2007 that the country experienced its next crisis.

The U.S. experience was most interesting. It had two central banks in the early nineteenth century, the Bank of the United States (1791&ndash1811) and a second Bank of the United States (1816&ndash1836). Both were set up on the model of the Bank of England, but unlike the British, Americans bore a deep-seated distrust of any concentration of financial power in general, and of central banks in particular, so that in each case, the charters were not renewed.

There followed an 80-year period characterized by considerable financial instability. Between 1836 and the onset of the Civil War&mdasha period known as the Free Banking Era&mdashstates allowed virtual free entry into banking with minimal regulation. Throughout the period, banks failed frequently, and several banking panics occurred. The payments system was notoriously inefficient, with thousands of dissimilar-looking state bank notes and counterfeits in circulation. In response, the government created the national banking system during the Civil War. While the system improved the efficiency of the payments system by providing a uniform currency based on national bank notes, it still provided no lender of last resort, and the era was rife with severe banking panics.

The crisis of 1907 was the straw that broke the camel&rsquos back. It led to the creation of the Federal Reserve in 1913, which was given the mandate of providing a uniform and elastic currency (that is, one which would accommodate the seasonal, cyclical, and secular movements in the economy) and to serve as a lender of last resort.


Contents

Paper currency first developed in Tang dynasty China during the 7th century, although true paper money did not appear until the 11th century, during the Song dynasty. The usage of paper currency later spread throughout the Mongol Empire or Yuan dynasty China. European explorers like Marco Polo introduced the concept in Europe during the 13th century. [16] [17] Napoleon issued paper banknotes in the early 1800s. [18] Cash paper money originated as receipts for value held on account "value received", and should not be conflated with promissory "sight bills" which were issued with a promise to convert at a later date.

The perception of banknotes as money has evolved over time. Originally, money was based on precious metals. Banknotes were seen by some as an I.O.U. or promissory note: a promise to pay someone in precious metal on presentation (see representative money). But they were readily accepted - for convenience and security - in London, for example, from the late 1600s onwards. With the removal of precious metals from the monetary system, banknotes evolved into pure fiat money.

Early Chinese paper money Edit

The first banknote-type instrument was used in China in the 7th century, during the Tang dynasty (618–907). Merchants would issue what are today called promissory notes in the form of receipts of deposit to wholesalers to avoid using the heavy bulk of copper coinage in large commercial transactions. [19] [14] [15] Before the use of these notes, the Chinese used coins that were circular, with a rectangular hole in the middle. Coins could be strung together on a rope. Merchants, if they were rich enough, found that the strings were too heavy to carry around easily, especially for large transactions. To solve this problem, coins could be left with a trusted person, with the merchant being given a slip of paper (the receipt) recording how much money they had deposited with that person. When they returned with the paper to that person, their coins would be returned.

True paper money, called "jiaozi", developed from these promissory notes by the 11th century, during the Song dynasty. [20] [21] By 960, the Song government was short of copper for striking coins, and issued the first generally circulating notes. These notes were a promise by the ruler to redeem them later for some other object of value, usually specie. The issue of credit notes was often for a limited duration, and at some discount to the promised amount later. The jiaozi did not replace coins but was used alongside them.

The central government soon observed the economic advantages of printing paper money, issuing a monopoly for the issue of these certificates of deposit to several deposit shops. [19] By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins. [15] By the 1120s the central government started to produce its own state-issued paper money (using woodblock printing). [19]

Even before this point, the Song government was amassing large amounts of paper tribute. It was recorded that each year before 1101, the prefecture of Xin'an (modern Shexian, Anhui) alone would send 1,500,000 sheets of paper in seven different varieties to the capital at Kaifeng. [22] In 1101, the Emperor Huizong of Song decided to lessen the amount of paper taken in the tribute quota, because it was causing detrimental effects and creating heavy burdens on the people of the region. [23] However, the government still needed masses of paper product for the exchange certificates and the state's new issuing of paper money. For the printing of paper money alone, the Song government established several government-run factories in the cities of Huizhou, [ which? ] Chengdu, Hangzhou, and Anqi. [23]

The workforce employed in these paper money factories was quite large it was recorded in 1175 that the factory at Hangzhou alone employed more than a thousand workers a day. [23] However, the government issues of paper money were not yet nationwide standards of currency at that point issues of banknotes were limited to regional areas of the empire, and were valid for use only in a designated and temporary limit of three years. [15]

The geographic limitation changed between 1265 and 1274, when the late southern Song government issued a nationwide paper currency standard, which was backed by gold or silver. [15] The range of varying values for these banknotes was perhaps from one string of cash to one hundred at the most. [15] Ever after 1107, the government printed money in no less than six ink colors and printed notes with intricate designs and sometimes even with mixture of a unique fiber in the paper to combat counterfeiting.

The founder of the Yuan dynasty, Kublai Khan, issued paper money known as Jiaochao. The original notes were restricted by area and duration, as in the Song dynasty, but in the later years, facing massive shortages of specie to fund their rule, the paper money began to be issued without restrictions on duration. Venetian merchants were impressed by the fact that the Chinese paper money was guaranteed by the State.

European explorers and merchants Edit

According to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. [24]

Around 1150, the Knights Templar would issue notes to pilgrims. Pilgrims would deposit valuables with a local Templar preceptory before embarking for the Holy Land and receive a document indicating the value of their deposit. They would then use that document upon arrival in the Holy Land to receive funds from the treasury of equal value. [25] [26]

In the 13th century, Chinese paper money of Mongol Yuan became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. [16] [27] Marco Polo's account of paper money during the Yuan dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country." [17]

All these pieces of paper are, issued with as much solemnity and authority as if they were of pure gold or silver. with these pieces of paper, made as I have described, Kublai Khan causes all payments on his own account to be made and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold

In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of cash over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whomever had it in their possession. These notes are seen as a predecessor to regular banknotes by some but are mainly thought of as proto bills of exchange and cheques. [28] The term "bank note" comes from the notes of the bank ("nota di banco") and dates from the 14th century it originally recognized the right of the holder of the note to collect the precious metal (usually gold or silver) deposited with a banker (via a currency account). In the 14th century, it was used in every part of Europe and in Italian city-state merchants colonies outside of Europe. For international payments, the more efficient and sophisticated bill of exchange ("lettera di cambio"), that is, a promissory note based on a virtual currency account (usually a coin no longer physically existing), was used more often. All physical currencies were physically related to this virtual currency this instrument also served as credit.

Birth of European banknotes Edit

The shift toward the use of these receipts as a means of payment took place in the mid-17th century, as the price revolution, when relatively rapid gold inflation was causing a re-assessment of how money worked. The goldsmith bankers of London began to give out the receipts as payable to the bearer of the document rather than the original depositor. This meant that the note could be used as currency based on the security of the goldsmith, not the account holder of the goldsmith-banker. [30] The bankers also began issuing a greater value of notes than the total value of their physical reserves in the form of loans, on the assumption that they would not have to redeem all of their issued banknotes at the same time. This pivotal shift changed the simple promissory note into an agency for the expansion of the monetary supply itself. As these receipts were increasingly used in the money circulation system, depositors began to ask for multiple receipts to be made out in smaller, fixed denominations for use as money. The receipts soon became a written order to pay the amount to whoever had possession of the note. These notes are credited as the first modern banknotes. [28] [31]

The first short-lived attempt at issuing banknotes by a central bank was in 1661 by Stockholms Banco, a predecessor of Sweden's central bank Sveriges Riksbank. [32] These replaced the copper-plates being used instead as a means of payment. [33] This banknote issue was brought about by the peculiar circumstances of the Swedish coin supply. Cheap foreign imports of copper had forced the Crown to steadily increase the size of the copper coinage to maintain its value relative to silver. The heavy weight of the new coins encouraged merchants to deposit it in exchange for receipts. These became banknotes when the manager of the Bank decoupled the rate of note issue from the bank currency reserves. Three years later, the bank went bankrupt, after rapidly increasing the artificial money supply through the large-scale printing of paper money. A new bank, the Riksens Ständers Bank was established in 1668, but did not issue banknotes until the 19th century. [34]

Permanent issue of banknotes Edit

The modern banknote rests on the assumption that money is determined by a social and legal consensus. A gold coin's value is simply a reflection of the supply and demand mechanism of a society exchanging goods in a free market, as opposed to stemming from any intrinsic property of the metal. By the late 17th century, this new conceptual outlook helped to stimulate the issue of banknotes. The economist Nicholas Barbon wrote that money "was an imaginary value made by a law for the convenience of exchange." [35] A temporary experiment of banknote issue was carried out by Sir William Phips as the Governor of the Province of Massachusetts Bay in 1690 to help fund the war effort against France. [36]

The first bank to initiate the permanent issue of banknotes was the Bank of England. Established in 1694 to raise money for the funding of the war against France, the bank began issuing notes in 1695 with the promise to pay the bearer the value of the note on demand. They were initially handwritten to a precise amount and issued on deposit or as a loan. There was a gradual move toward the issuance of fixed denomination notes, and by 1745, standardized printed notes ranging from £20 to £1,000 were being printed. Fully printed notes that did not require the name of the payee and the cashier's signature first appeared in 1855. [37]

The Scottish economist John Law helped establish banknotes as a formal currency in France, after the wars waged by Louis XIV left the country with a shortage of precious metals for coinage.

In the United States there were early attempts at establishing a central bank in 1791 and 1816, but it was only in 1862 that the federal government of the United States began to print banknotes.

Central bank issuance of legal tender Edit

Originally, the banknote was simply a promise to the bearer that they could redeem it for its value in specie, but in 1833 the second in a series of Bank Charter Acts established that banknotes would be considered as legal tender during peacetime. [38]

Until the mid-nineteenth century, commercial banks were able to issue their own banknotes, and notes issued by provincial banking companies were the common form of currency throughout England, outside London. [39] The Bank Charter Act of 1844, which established the modern central bank, [40] restricted authorisation to issue new banknotes to the Bank of England, which would henceforth have sole control of the money supply in 1921. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold or up to £14 million in government debt. The Act gave the Bank of England an effective monopoly over the note issue from 1928. [41] [42]

Generally, a central bank or treasury is solely responsible within a state or currency union for the issue of banknotes. However, this is not always the case, and historically the paper currency of countries was often handled entirely by private banks. Thus, many different banks or institutions may have issued banknotes in a given country. Commercial banks in the United States had legally issued banknotes before there was a national currency however, these became subject to government authorization from 1863 to 1932. In the last of these series, the issuing bank would stamp its name and promise to pay, along with the signatures of its president and cashier on a preprinted note. By this time, the notes were standardized in appearance and not too different from Federal Reserve Notes.

In a small number of countries, private banknote issue continues to this day. For example, by virtue of the complex constitutional setup in the United Kingdom, certain commercial banks in two of the state's four constituent countries (Scotland and Northern Ireland) continue to print their own banknotes for domestic circulation, even though they are not fiat money or declared in law as legal tender anywhere. The UK's central bank, the Bank of England, prints notes which are legal tender in England and Wales these notes are also usable as money (but not legal tender) in the rest of the UK (see Banknotes of the pound sterling).

In the two Special Administrative Regions of the People's Republic of China, arrangements are similar to those in the UK in Hong Kong, three commercial banks are licensed to issue Hong Kong dollar notes, [43] and in Macau, banknotes of the Macanese pataca are issued by two different commercial banks. In Luxembourg, the Banque Internationale à Luxembourg was entitled to issue its own Luxembourgish franc notes until the introduction of the Euro in 1999. [44]

As well as commercial issuers, other organizations may have note-issuing powers for example, until 2002 the Singapore dollar was issued by the Board of Commissioners of Currency Singapore, a government agency which was later taken over by the Monetary Authority of Singapore. [43]

As with any printing, there is also a chance for banknotes to have printing errors. For U.S. banknotes, these errors can include board break errors, butterfly fold errors, cutting errors, dual denomination errors, fold over errors, and misalignment errors. [45]

Prior to the introduction of banknotes, precious or semiprecious metals minted into coins to certify their substance were widely used as a medium of exchange. The value that people attributed to coins was originally based upon the value of the metal unless they were token issues or had been debased. Banknotes were originally a claim for the coins held by the bank, but due to the ease with which they could be transferred and the confidence that people had in the capacity of the bank to settle the notes in coin if presented, they became a popular means of exchange in their own right. They now make up a very small proportion of the "money" that people think that they have as demand deposit bank accounts and electronic payments have negated the need to carry notes and coins.

Banknotes have a natural advantage over coins in that they are lighter to carry but are also less durable. Banknotes issued by commercial banks had counterparty risk, meaning that the bank may not be able to make payment when the note was presented. Notes issued by central banks had a theoretical risk when they were backed by gold and silver. Both banknotes and coins are subject to inflation. The durability of coins means that even if metal coins melt in a fire or are submerged under the sea for hundreds of years they still have some value when they are recovered. Gold coins salvaged from shipwrecks retain almost all of their original appearance, but silver coins slowly corrode. [46] [47]

Other costs of using bearer money include:

  1. Discounting to face value: Before national currencies and efficient clearing houses, banknotes were only redeemable at face value at the issuing bank. Even a branch bank could discount notes of other branches of the same bank. The discounts usually increased with distance from the issuing bank. The discount also depended on the perceived safety of the bank. When banks failed, the notes were usually partly redeemed out of reserves, but sometimes became worthless. [48][49] The problem of discounting within a country does not exist with national currencies however, under floating exchange rates currencies are valued relative to one another in the foreign exchange market. paper notes has always been a problem, especially since the introduction of color photocopiers and computer image scanners. Numerous banks and nations have incorporated many types of countermeasures in order to keep the money secure. However, extremely sophisticated counterfeit notes known as superdollars have been detected in recent years.
  2. Manufacturing or issue costs. Coins are produced by industrial manufacturing methods that process the precious or semi-precious metals, and require additions of alloy for hardness and wear resistance. By contrast, bank notes are printed paper (or polymer), and typically have a higher cost of issue, especially in larger denominations, compared with coins of the same value.
  3. Wear costs. Banknotes don't lose economic value by wear, since, even if they are in poor condition, they are still a legally valid claim on the issuing bank. However, banks of issue do have to pay the cost of replacing banknotes in poor condition and paper notes wear out much faster than coins.
  4. Cost of transport. Coins can be expensive to transport for high value transactions, but banknotes can be issued in large denominations that are lighter than the equivalent value in coins.
  5. Cost of acceptance. Coins can be checked for authenticity by weighing and other forms of examination and testing. These costs can be significant, but good quality coin design and manufacturing can help reduce these costs. Banknotes also have an acceptance cost, the costs of checking the banknote's security features and confirming acceptability of the issuing bank.

The different disadvantages between coins and banknotes imply that there may be an ongoing role for both forms of bearer money, each being used where its advantages outweigh its disadvantages.

Paper banknotes Edit

Most banknotes are made from cotton paper with a weight of 80 to 90 grams per square meter. The cotton is sometimes mixed with linen, abaca, or other textile fibres. Generally, the paper used is different from ordinary paper: it is much more resilient, resists wear and tear (the average life of a banknote is two years), [50] and also does not contain the usual agents that make ordinary paper glow slightly under ultraviolet light. Unlike most printing and writing paper, banknote paper is infused with polyvinyl alcohol or gelatin, instead of water, to give it extra strength. Early Chinese banknotes were printed on paper made of mulberry bark. Mitsumata (Edgeworthia chrysantha) and other fibers are used in Japanese banknote paper [51] (a kind of Washi).

Most banknotes are made using the mould made process in which a watermark and thread is incorporated during the paper forming process. The thread is a simple looking security component found in most banknotes. It is however often rather complex in construction comprising fluorescent, magnetic, metallic and micro print elements. By combining it with watermarking technology the thread can be made to surface periodically on one side only. This is known as windowed thread and further increases the counterfeit resistance of the banknote paper. This process was invented by Portals, part of the De La Rue group in the UK. Other related methods include watermarking to reduce the number of corner folds by strengthening this part of the note. Varnishing and coatings reduce the accumulation of dirt on the note for longer durability in circulation.

Another security feature is based on windows in the paper which are covered by holographic foils to make it very hard to copy. Such technology is applied as a portrait window for the higher denominations of the Europa series (ES2) of the euro banknotes. [52] Windows are also used with the Hybrid substrate from Giesecke+Devrient which is composed of an inner layer of paper substrate with thin outer layers of plastic film for high durability. [53]

History of counterfeiting and security measures Edit

When paper bank notes were first introduced in England, they resulted in a dramatic rise in counterfeiting. [ citation needed ] The attempts by the Bank of England and the Royal Mint to stamp out currency crime led to new policing strategies, including the increased use of entrapment. [54]

The characteristics of banknotes, their materials and production techniques (as well as their development over history) are topics that normally aren't thoroughly examined by historians, even though now there are a number of works detailing how bank notes were actually constructed. This is mostly due to the fact that historians prioritize the theoretical understanding of how money worked rather than how it was produced. [55] The first great deterrent against counterfeiting was the death penalty for forgers, but this wasn't enough to stop the rise of counterfeiting. Over the eighteenth century, far fewer banknotes were circulating in England compared to the boom of bank notes in the nineteenth century because of this, improving note-making techniques wasn't considered a compelling issue.

In the eighteenth century, banknotes were produced mainly through copper-plate engraving and printing and they were single-sided. Notes making technologies remained basically the same during the eighteenth century [56] The first banknotes were produced through the so-called intaglio printing, a technique that consisted of engraving a copper plate by hand and then covering it in ink to print the bank notes. Only with this technique it was possible, at that time, to force the paper into the lines of the engraving and to make suitable banknotes. Another factor that made it harder to counterfeit banknotes was the paper, since the type of paper used for banknotes was rather different from the paper commercially available at that time. Despite this, some forgers managed to successfully forge notes by getting involved with and consulting paper makers, in order to make a similar kind of paper by themselves. [57] Furthermore, watermarked paper was also used since banknotes first appeared it involved the sewing of a thin wire frame into paper mould. Watermarks for notes were first used in 1697 by a Berkshire paper maker whose name was Rice Watkins. [57] Watermarks, together with a special paper type, were supposed to make it harder and more expensive to forge banknotes, since more complex and expensive paper making machines were needed in order to make them.

At the beginning of the nineteenth century (the so-called Bank Restriction Period, 1797-1821), the dramatically increased demand of bank notes slowly forced the banks to refine the technologies employed. [57] In 1801, watermarks, which previously were straight lines, became wavy, thanks to the idea of a watermark mould maker whose name was William Brewer. This made even harder the counterfeiting of bank notes, at least in the short term, since in 1803 the number of forged bank notes fell to just 3000, compared to 5000 of the previous year [58] In the same period, bank notes also started to become double-sided and with more complex patterns, and banks asked skilled engravers and artists to help them make their notes harder to counterfeit (episode labelled by historians as "the search for the inimitable banknote"). [59]

The ease with which paper money can be created, by both legitimate authorities and counterfeiters, has led both to a temptation in times of crisis such as war or revolution to produce paper money which was not supported by precious metal or other goods, thus leading to Hyperinflation and a loss of faith in the value of paper money, e.g. the Continental Currency produced by the Continental Congress during the American Revolution, the Assignats produced during the French Revolution, the paper currency produced by the Confederate States of America and the individual states of the Confederate States of America, the financing of World War I by the Central Powers (by 1922 1 gold Austro-Hungarian krone of 1914 was worth 14,400 paper Kronen), the devaluation of the Yugoslav Dinar in the 1990s, etc. Banknotes may also be overprinted to reflect political changes that occur faster than new currency can be printed.

In 1988, Austria produced the 5000 Schilling banknote (Mozart), which is the first foil application (Kinegram) to a paper banknote in the history of banknote printing. The application of optical features is now in common use throughout the world. Many countries' banknotes now have embedded holograms.

Polymer banknotes Edit

In 1983, Costa Rica and Haiti issued the first Tyvek and the Isle of Man issued the first Bradvek polymer (or plastic) banknotes these were printed by the American Banknote Company and developed by DuPont. These early plastic notes were plagued with issues such as ink wearing off and were discontinued. In 1988, after significant research and development in Australia by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Reserve Bank of Australia, Australia produced the first polymer banknote made from biaxially-oriented polypropylene (plastic), and in 1996, it became the first country to have a full set of circulating polymer banknotes of all denominations completely replacing its paper banknotes. Since then, other countries to adopt circulating polymer banknotes include Bangladesh, Brazil, Brunei, Canada, Chile, Guatemala, Dominican Republic, Indonesia, Israel, Malaysia, Mexico, Nepal, New Zealand, Papua New Guinea, Paraguay, Romania, Samoa, Singapore, the Solomon Islands, Thailand, Trinidad and Tobago, the United Kingdom, Uruguay, Vietnam, and Zambia, with other countries issuing commemorative polymer notes, including China, Kuwait, the Northern Bank of Northern Ireland, Taiwan and Hong Kong. [60] Another country indicating plans to issue polymer banknotes is Nigeria. [ citation needed ] In 2005, Bulgaria issued the world's first hybrid paper-polymer banknote. [ citation needed ]

Polymer banknotes were developed to improve durability and prevent counterfeiting through incorporated security features, such as optically variable devices that are extremely difficult to reproduce.


Central bank

A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union, [1] and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Most central banks also have supervisory and regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.

Central banks in most developed nations are institutionally independent from political interference. [2] [3] [4] Still, limited control by the executive and legislative bodies exists. [5] [6]


The Declaration of Interdependence (1976)

On January 30, 1976, came the announcement of "A Declaration of Interdependence", a document which endorsed a one-world government. The announcement was made at a meeting held at Philadelphia's Independence Hall, which was sponsored by the World Affairs Council (and had stemmed from a five point program they had announced in September, 1975). The meeting was funded with a $100,000 grant from the Pennsylvania Bicentennial Committee. The document, written by CFR member Henry Steele Comsmager began with this sentence:

"Two centuries ago our forefathers brought forth a new nation now we must join with others to bring forth a new world order."

It was signed by 24 U.S. Senators and 80 U.S. Representatives, including:

  • Sen. Alan Cranston (D-CA, CFR)
  • Sen. Jacob Javits (R-NY)
  • Sen. Hubert Humphrey D-MN)
  • Sen. George McGovern (D-SD)
  • Sen. William Proxmire (D-WI)
  • Sen. Charles Mathias (CFR)
  • Sen. Clairborne Pell (CFR)
  • Rep. Paul Simon
  • Rep. Patricia Shroeder
  • Rep. Louis Stokes
  • Rep. Les Aspin (Secretary of Defense under Clinton)
  • Rep. John B. Anderson (R-IL)
  • Rep. Morris K. Udall (D-AZ)

This document went through further drafts, and in 1984, it was presented by the Committee on the Constitutional System (CCS) as an alternative to the existing Constitution. One of the group's Board members, James MacGregor Burns, a history professor, said:

"If we are to turn the founders upside down . we must directly confront the constitutional structure they erected."

About a third of the CCS Board members belonged to the CFR, including Chairman C. Douglas Dillon (former Secretary of Treasury), Lloyd Cutler (former legal council to President Carter, and council to President Clinton), and Sen. Nancy Kassebaum. Some of the other members were: Robert McNamara (former Secretary of Defense under Kennedy and Johnson), Sen. Daniel Patrick Moynihan, Sen. Charles Mathias, Sen. J. William Fulbright, and others who were associated with the Brookings Institution, Rockefeller Foundation, and Woodrow Wilson Center.

It is ironic, but organizations claiming to be "conservative," seem to be the strongest supporters for a Constitutional Convention. Most notable are: American Legislative Exchange Council (ALEC), National Taxpayers' Union (NTU), Republican National Committee (RNC), and the Committee on the Constitutional System (CCS).

In 1992, Ross Perot, who had become a political force to be reckoned with, publicly called for a Constitutional Convention. In guest appearances with Barbara Walters, Phil Donahue and Larry King he stated that we needed a Parliamentary Government, and pledged that "his people" could get the remaining states needed for a Constitutional Convention call "in their sleep."


In our examination of modern monetary systems and economies, it&rsquos worth taking some time to examine the most prominent approaches, at least in the last century, to solving the problems of economic incentives.

Capitalism and communism stand in stark contrast to each other as the most clear examples of the extremes of the economic spectrum from a decentralized system of free trade to one that is deeply centralized, being directly controlled by a collection of governing powers.

The two contrasting systems have sought to solve economic problems of the modern world. Both have failed in a number of ways.

Note that in this essay, the goal is to limit the scope of our investigation into the degree of centralization: there are plenty of other pros and cons to communism and capitalism outside the scope of this inquiry: and we are specifically limiting our thesis to the results of communism and deregulated capitalism, rather than the theoretical strengths or weaknesses.

True free-market or capitalist economies should ideally operate in a decentralized manner, with no central force controlling the movement between money, goods, and services. The &ldquo invisible hand ,&rdquo as Adam Smith described it, allows supply and demand dynamics to move the agreed-upon value of any given product or service.

Products and services are naturally provided through the profit motive without the need for a central orchestrator. Competition and a constant striving for innovation and improvement is incentivized by this profit-motive &mdash merchants enjoy greater success if people choose their superior products or services. Poorly made products and shoddy services fail, thus continuing the natural evolution of improvement and innovation in an economic &ldquo survival of the fittest &rdquo scenario.

While successful businesses flourish and lousy companies fail, the consumer benefits most in this system, receiving a better product or service at a better price. This, of course, is an idealized scenario of how capitalism should work.

source: www.nicksamoylov.com

Centralized economies, like those that operate under communism, take a different approach to providing for needs and wants. In a centralized economic system, a few members of the population decide what is important to have available in society and then determine what must be produced at a given cost and subsequent set price, which is then passed on to consumers.

There is little in the way of competition, but everyone, ideally, has access to a given product at a relatively cheap price since it is produced in quantities dictated by the powers-that-be. Suppliers are paid according to what is deemed fair or appropriate given production costs, or are simply controlled directly by the central parties at the shared expense of the population.

In a &lsquoworking&rsquo communist model, all needs would be prioritized and provided while frivolous wants and greedy motivations would take a backseat. Economic and social inequality would disappear. Theoretically.

Of course, systems that are centralized-by-design exhibit some pretty obvious problems. Firstly, if the powers-that-be miscalculate the need for a given product, there can be a problem ensuring a sufficient supply for the needs or wants of a population.

Secondly, in a centralized economy, the desire to compete to be better in order to be more profitable does not exist. Participants are not motivated to be efficient or to make enough of a product, for example, or even to try to make a better product for consumers to enjoy, since the reward is the same, regardless of performance.


“The centralization of power always fails”

As we stand at the beginning of the new year, there’s a lot of hope by investors, business owners, citizens, all of us, that 2021 will be better than its predecessor. We all wish for an end to the pandemic, a return to normalcy, to social interactions and to productive life. However, as we all know, “wishing doesn’t make it so”, and being prepared for the risks and challenges ahead is a far more effective strategy than being willfully blind to them and hoping they’ll just magically go away.

In my efforts to identify those risks and figure out what a responsible investor can do about them, I asked Martin Armstrong, one of the most famous economic forecasters alive, to share his own views and outlook. It’s hard to overstate the quality and value of his insights. His record speaks for itself, as his analyses and forecasts have been proven accurate again and again.

With over 40 years of experience in monitoring and forecasting market behavior and a deep understanding of monetary history, Martin has developed numerous proprietary models that identify market patterns, the most famous of which is his Economic Confidence Model. He predicted the 1987 Black Monday crash to the day, the 1989 Japanese stock market collapse, as well as the Russian financial crash in 1998.

His latest book, “The Cycle of War & the Coronavirus”, is a comprehensive, global review of the cycle of war and civil unrest throughout history that is especially relevant today.

Claudio Grass (CG): 2020 was a year that will likely find a special place in future history books, as we saw a lot of things happen for the first time, at least in our lifetimes. Do you see all these gigantic shifts and this entire COVID crisis as being indeed unprecedented, or can you identify parallels or similar crises from the past that we might perhaps learn from?

Martin Armstrong (MA): This is the beginning of political unrest similar to 1912, when the progressive movement resulted in the Republican Party splitting. Never before has government deliberately used a disease for political gain. Historically, you quarantined only those who were sick, not the entire nation. Evidence is abundant that the lockdowns have not reduced infections. New York suffered nearly 20% more deaths than Florida, which was not locked down in a draconian manner.

CG: When we look at the extent and the depth of the damage caused the lockdowns and the shutdowns, its really hard to see the bold recovery in 2021 that world leaders and institutions seem to be already celebrating. Unemployment levels, productivity metrics, bankruptcies, all paint the opposite picture. What is your outlook for the coming months and years? Can we really recover all this lost ground so swiftly?

MA: No, this has been the peak in the Western economy, which is deliberately being crashed for the sake of what they are calling “build back better”, to support the World Economic Forum’s “Great Reset,” which is their agenda for 2030. They believe that they can retrain people to adapt to a “green economy”. This took place during the Great Depression, as the economy moved from 40% agrarian to manufacturing. That resulted in 25% unemployment that was only reduced by going to WWII. I don’t believe that we will be able to recover fully until after 2037. You cannot rebuild an economy by changing the entire system in less than 26 years. Additionally, the elimination of fossil fuels is unrealistic. We lack the power grids, and even military jets could not be converted to electricity.

CG: One of the most striking measures that most governments took during this crisis was the extraordinary fiscal firepower they deployed to support the economy”. From checks to citizens to gift loans” to businesses, it was a kind of blind and indiscriminate spending that we havent seen before. Do you see an inflationary risk on the horizon and are there also other dangers that might result from these policies, politically or socially?

MA: The first impact is deflation. Increasing the money supply will not by itself create inflation unless the people spend the money. Because people fear the future, they are in a savings mode. This will shift and create inflation when the confidence in government collapses. That is when the shift to tangible assets historically takes place. Politically, we have moved from a democracy to socialism, which is now beginning to collapse because excessively low interest rates undermined pension funds and social programs.

The result of this returns to authoritarianism, as we are witnessing, with lockdowns designed more to prevent civil unrest. Socially, this increases the risk of war just as the excessive reparation payments upon Germany following WWI which harmed the German individual led to political change in 1933. Therefore, the social risk of civil unrest increases with economic declines. It is the economy which produces peace as long as everyone benefits, it is not nuclear arsenals. China, Japan, and Germany all benefitted from producing goods to sell to the American consumer that produced jobs in their homelands and the prosperity reduced the risk of war.

CG: Before this crisis, many conservative investors and observers were criticizing and often ridiculing the tenets of Modern Monetary Theory. We all saw the idea that deficits dont matter” as childish and simply untenable, and yet today it would appear to be the mainstream policy direction. For how long can this print, borrow, spend, repeat” strategy hold?

MA: The Modern Monetary Theory (MMT) arose because of Quantitative Easing, which has prevailed since 2008, yet has failed to produce serious inflation or stimulate the economy. This was exacerbated by negative interest rates since 2014, causing people to invest in equities for returns unavailable in banks or bonds. People were unwilling to borrow and expand businesses while taxes were rising, and the future was uncertain. The capital formation that relied upon reasonable returns of interest was undermined and shifted into capital investment. The policies of central banks lowering rates were not passed on by the banks to the consumer.

Therefore, the illusion of MMT has only exposed the fallacy of Keynesian economics that government can manipulate the economy by affecting the demand of consumers. People will pay 20% interest if they think they will double their money next year. But they will not pay 1% interest if they do not believe they can make 1% next year. So it is a question of confidence, not the empirical rate of interest. This policy of MMT is coming to an end here in 2021.

CG: At the beginning of the COVID crisis, the ease with which the global economy, international trade and travel were shut down was shocking to many citizens and business owners, but it is arguably even more disturbing to see these policies prolonged, in an on and off” mode for all these months. Can we expect to see a reversal of these restrictions and a full reinstatement of all these rights that have been curbed or suspended due to the pandemic, or have we simply entered a new normal”?

MA: We have entered a “new normal”, because these lockdowns and restrictions are being imposed for economic reasons. The 1969 Hong Kong flu killed four times the number of people compared to COVID. Yet, there were no lockdowns, and the concert festival known as Woodstock took place in the middle of that pandemic. This is being driven to address what they call a climate crisis with the object of preventing people from commuting to work, travel for tourism, and to shift from fossil fuels to clean energy. This is why we are seeing the imposition of COVID vaccine certificates to be able even to travel. Those who resist the vaccine are deemed non-conformists and singled out much as the case was under Stalin in Russia.

CG: Looking at the US, this last year was exceptionally hard for the nation, with riots and widespread political frictions and unrest. The election was heated, contested and very bitter, but do you think the change of guard will serve to pacify those tensions, as mainstream analysts and pundits predicted?

MA: No way. Many now see this as racism. During the Black Lives Movement, the police were told to stand down, whereas Trump supporters are discriminated against. This is being reported as a rise in white supremacy even in the military. There is a wrong assumption that impeaching Trump will simply lead to disbanding his supporters. What is not being looked at closely is that Trump was simply there at the right time. His supporters have been a long growing populist uprising against career politicians. This stretches back long before Trump, through Pat Buchanan, Ross Perot, Barry Goldwater, George Wallace, Huey Long, William Jennings Bryan, and Andrew Jackson. So, it is unlikely that the removal of Trump will result in quieting this resentment. If anything, it will only confirm their convictions.

CG: During this whole ordeal, weve witnessed serious attempts by governments and international organizations to expand their reach and to further centralize power. But we also saw an opposing force, by private businesses and individuals who saw an opportunity for decentralization, with the most obvious example being the mass exodus from many urban centers and a significant increase of people deciding to try and start their own small business. Which force do you think is more likely to prevail?

MA: Historically, the centralization of power always fails. When the Russian Revolution took place, they seized all private assets, including farms. The decisions of when to plant crops then became bureaucratic, which resulted in catastrophic crop failures. Stalin then stole the food from Ukraine, killing 7 million people in the process. Throughout history, centralized planning always fails. The movement to the suburbs took place in ancient Rome from which we derive even the term from “suburbium” as the population declined from 1 million to 15 thousand.

CG: For conservative investors that are focused on protecting and preserving their wealth, the current market conditions appear to be very challenging. How can one still invest soundly, with a long-term view, in an environment where markets are roaring to new highs just as the real economy crumbles to new lows?

MA: The shift into equities has been the shift in confidence from government to private. From a long-term perspective, the tangible assets survive such transitions, from real estate, art, and collectibles to precious metals. They tend to make the transition in these shifts from public to private.

CG: On this topic of protection and insurance” for investors, what is your outlook on real assets and on physical precious metals in the months and years to come?

MA: The problem with gold has been government regulation and their war against private assets. Before, one could travel with a briefcase full of gold, but that is no longer possible. So, the mobility of tangible assets has been largely circumvented. The mobility of other tangible assets, such as equities, will eventually be targeted in the transition toward digital currencies.

CG: Overall, what would be your advice to investors, savers and ordinary citizens in navigating these uncertain times? Is the worst behind us and we should focus on rebuilding and recovering? Or is it yet to come and we should brace for impact?

MA: We should be bracing for impact, because the abuse of governments in this attempt to redesign the world economy with “Build Back Better” will lead to serious disruptions economically. We will see a decline in economic growth and a rise in civil unrest globally, which in some countries will lead to revolution and the increasing risk of a world war after 2024.


Centralization of Money - HISTORY

Interview with Martin A. Armstrong, founder AE Global Solutions Inc.

As we stand at the beginning of the new year, there’s a lot of hope by investors, business owners, citizens, all of us, that 2021 will be better than its predecessor. We all wish for an end to the pandemic, a return to normalcy, to social interactions and to productive life. However, as we all know, “wishing doesn’t make it so”, and being prepared for the risks and challenges ahead is a far more effective strategy than being willfully blind to them and hoping they’ll just magically go away.

In my efforts to identify those risks and figure out what a responsible investor can do about them, I asked Martin Armstrong, one of the most famous economic forecasters alive, to share his own views and outlook. It’s hard to overstate the quality and value of his insights. His record speaks for itself, as his analyses and forecasts have been proven accurate again and again.

Glove Station The Comb. Buy New $25.99 (as of 05:46 EST - Details ) With over 40 years of experience in monitoring and forecasting market behavior and a deep understanding of monetary history, Martin has developed numerous proprietary models that identify market patterns, the most famous of which is his Economic Confidence Model. He predicted the 1987 Black Monday crash to the day, the 1989 Japanese stock market collapse, as well as the Russian financial crash in 1998.

His latest book, “The Cycle of War & the Coronavirus”, is a comprehensive, global review of the cycle of war and civil unrest throughout history that is especially relevant today.

Claudio Grass (CG): 2020 was a year that will likely find a special place in future history books, as we saw a lot of things happen for the first time, at least in our lifetimes. Do you see all these gigantic shifts and this entire COVID crisis as being indeed unprecedented, or can you identify parallels or similar crises from the past that we might perhaps learn from?

Martin Armstrong (MA): This is the beginning of political unrest similar to 1912, when the progressive movement resulted in the Republican Party splitting. Never before has government deliberately used a disease for political gain. Historically, you quarantined only those who were sick, not the entire nation. Evidence is abundant that the lockdowns have not reduced infections. New York suffered nearly 20% more deaths than Florida, which was not locked down in a draconian manner.

CG: When we look at the extent and the depth of the damage caused the lockdowns and the shutdowns, its really hard to see the bold recovery in 2021 that world leaders and institutions seem to be already celebrating. Unemployment levels, productivity metrics, bankruptcies, all paint the opposite picture. What is your outlook for the coming months and years? Can we really recover all this lost ground so swiftly?

MA: No, this has been the peak in the Western economy, which is deliberately being crashed for the sake of what they are calling “build back better”, to support the World Economic Forum’s “Great Reset,” which is their agenda for 2030. They believe that they can retrain people to adapt to a “green economy”. This took place during the Great Depression, as the economy moved from 40% agrarian to manufacturing. That resulted in 25% unemployment that was only reduced by going to WWII. I don’t believe that we will be able to recover fully until after 2037. You cannot rebuild an economy by changing the entire system in less than 26 years. Additionally, the elimination of fossil fuels is unrealistic. We lack the power grids, and even military jets could not be converted to electricity. Timberland Men&rsquos. Buy New $99.95 (as of 05:46 EST - Details )

CG: One of the most striking measures that most governments took during this crisis was the extraordinary fiscal firepower they deployed to support the economy”. From checks to citizens to gift loans” to businesses, it was a kind of blind and indiscriminate spending that we havent seen before. Do you see an inflationary risk on the horizon and are there also other dangers that might result from these policies, politically or socially?

MA: The first impact is deflation. Increasing the money supply will not by itself create inflation unless the people spend the money. Because people fear the future, they are in a savings mode. This will shift and create inflation when the confidence in government collapses. That is when the shift to tangible assets historically takes place. Politically, we have moved from a democracy to socialism, which is now beginning to collapse because excessively low interest rates undermined pension funds and social programs.

The result of this returns to authoritarianism, as we are witnessing, with lockdowns designed more to prevent civil unrest. Socially, this increases the risk of war just as the excessive reparation payments upon Germany following WWI which harmed the German individual led to political change in 1933. Therefore, the social risk of civil unrest increases with economic declines. It is the economy which produces peace as long as everyone benefits, it is not nuclear arsenals. China, Japan, and Germany all benefitted from producing goods to sell to the American consumer that produced jobs in their homelands and the prosperity reduced the risk of war.

CG: Before this crisis, many conservative investors and observers were criticizing and often ridiculing the tenets of Modern Monetary Theory. We all saw the idea that deficits dont matter” as childish and simply untenable, and yet today it would appear to be the mainstream policy direction. For how long can this print, borrow, spend, repeat” strategy hold?

MA: The Modern Monetary Theory (MMT) arose because of Quantitative Easing, which has prevailed since 2008, yet has failed to produce serious inflation or stimulate the economy. This was exacerbated by negative interest rates since 2014, causing people to invest in equities for returns unavailable in banks or bonds. People were unwilling to borrow and expand businesses while taxes were rising, and the future was uncertain. The capital formation that relied upon reasonable returns of interest was undermined and shifted into capital investment. The policies of central banks lowering rates were not passed on by the banks to the consumer.

Men&rsquos Thermal Un. Buy New $28.99 (as of 05:46 EST - Details ) Therefore, the illusion of MMT has only exposed the fallacy of Keynesian economics that government can manipulate the economy by affecting the demand of consumers. People will pay 20% interest if they think they will double their money next year. But they will not pay 1% interest if they do not believe they can make 1% next year. So it is a question of confidence, not the empirical rate of interest. This policy of MMT is coming to an end here in 2021.

CG: At the beginning of the COVID crisis, the ease with which the global economy, international trade and travel were shut down was shocking to many citizens and business owners, but it is arguably even more disturbing to see these policies prolonged, in an on and off” mode for all these months. Can we expect to see a reversal of these restrictions and a full reinstatement of all these rights that have been curbed or suspended due to the pandemic, or have we simply entered a new normal”?

MA: We have entered a “new normal”, because these lockdowns and restrictions are being imposed for economic reasons. The 1969 Hong Kong flu killed four times the number of people compared to COVID. Yet, there were no lockdowns, and the concert festival known as Woodstock took place in the middle of that pandemic. This is being driven to address what they call a climate crisis with the object of preventing people from commuting to work, travel for tourism, and to shift from fossil fuels to clean energy. This is why we are seeing the imposition of COVID vaccine certificates to be able even to travel. Those who resist the vaccine are deemed non-conformists and singled out much as the case was under Stalin in Russia.

CG: Looking at the US, this last year was exceptionally hard for the nation, with riots and widespread political frictions and unrest. The election was heated, contested and very bitter, but do you think the change of guard will serve to pacify those tensions, as mainstream analysts and pundits predicted?

MA: No way. Many now see this as racism. During the Black Lives Movement, the police were told to stand down, whereas Trump supporters are discriminated against. This is being reported as a rise in white supremacy even in the military. There is a wrong assumption that impeaching Trump will simply lead to disbanding his supporters. What is not being looked at closely is that Trump was simply there at the right time. His supporters have been a long growing populist uprising against career politicians. This stretches back long before Trump, through Pat Buchanan, Ross Perot, Barry Goldwater, George Wallace, Huey Long, William Jennings Bryan, and Andrew Jackson. So, it is unlikely that the removal of Trump will result in quieting this resentment. If anything, it will only confirm their convictions. MOERDENG Men&rsquos W. Buy New $79.99 (as of 05:46 EST - Details )

CG: During this whole ordeal, weve witnessed serious attempts by governments and international organizations to expand their reach and to further centralize power. But we also saw an opposing force, by private businesses and individuals who saw an opportunity for decentralization, with the most obvious example being the mass exodus from many urban centers and a significant increase of people deciding to try and start their own small business. Which force do you think is more likely to prevail?

MA: Historically, the centralization of power always fails. When the Russian Revolution took place, they seized all private assets, including farms. The decisions of when to plant crops then became bureaucratic, which resulted in catastrophic crop failures. Stalin then stole the food from Ukraine, killing 7 million people in the process. Throughout history, centralized planning always fails. The movement to the suburbs took place in ancient Rome from which we derive even the term from “suburbium” as the population declined from 1 million to 15 thousand.

CG: For conservative investors that are focused on protecting and preserving their wealth, the current market conditions appear to be very challenging. How can one still invest soundly, with a long-term view, in an environment where markets are roaring to new highs just as the real economy crumbles to new lows?

MA: The shift into equities has been the shift in confidence from government to private. From a long-term perspective, the tangible assets survive such transitions, from real estate, art, and collectibles to precious metals. They tend to make the transition in these shifts from public to private.

CG: On this topic of protection and insurance” for investors, what is your outlook on real assets and on physical precious metals in the months and years to come?

MA: The problem with gold has been government regulation and their war against private assets. Before, one could travel with a briefcase full of gold, but that is no longer possible. So, the mobility of tangible assets has been largely circumvented. The mobility of other tangible assets, such as equities, will eventually be targeted in the transition toward digital currencies. KINGBIKE Balaclava Ski. Buy New $9.95 (as of 05:46 EST - Details )

CG: Overall, what would be your advice to investors, savers and ordinary citizens in navigating these uncertain times? Is the worst behind us and we should focus on rebuilding and recovering? Or is it yet to come and we should brace for impact?

MA: We should be bracing for impact, because the abuse of governments in this attempt to redesign the world economy with “Build Back Better” will lead to serious disruptions economically. We will see a decline in economic growth and a rise in civil unrest globally, which in some countries will lead to revolution and the increasing risk of a world war after 2024.


Centralization

Centralization refers to the process in which activities involving planning and decision-making within an organization Corporate Structure Corporate structure refers to the organization of different departments or business units within a company. Depending on a company&rsquos goals and the industry are concentrated to a specific leader Leadership Traits Leadership traits refer to personal qualities that define effective leaders. Leadership refers to the ability of an individual or an organization to guide individuals, teams, or organizations toward the fulfillment of goals and objectives. Leadership plays an important function in management or location. In a centralized organization, the decision-making powers are retained in the head office, and all other offices receive commands from the main office. The executives and specialists who make critical decisions are based in the head office.

Similarly, in a centralized government structure, the decision-making authority is concentrated at the top, and all other lower levels follow the directions coming from the top of the organization structure.

Advantages of Centralization

An effective centralization offers the following advantages:

1. A clear chain of command

A centralized organization benefits from a clear chain of command because every person within the organization knows who to report to. Junior employees know who to approach whenever they have concerns about the organization. On the other hand, senior executives follow a clear plan of delegating authority to employees who excel in specific functions. The executives also gain the confidence that when they delegate responsibilities to mid-level managers and other employees, there will be no overlap. A clear chain of command is beneficial when the organization needs to execute decisions quickly and in a unified manner.

2. Focused vision

When an organization follows a centralized management structure, it can focus on the fulfillment of its vision with ease. There are clear lines of communication and the senior executive can communicate the organization&rsquos vision to employees and guide them toward the achievement of the vision. In the absence of centralized management, there will be inconsistencies in relaying the message to employees because there are no clear lines of authority. Directing the organization&rsquos vision from the top allows for a smooth implementation of its visions and strategies. The organization&rsquos stakeholders Stakeholder In business, a stakeholder is any individual, group, or party that has an interest in an organization and the outcomes of its actions. Common examples such as customers, suppliers, and communities also receive a uniform message.

3. Reduced costs

A centralized organization adheres to standard procedures and methods that guide the organization, which helps reduce office and administrative costs SG&A SG&A includes all non-production expenses incurred by a company in any given period. It includes expenses such as rent, advertising, marketing . The main decision-makers are housed at the company&rsquos head office or headquarters, and therefore, there is no need for deploying more departments and equipment to other branches. Also, the organization does not need to incur extra costs to hire specialists for its branches since critical decisions are made at the head office and then communicated to the branches. The clear chain of command reduces duplication of responsibilities that may result in additional costs to the organization.

4. Quick implementation of decisions

In a centralized organization, decisions are made by a small group of people and then communicated to the lower-level managers. The involvement of only a few people makes the decision-making process more efficient since they can discuss the details of each decision in one meeting. The decisions are then communicated to the lower levels of the organization for implementation. If lower-level managers are involved in the decision-making process, the process will take longer and conflicts will arise. That will make the implementation process lengthy and complicated because some managers may object to the decisions if their input is ignored.

5. Improved quality of work

The standardized procedures and better supervision in a centralized organization result in improved quality of work. There are supervisors in each department who ensure that the outputs are uniform and of high quality. The use of advanced equipment reduces potential wastage from manual work and also helps guarantee high-quality work. Standardization of work also reduces the replication of tasks that may result in high labor costs.

Disadvantages of Centralization

The following are the disadvantages of centralization:

1. Bureaucratic leadership

Centralized management resembles a dictatorial form of leadership where employees are only expected to deliver results according to what the top executives assign them. Employees are unable to contribute to the decision-making process of the organization, and they are merely implementers of decisions made at a higher level. When the employees face difficulties in implementing some of the decisions, the executives will not understand because they are only decision-makers and not implementers of the decisions. The result of such actions is a decline in performance because the employees lack the motivation to implement decisions taken by top-level managers without the input of lower-level employees.

2. Remote control

The organization&rsquos executives are under tremendous pressure to formulate decisions for the organization, and they lack control over the implementation process. The failure of executives to decentralize the decision-making process adds a lot of work to their desks. The executives suffer from a lack of time to supervise the implementation of the decisions. This leads to reluctance on the part of employees. Therefore, the executives may end up making too many decisions that are either poorly implemented or ignored by the employees.

3. Delays in work

Centralization results in delays in work as records are sent to and from the head office. Employees rely on the information communicated to them from the top, and there will be a loss in man-hours if there are delays in relaying the records. This means that the employees will be less productive if they need to wait long periods to get guidance on their next projects.

4. Lack of employee loyalty

Employees become loyal to an organization when they are allowed personal initiatives in the work they do. They can introduce their creativity and suggest ways of performing certain tasks. However, in centralization, there is no initiative in work because employees perform tasks conceptualized by top executives. This limits their creativity and loyalty to the organization due to the rigidity of the work.

Summary

Centralization refers to a setup in which the decision-making powers are concentrated in a few leaders at the top of the organizational structure. Decisions are made at the top and communicated to lower-level managers for implementation.

Other resources

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  • Corporate Strategy Corporate Strategy Corporate Strategy focuses on how to manage resources, risk and return across a firm, as opposed to looking at competitive advantages in business strategy
  • Groupthink Groupthink Groupthink is a term developed by social psychologist Irving Janis in 1972 to describe faulty decisions made by a group due to group pressures. Groupthink is a phenomenon in which the ways of approaching problems or matters are dealt by the consensus of a group rather than by individuals acting independently.
  • Corporate Development Corporate Development Corporate development is the group at a corporation responsible for strategic decisions to grow and restructure its business, establish strategic partnerships, engage in mergers & acquisitions (M&A), and/or achieve organizational excellence. Corp Dev also pursues opportunities that leverage the value of the company&rsquos business platform.
  • Leading by Example Leading by Example Leadership is a process in which an individual influences the behavior and attitudes of other people. Leading by example helps other people see what lies

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Watch the video: Εθνοσυνέλευση, 19921, Σύνταγμα, Αθήνα.