Mr. Bernanke is
the world’s premier central banker. He is a very smart man with a
stellar academic record. He has carried the ways of the seminar into the FED.
He thinks about central banking a great deal, and he lets us know what he
But, in the end,
his thought is collectivist, and his political beliefs override economic
facts. And I think that this is a very serious matter, because this
collectivism entails the power to impose a monetary policy on all of us who
have been deprived of a free market in money and banking. We are the losers.
We are losing and have lost big time.
advocates price stability in no uncertain terms. In his speech in 2006, "The Benefits of Price Stability," he
extols the virtues of price stability. I will come back to that later. But
first, let us keep our thinking as clear as possible. Let us examine the record
of price stability in the United States. We have all seen this before, but I
set it down before you again so that we know precisely what we are talking
I am going to
assume that we can measure the price level. Otherwise, we cannot talk about
it. I know all the problems involved in this measurement. But I think we all
know that things generally cost more today than 50 years ago. We know that
somehow we measure the price level and that the concept of the price level
has meaning for us.
There is an inflation
calculator here that will serve our purposes. And it
uses standard data between 1800 and 2008. It’s easy to use. I insert
$100 as a basic amount of money in every calculation, and the question is how
much money it takes to buy the same goods at a later time.
Here are some
results for different periods. I choose these periods a priori. I
divide the period 1800–2008 into four nearly equal sub-periods. The
first three are 52 years each; the last is 49 years. Why do I do that? I do
that because I want long-term major facts. I do that to remove short-term
effects of all kinds. I believe that in economic matters there are often lags
that take time to work out, and I want to overcome any such lags. The results
come out as follows:
100 becomes 48.89
100 becomes 108.06
100 becomes 321.31
100 becomes 730.73
This means that
in 1852 it took $48.89 to buy what cost $100 in 1800. The price level fell.
Between 1853 and 1905, the price level rose very slightly from 100 to 108.06.
The next two sub-periods show very substantial increases in the price level.
Since 1959, the price level has gone up seven hundred and thirty percent.
Now, I bring to
bear the following knowledge:
1. The national
banking system began in 1863. I can define an era
between 1800–1862 as "sort of free banking" or call it any
other name that you want to. There was some central banking in this first
era, and there was government action in money and banking; but it was also a
time of various regulated forms of free banking. Individual banks issued bank
notes. There was no FED and no single national money.
2. I can define
1863–1913 as the national banking era. This system was by a national
statute, and it ended with the start of the FED.
3. I can define
1914–1971 as another era: the FED + central bank international gold
4. I can define
1971–present as yet another era: the FED + no central bank gold
Let us again look
at price level changes or price inflation.
100 becomes 58.64
100 becomes 80.36
100 becomes 403.90
100 becomes 509.17
Next, I observe
that these periods have unequal lengths. To make them comparable, I convert
to continuously compounded annual growth. I take the natural log of end
value/start value and divide by the era’s number of years. This gives
ln (58.64/100) x 1/62 = –0.0086 per annum or –0.86 percent per year
ln (80.36/100) x 1/50 = –0.0044 per annum or –0.44 percent per
ln (403.9/100) x 1/57 = 0.0245 per annum or 2.45 percent per year
ln (509.17/100) x 1/37 = 0.0440 per annum or 4.4 percent per year
For our purposes,
it’s not worth sub-dividing any further on the basis of other things,
such as Volcker vs. Greenspan, or wars and depressions, and so on. I want us
to be able to see the big picture about the price level.
that there is a remarkable difference pre-1913 (the FED’s beginning)
and after 1913.
Before and after
1913, we have two big eras. Before 1913, there is no institutional central
bank with teeth to speak of. After 1913, we get a modern central bank with
all sorts of powers. At the same time, pre-1913 there is lots of metal (gold
and silver) being used for money and banking. After 1913, the use of metal
diminishes, and the FED can do open-market operations. We get other non-metal
In these two
eras, we find
100 becomes 58.10. –0.0048 per year or –0.48% a year
100 becomes 2124.41. 0.0325 per year or 3.25% a year
In which era is
there more price stability? This is obvious. Before there is a central bank
and when metals are being used in the money and banking system, there is
greater price stability. There is no contest. Pre-1913, the price
level falls gently each year on the average by less than ½ of one
percent. After 1913, the price level rises each year by 6.8 times as much as
it used to decline before 1913 (in absolute value.) And we know that since
gold disappeared from central banking settlements altogether, from 1971
onwards, that the price level increase even went up further, to 4.4 percent a
year in the U.S.
It is entirely
reasonable to conclude that discretionary central banking with open market
operations and without gold playing an essential constraining role is the cause
of greater price instability and price inflation. Central banking with
discretionary open market operations and without the constraint of gold is
what helps defines central banking; that and the fact that its notes are
legal tender by law. If open market operations were taken away and if the
central bank had to redeem its currency in gold, we would no longer have central
banking as we know it now and as we have known it since 1913. For this
reason, it is reasonable simply to say that central banking is the cause of
greater price instability. To achieve price stability, we need only get rid
of central banking. If we do that by stripping it of various powers like open
market operations and by making it redeem in gold, all the while retaining
the shell institution, we are essentially getting rid of central banking.
We can reach
these conclusions if we look at the record. They are not conclusions that
depend on being a libertarian, a socialist, a democrat, a republican, a
collectivist, or anything else. And if we go into the matter more deeply and
examine the theory of how the monetary systems operate before and after 1913,
we will affirm these conclusions again. I will do this only briefly, but
enough to convey the basic idea. Banks before 1913 could not inflate in any
serious way because if they did, there would be a run on the bank. The
depositors would demand redemption in gold, and that would cut short the
bank’s inflation. So banks had to be careful about making too many
loans. After 1913, the FED essentially had the power to inflate without
having to worry about gold redemption. At first it did this for special reasons
like wars and depression; and gold actually flowed into the U.S. because of
problems overseas. But eventually, the government simply stopped redeeming in
gold altogether, so that the FED could inflate without gold as a constraint.
And so, no matter what our political beliefs are, we have to conclude that
sensible theory also tells us that central banking causes price instability.
what Ben Bernanke says about price stability.
particular, I will argue for what I believe has become the consensus view,
that the mandated goals of price stability and maximum employment are almost
entirely complementary. Central bankers, economists, and other knowledgeable
observers around the world agree that price stability both contributes
importantly to the economy's growth and employment prospects in the longer
term and moderates the variability of output and employment in the short to
My goodness, he
believes that price stability contributes to economic growth and to lower
variability of output and employment. He should favor getting rid of the FED
in that case, for the evidence is overwhelming that the FED has de-stabilized
the price level.
stability plays a dual role in modern central banking: It is both an end and
a means of monetary policy."
stability is a goal of monetary policy, then executing monetary policy via
the FED is a darn poor way to achieve it. We could achieve it better by going
back to the pre-FED system. In the 1800–1863 free banking era, the
price level fell by less than 1 percent a year.
believes in price stability:
price stability preserves the integrity and purchasing power of the nation's
money. When prices are stable, people can hold money for transactions and
other purposes without having to worry that inflation will eat away at the
real value of their money balances. Equally important, stable prices allow
people to rely on the dollar as a measure of value when making long-term
contracts, engaging in long-term planning, or borrowing or lending for long
periods. As economist Martin Feldstein has frequently pointed out, price
stability also permits tax laws, accounting rules, and the like to be
expressed in dollar terms without being subject to distortions arising from
fluctuations in the value of money. Economists like to argue that money
belongs in the same class as the wheel and the inclined plane among ancient
inventions of great social utility. Price stability allows that invention to
work with minimal friction."
And if you read
this speech in full, you will find even more reasons he gives why price
stability is a good thing. He just goes on and on and on about how wonderful
price stability is.
I myself am not
affirming that price stability is a good thing. I personally believe that we
should have free markets (which in my mind includes ethical and legal
practices that aim at personal responsibility, no theft, and no fraud) and
let the price level chips fall where they may. We should not have a body that
is measuring the price level and attempting to manipulate it.
My point is that
if Bernanke believes all this about price stability, then he should advocate
getting rid of central banking. Why doesn’t he do that? The answer goes
beyond economics. It goes to social and political theory. The answer is that
he does not believe in a free market or free banking. He believes in
collectivism. His personal political beliefs override the facts of economics.
collectivism? There are some decent quotes here that
give the sense of the idea. Ayn Rand’s statement is a good one:
means the subjugation of the individual to a group – whether to a race,
class or state does not matter. Collectivism holds that man must be chained
to collective action and collective thought for the sake of what is called
'the common good'."
that individual actions that add up to overall monetary outcomes (which is a
kind of spontaneous free market policy) are inferior to centralized monetary
policy imposed at the discretion of an elite run by him and other central
bankers. He simply does not believe in liberty and free markets.
It is a clear
fact that monetary policy affects the price level. Bernanke believes this.
But Bernanke believes that the FED should control the price level
through monetary policy, although such control is associated with price level
and economic instability. He does not believe in liberty. He is a
collectivist, and his collectivism overrules and biases his views of the
economics of the matter. He blinds himself to the fact that a system of no
central banking and decentralized free banking stabilizes the price level
better than a central banking system unattached to gold.
I could try to
persuade him that when the FED attempts to control the price level, it introduces
price instability and economic problems. I don’t think he will accept
that. He happens to believe that the FED under Greenspan did a marvelous job:
striking, Greenspan's tenure aligns closely with the Great Moderation, the
reduction in economic volatility I mentioned earlier, as well as with a
strong revival in U.S. productivity growth – developments that had many
sources, no doubt, but that were supported, in my view, by monetary stability."
Written in 2006,
he did not understand that, despite a seemingly low rate of price inflation,
the central banking system still was causing serious problems that
would show up the very next year. He cannot see these things because of his
political belief in collectivist monetary policy.
Bernanke believes that inflation targeting is the
way to go for the FED:
"What I find
particularly appealing about constrained discretion, which is the heart of
the inflation-targeting approach, is the possibility of using it to get
better results in terms of both inflation and employment. Personally, I
subscribe unreservedly to the Humphrey-Hawkins dual mandate, and I would not
be interested in the inflation-targeting approach if I didn't think it was
the best available technology for achieving both sets of policy
collectivism is on full display in his endorsement of the Humphrey-Hawkins Full Employment
Act which I have taken apart piece by piece here.
I think that even
if we were able to explain the drawbacks of any central banking regime
to Bernanke, even one that engaged in inflation-targeting, he would not back
down from his belief in central banking. His belief in central banking is
that firmly anchored:
always taken it to be a bedrock principle that when the stability or very
functioning of financial markets is threatened, as during the October 1987
stock market crash or the September 11 terrorist attacks, that the Federal
Reserve would take a leadership role in protecting the integrity of the system."
In point of fact,
markets respond to information about problems in the economic system, and
that includes the international currency system. As I wrote a few
price movements in general are notoriously hard to explain, but in this case
 the evidence points clearly to concerns about the international
currency system. The latter was one of the basic causes
at work in 1929 and again in 1972–74. After several such experiences
and others in the nineteenth century, we have every reason to believe that
monetary concerns are often central to bear markets. This important fact is
not as widely known or appreciated as it should be."
What we are
dealing with in someone like Bernanke is ingrained beliefs and prejudices. No
matter how many arguments one may come up with, a smart person like him will
come up with new rationales, new facts, and new interpretations so as to
deflect the arguments. He will defend his economic position adamantly because
he holds a political opinion that he will not abandon.
We do not have
here a simple matter of differences in opinion between some economists and
others, with Bernanke interpreting economic matters one way and some of us
interpreting them another way. Yes, that sometimes goes on; but it is hard to
see in this case that one can deny that price stability was achieved in the
19th century without the FED and that there are good reasons why
it was achieved without the FED. Collectivists like Bernanke who pass and
laud measures like the Humphrey-Hawkins Act do not accept economic facts and
theories that may be true. They resolve conflicts between truth and their
beliefs by sticking to their collectivist beliefs.
stubbornly believe things that are false are no great problem to the rest of
us as long as they don’t have the power to make us go along with their
This is not the
case in our political system. We have a very serious problem. The
collectivists are running the entire society and they are wrecking it. Ben
Bernanke is one of them. Replacing him with another collectivist won’t
do any good. The institutions we have are collectivist, and they attract
collectivists to run them.
Michael S. Rozeff is a retired Professor of Finance
living in East Amherst, New York. He publishes regularly his ideas and
analysis on www.LewRockwell.com .
Copyright © 2009 by LewRockwell.com. Permission
to reprint in whole or in part is gladly granted, provided full credit is