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If Ron Paul succeeds in getting the Fed audited, the
consequences could be far-reaching. Assuming the audit isn't rigged to
protect the guilty, as a similar bill was in 1978, the Fed will need every obfuscating Keynesian to
testify and write editorials on its behalf, to reassure the public that
monetary matters really are best left to the gods who rule us, such as Ben
Bernanke and Timothy Geithner. Monetarists, too,
would likely join the "Save the Fed" crusade, perhaps arguing that
even a great free market economist like Milton Friedman considered the Fed
useful for preventing and curing recessions.
But the really appetizing part of auditing the Fed
is knowing what stands behind it. The Fed is a racket at heart, a con game
writ large — what else can you call an organization with the exclusive
privilege of printing money in the trillions and handing it over to friends?
But if this is true, what does that say about the state, the organization
that created and sanctions it? Is the Fed an honest mistake in the state's
otherwise undying efforts to preserve our liberty, or might it be a key
component of a bigger racket?
Without the power of the state, there would be no
proposal to audit the Fed because there would be no Fed to audit. Like any
cartel, it exists to protect its members from market retribution, and only
the police power of the state can make us shoulder that burden. A bill to
audit the Fed could by force of logic become a state audit, much like the
investigations of the 1972 Watergate burglary exposed the grinning skull
behind the government's public persona. During a Fed audit, for example,
would it not be reasonable to ask why the people's elected representatives
continue to support a banking system that secretly steals wealth from their
countrymen and other dollar holders? Or are we to take the naïve
position that most elected officials really are clueless about the Fed's
policy of currency debasement and the effects such policies have had
in history?
Partners
in Crime
There are any number of ways a Fed audit could bring
the state itself under close scrutiny, but let us sketch just one line of
argument:
1. It is well known that banks engage in fractional-reserve lending,
meaning that bankers use their deposits in lending operations, with only a
part of their loans covered by money reserves. Fractional reserves expand the
money supply, which, until the age of Keynes and Fisher, was called
inflation. [1] It is also common knowledge that when banks
extend too much credit, depositors quite naturally get nervous and start
withdrawing their money.
Although
fractional reserves would seemingly qualify as a form of embezzlement —
the act of taking for personal use other people's property without their
knowledge or consent — government court rulings have never viewed it as
such. As Murray Rothbard observed, a bank that fails to meet its deposit obligations
is just another insolvent, not an embezzler. Following the British ruling in Foley v. Hill and Others
in 1848, US courts consider that money left with a banker is, "to all
intents and purposes, the money of the banker, to do with as he
pleases."[2]
This holds
even if the banker engages in "hazardous speculation." Thus,
according to the state, there can be no embezzlement because the money
belongs to the bank, not the depositor. But was there ever a depositor who
thought he was turning his money over to the banker so he could "do as
he pleases" with it? Furthermore, when the banker, in loaning the
customer's deposit to another party, essentially creates two claims to the
same piece of property (the money deposited), there is no way he can meet his
obligations to both depositor and borrower at the same time. Why does the
state exempt banks from the law of contradiction?
2. Without
a central bank, fractional-reserve banking leads to repetitive crises, as
banks are incapable of meeting redemption demands. Banks that have trouble
meeting their obligations need money fast, and this is one of the problems a
central bank addresses. "The
very existence of a fractional-reserve banking system invariably leads to the
emergence of a central bank as a lender of last resort,"
Jesus Huerta de Soto tells us.[3]
True, but
as de Soto recognizes, central banks don't emerge from open and candid
discussions within the banking community, unless one regards their wish for
"a more elastic currency" as an instance of brute honesty. To
succeed, central banks need protection from competition; they need to be the
monopoly supplier of bank notes. But monopolies in this sense don't emerge on
a free market. A deal needs to be cut between big bankers and influential
politicians to create a bank with legal privileges. This arrangement is then
forced on us not, presented not as a special privilege but as serving the
public interest. And we need to be forced to accept the privileged bank's
fiat money in trade for real goods or services. It bears repeating: a central
bank "is not a natural product of banking development," as Vera
Smith concluded in her well-known study.[4] "It comes
into being as a result of government favors." What does a government get
in exchange for these favors, a Fed auditor might ask?
3. With a central bank, fractional-reserve banking leads to repetitive
crises, but they may differ from crises without a central bank in two
respects: one, because a central bank enforces a uniform rate of inflation
(credit expansion), one bank can't jeopardize the rest by overexpanding
more than others; consequently, the day of reckoning is delayed, and the
correction needed is more severe. And two, when the crisis hits, the central
bank provides a means for more monetary wrongdoing.
Since the
requirement of redemption limits the inflationary potential of a central
bank, governments sooner or later get around to outlawing money itself and
force us to use exclusively what was formerly only a money substitute.
Governments, in other words, outlaw gold and make us use their paper.
Question from the auditor: how does this arrangement qualify as a free
market, as so many commentators today tacitly believe when they blame the
crisis on the free market?
With gold
gone the central bank becomes government's genie, able to grant it almost
unlimited spending. Massive spending in the '30s didn't cure the Depression,
though it did make government a much heavier load for the market to bear.
Does the
central bank's ability to orchestrate inflation have any connection with a
government's involvement in war? Might the world wars have been far shorter
and less destructive of life and property, while propagating fewer bloody
shoots of their own, without the aid of central banking and a fiat-paper
standard? The enormous monetary outlays of war go to politically favored
firms, which thus have an incentive to foster a more belligerent and
interventionist foreign policy. Is this military-industrial-congressional complex killing us? How eager will politicians be to go to
war or police the world if they no longer have a printing press to pay for
their adventures?
Might we all be better off with a money and banking
system that is completely severed from government? And might we be better off
with a government that can't feed on inflation?
The Pujo Committee
Prior to passage of the Federal Reserve Act,
Wisconsin Senator Robert LaFollette and Minnesota
Congressman Charles Lindbergh Sr. delivered scathing speeches attacking
"the money trust" for causing booms and busts. LaFollette
charged that the entire country was controlled by just fifty men, a claim
that a Morgan partner rejected as totally absurd. He knew firsthand the
number was not more than eight.
Following Lindbergh's resolution, Congress created
the Pujo Committee to investigate the big bankers,
but the committee was firmly in the hands of the trust itself. During the
summer of 1912, the committee scared the wits out of people with statistics
and testimonies showing the power Wall Street had over the economy. To the
public, Congress seemed to be doing its job by cracking down on corruption,
though at no time were Lindbergh or LaFollette
called to testify, nor did anyone seem to attach any significance to the fact
that the biggest bankers were leading the charge for reform.
The committee concluded that banking reform was
urgent and necessary to bring Wall Street under control, and a year later
Congress and President Wilson gave the country a central bank as an early
Christmas present.[5] As Rothbard
notes, the composition of the first Federal Reserve Board more or less
reflected the power structure of those present at the Fed's founding meeting
at Jekyll Island in 1910, with Morgan man Benjamin Strong actually running
the system as head of the New York Fed.[6]
Power grabs are a frequent and predictable outcome
of government investigations. However, any audit that exposes the Fed's
relationship to the state will be worth doing, even if the Fed's friends keep
it where it is.
Notes
[1] Jorg Guido Hulsmann, The
Ethics of Money Production, Ludwig von Mises Institute, 2008, p. 85
[2] Murray N.
Rothbard, The
Case Against the Fed, Ludwig von Mises Institute, 1994, p. 42.
[3] Jesus
Huerta de Soto, Money,
Bank Credit, and Economic Cycles, Ludwig von Mises Institute, 2006, p. 638
(emphasis in original).
[4] Vera C.
Smith, The
Rationale of Central Banking and the Free Banking Alternative, Liberty Press, 1990, p. 169.
[5] G. Edward
Griffin, The
Creature from Jekyll Island: A Second Look at the Federal Reserve, American Media, 2002, pp. 443–444.
[6] Rothbard, pp. 121–125.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
Also
by George F. Smith
George F. Smith is the author
of The Flight of the Barbarous Relic, a novel about a renegade Fed chairman
and the editor of Barbarous Relic.com.
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