great thinker once wrote that "all things useful are of such a nature
that where there is too much of them they must either do harm, or at any rate
be of no use, to their possessors."
experienced the harmful results of a paper currency manufactured at will,
early US statesmen tried to forbid it from ever happening again. Article I,
Section 10 of the Constitution specified that no state shall "make any
Thing but gold and silver Coin a Tender in Payment of Debts," while the
US Coinage Act of 1792,
consistent with the Constitution, provided for a US Mint, which stamped
silver and gold coins. One dollar was defined by statute as a specific weight
of gold. The Act also invoked the death penalty for anyone found to be
lower in character, quality, or value; to degrade.
120 years the dollar, though at times volatile, maintained its value: $1.01
in the year 1912 has the same "purchase power" as $1 in the year
different trend began in 1913 when Congress and Woodrow Wilson, at the behest
of the country's most powerful bankers, forced a banking cartel on the
economy. The claim was that not only would this institution preserve the
value of the dollar but it would also protect the economy against inflation and prevent
violent swings in market activity.
was to be understood as a rise in prices rather than an increase in the money
supply. By this definition, the country experienced a noninflationary 1920s,
and the leading experts
assured that the good times would roll indefinitely — though perhaps
with an occasional dip every now and then.
market money was finally outlawed, the Fed could create as many paper notes
as it wanted and not worry about annoying dollar holders demanding redemption
of the IOUs they held. The result? Alan Greenspan noted that
two decades following the abandonment of the gold standard in 1933, the
consumer price index in the United States nearly doubled. And, in the four
decades after that, prices quintupled. Monetary policy, unleashed from the
constraint of domestic gold convertibility, had allowed a persistent
overissuance of money.
other words, with the dollar no longer defined as a weight of gold or other
metal, the Fed's "monetary policy" depreciated its purchasing power
by 91 percent in 60 years, from 1933–1993.
recently as a decade ago, central bankers, having witnessed more than a
half-century of chronic inflation, appeared to confirm that a fiat currency
was inherently subject to excess.
bankers merely "witnessed" the "half-century of chronic
inflation" that followed their "monetary policy." The same Fed
spokesman encouraged us to be optimistic:
record of the past twenty years appears to underscore the observation that,
although pressures for excess issuance of fiat money are chronic, a prudent
monetary policy maintained over a protracted period can contain the forces of
prudent monetary policy could "contain the forces of inflation,"
but what in fact happened? Using an inflation calculator, we find that
Consumer Price Index (CPI) price inflation nearly doubled.
Apparently, Greenspan and his Fed buddies didn't witness this inflation.
what is this mysterious "monetary policy" that Greenspan mentioned
that has so ravaged the dollar? The Fed tells us that
term "monetary policy" refers to the actions undertaken by a
central bank, such as the Federal Reserve, to influence the availability and
cost of money and credit to help promote national economic goals. The Federal
Reserve Act of 1913 gave the Federal Reserve responsibility for setting
contrast, Jörg Guido Hülsmann explains that "natural
monies," the kind originating on a free market,
their existence exclusively to the fact that they satisfy human needs better
than any other medium of exchange. As soon as this is no longer the case, the
market participants will choose to discard them and adopt other monies. This
freedom of choice assures, so to speak, a grass-roots democratic selection of
the best available monies — the natural monies.
monies are regulated by the market. There is no chronic pressure for
"excess issuance" of natural monies. They are not issued. Their
supply is determined by market forces, and they serve to promote the welfare
of the people who use them, not the collectivist notion of "national
economic goals." In the United States, natural monies, in spite of
government meddling, kept inflation at bay for over a century. Then the
policymakers took over.
boom bears some resemblance to real prosperity,
policymakers can look brilliant for awhile. And their brilliance, based on
the idea that "this time it's different," makes headlines. Thus, on
September 26, 2002, Britain's Queen Elizabeth II bestowed an honorary knighthood on a
former Juilliard clarinet student for
his "contribution to global economic stability." Such a prestigious
award would not be granted to someone who had been reckless in violating
Aristotle's observation about too much of something causing harm, it would
printers, meanwhile, were busy creating an illusion:
accommodation — and the expectation that it will persist — is
distorting asset prices. Most of this distortion is deliberate and a
desirable effect of the stance of policy.
give a false or misleading account of.
accommodation" means low interest rates, which means too much money is
available. Economic activity increased to the point that asset prices were
distorted. This was far from being seen as a mistake and a problem, and Kohn
admitted it was "deliberate and desirable."
this case, the distortion was a false account of housing prices. How
distorted were they?
the two decades ending in 2001, the national median home price ranged from
2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004, and
4.6 in 2006. This housing bubble resulted in quite a few homeowners
refinancing their homes at lower interest rates, or financing consumer
spending by taking out second mortgages secured by the price appreciation.
the money supply increase was at the bottom of the price distortion, the Fed
decided to close the curtain:
March 2006, the Federal Reserve ceased to make public M3, arguably the most
reliable means of measuring the money supply. … M3 had increased past 9
percent in the three months prior to the move, and a total 17 percent
inflation in the past year.
that this move alarmed the true believers. Gerard Baker, for example, declared that
"[h]istorians will marvel at the stability of our era."
dollars being multiplied at will, the results were predictable:
2002, the US dollar has depreciated over 40 percent against a basket of major
currencies, weighted by their countries' trade with the United States. Over
the past two years, the trade-weighted dollar has fallen by 15 percent.
happened to the Fed's promise of a stable dollar?
[American Institute for Economic Research] report points out that in 1978,
legislation asked the Fed to have 'stable prices' as a goal when conducting
monetary policy. Yet the CPI has tripled since then.
this fact bother Donald Kohn? No. A sinking dollar is Fed strategy.
market interest rates should continue to induce savers to diversify into
riskier assets, which would contribute to a further reversal in the flight to
liquidity and safety that has characterized the past few years.
were diversifying into riskier assets during the happy days of the housing boom,
when they were buying houses at 4–5 times their annual household income
and personal debt reached unprecedented levels:
debt service-to-income ratio — the percentage of a household's
disposable income that goes to service that debt — rose to a historical
high of 13.9 percent in the third quarter of 2007.
Kohn waits for the low interest rates to ignite another debt orgy, do these
lower rates and their detrimental effect on the dollar bother other members
of the Fed?
whether the depreciation of the dollar might be considered a barometer of the
Fed's credibility as the protector of the purchasing power of the US
currency, [Richmond Federal Reserve Bank President Jeffrey Lacker] said,
"Our central objective is and always has been the domestic purchasing
power of the US currency."
the central objective can be either to preserve or destroy the dollar's
purchasing power. Lacker somehow forgot to say which.
Fed monetary policy, then, the dollar is cheapened to produce an economy on
steroids that eventually breaks down. Free-lunch economists react to the
breakdown with stunned disbelief because they had been assuring us that
"this time it's different." When reality sets in, they confess to
their former blindness.
Saw It Coming
The Austrian theory of the trade cycle explains why the Fed's below-market interest rates invariably lead
to a correction known as the bust, or most recently, a meltdown. This theory is
not new. Why is it so relatively unknown or out of favor with most
Queen Elizabeth attended the opening of a new building at the London School
of Economics in November 2008, she asked the academics,
"Why did nobody notice it?" How could a global financial meltdown
sneak up on the crème de la crème of the economics profession?
One professor's answer: "At every stage, someone was relying on somebody
else and everyone thought they were doing the right thing."
monetary policy, the dollar is cheapened to produce an economy on steroids
that eventually breaks down."
inquisitive layman could get a picture of mounting trouble such as the one sketched
above with ordinary web searches. How could this professor and others like
him proclaim intellectual innocence when the works of Austrian masters
— which have been available for decades and are currently offered in
electronic form for the price of a free download
— flatly contradict his assertion that "everyone thought they were
doing the right thing"?
could he complain that the Austrian school is too obscure for serious
scholarship, given that one of its members was a 1974 Nobel Laureate.
lady who knighted Greenspan for his contribution to "global
stability" might like to know that Austrian theory provided the crystal
ball that helped numerous commentators announce the train wreck well in
advance of its arrival — and that according to Austrian theory only
a train wreck can occur when money grows on trees. If someone had briefed her
on the Austrians before her visit, she might have had the new building razed
rather than dedicated. Given that her portfolio lost £25 million, the
professor is lucky to have his head.
by Rothbard, Mises, Hayek, de Soto, Hülsmann, Paul, and Sennholz, among
others — and all published before the meltdown — explain
in detail what happens when government officials and bankers get together and
take over the country's money supply. In brief, they subject everyone to an
unaccountable monopoly called a central bank, enact legal-tender laws to
force acceptance of the central bank's fiat paper notes, and abolish or
cripple through regulations the autonomous market monies, gold and silver.
modern central banking, an economy endures chronic monetary inflation, wealth
redistribution, trade cycles, an obsession with Fed rhetoric, confiscation of
savings, malinvestment of resources, impoverishment of the poor and middle
class, enrichment of the politically connected, institutionalized moral
hazard, mass delusion as a norm, and mushrooming government growth. The
central-banking system and its spurious currency amount to a doomsday machine that
could topple civilization itself.
Are Central Banks Still on the Job?
rhetoric aside, central banks exist to ensure the profits of the largest
commercial banks and to feed government growth. As with any successful
racket, central banks are not without a veneer of legitimacy.
there are and have been many influential writers who believe the money supply must grow as production increases.
Central banking grows the money supply while offering protection to the
growers through bailouts and the government's prohibition on competition.
money into the economy has well-known political consequences as well. Other
things equal, if the money supply stays flat as production rises, prices will
tend to fall, nudging real wages higher. While this is certainly beneficial,
politicians resent it because they can't buy votes when the market makes
people richer: the political way is to distribute free lunches through the
banking system's printing press.
it is naive to expect root criticism of central banking from trained
economists, most of whom get at least some of their daily bread from the
government. As Hülsmann has written:
one of the home truths of the economics profession that virtually all of its
members are government employees. Even more to the point, a great number of monetary
economists are employees of central banks and other monetary authorities; and
even those monetary economists who are "only" regular professors at
state universities derive considerable prestige, and sometimes also large
chunks of their income, from research conducted on behalf of monetary
Gary North adds:
field of economic theory, the academic economists' support of central banking
is the best example of how political power, control over money, and the use
of this money to silence academia by hiring thousands of economists as
advisors have combined to neuter an entire profession.
a central bank, as Vera Smith wrote long ago,
"is not a natural product of banking development. It is imposed from
outside or comes into being as a result of government favors." Central
banks return the favors by giving politicians an ATM machine that will
seemingly never run dry, thus ensuring central banks' immortality. Without
bank would be able to give its notes forced currency by declaring them to be
legal tender for all payments, and it is unlikely that the public would
accept inconvertible notes of any such bank except at a discount varying with
the prospect of their again becoming convertible.
entrenched is the US central bank? As Gary North observed, it "is
beyond legal constraints. It is beyond market constraints. It answers to no
one. It is autonomous."
fourth, on the Fed's website we find this
Federal Reserve, the central bank of the United States, provides the nation
with a safe, flexible, and stable monetary and financial system.
statement is mostly unchallenged in mainstream circles. Those who proclaim
that the Fed is quite different, that it is in fact a creature
devouring civilization, are marginalized or ignored.
central bank, the Fed is widely regarded as the hallmark of an advanced
civilization. It's a distinguished banking-government institution that has
done its patriotic part in helping to fight World
War I, World War II, and various other conflicts far from
our shores; it has provided a fatherly hand in steering us through inflation,
recessions, depressions, stagflation, stock-market crashes, the S&L
crisis, the Asian crisis, the dot-com bubble, the Y2K scare, the 9/11 shock,
and now the morning after the housing bubble. It is forever on guard to see
that we never walk into stores and find prices permanently lower than they
were. The current Fed chairman is a family man — he's one
of us — and was Time's Person of the Year in 2009. Why would
such a man go around creating economic calamity?
what life was like without the Fed, we're told, we need only look at pre-1913
American history when "financial panics plagued the nation, leading to
bank failures and business bankruptcies that severely disrupted the
economy," as the federal reserve website informs us.
Rather than tolerate these mysterious "plagues," Congress and the
big bankers got together and passed a law called the Federal Reserve Act, the
provisions of which included the power "to furnish an elastic
currency," and "to establish a more effective supervision of
banking in the United States."
patently untrue to say government doesn't work, since
the plague of panics has ceased since President Wilson signed the act into
law. We now have meltdowns, but hold off on the blame — only recently
has the Fed been given the power to deal with those.
Whatever the Fed's shortcomings, we need to be as loyal to it as abused dogs
to a cruel master who means well. We need to accept the premise that the Fed
is our partner in prosperity and our savior during times of crisis.
Greenspan was extolling prudent monetary policies as the key to controlling
inflation, he was saying it, to paraphrase Rothbard,
pouring on increases in the money supply. Since central bankers are gleaned
from the brightest
humanity has to offer, there's no reason to assume monetary inflation
constitutes an imprudent monetary policy. That the monetary pumping was
followed by a meltdown was simply another event that central bankers
the Fed Defend Its Mantra
Fed and its many friends refused to allow its operations to be thrown open to
the public, but maybe it would be willing to do more than toss us a few
crumbs about Fed independence.
"I don't think the American people want Congress running monetary
policy," Bernanke said. They don't, but that's not the issue. The issue
is monetary policy itself. By enacting monetary policy, the Fed claims to
provide "the nation with a safe, flexible, and stable monetary and
financial system." How can a monetary system be regarded as "safe"
when monetary policy has stripped the dollar of 95 percent of its value?
that's only the beginning. Other questions have been circulating that
challenge the Fed's purpose.
did the CPI take off in earnest following FDR's gold confiscation order of
April 5, 1933, and Nixon/Volker's leap of faith to a world of pure fiat paper
on August 15, 1971?
did the value of the dollar, though volatile at times, nearly double between 1865 and
1912, a period when "monetary policy" was rudimentary at best and
Fed monetary policy was only a pipe dream for a few?
historical data underlie the Fed's contention that massive money creation and
huge deficits are the medicine needed to treat a bust? (Robert Higgs has rebutted the World War II
argument about hyper-Keynesianism bringing prosperity.) Why was the
depression of 1920–1921 in the United States short-lived in the absence
of such interventions? Why is accommodation so highly regarded when Japan, in
the same period, intervened to keep prices from falling but prolonged
their recession for seven years?
is the connection between the rise of central banking and the numerous hyperinflations in the twentieth
century? What role did central banks play in making the European war that
began in 1914 a world war? In what ways did Germany's post-war hyperinflation
foment World War II?
the presence of money in virtually all economic transactions, that money
the nerve center of the economic system," how can
Bernanke justify saying, "I don't
think that monetary policy was a particularly important source of the
6. Why is
a government-enforced monetary cartel somehow good for the public, when public cartels are generally
recognized as harmful
gold is such a "barbarous relic" and too inflexible to be used as
money, why is the Fort Knox Bullion Depository, home
of the gold Roosevelt confiscated in the 1930s, so heavily protected that
only an invasion — or Fed policy — could threaten its security?
Why does gold require such protection but not the stuff the Fed issues?
8. Why is
it that if a private individual or firm prints money they're engaged in the high
crime of counterfeiting, which is another name for
inflation, whereas when the Fed prints money it's called "monetary
policy" and is considered our best tool for avoiding inflation?
only good monetary policy is no monetary policy.
Aristotle, Politics 7.1.
Nystrom, "The Last Great Bubble — Counterfeiting the
Dollar." Emphasis in original.
Power of Money in the United States from 1774 to 2009.
Greenspan, "Issues for Monetary Policy,"
Remarks before the Economic Club of New York, December 19, 2002.
of Governors of the Federal Reserve System, Federal Open Market Committee, "About the FOMC."
 The Ethics of Money Production, p.
L. Kohn, FOMC transcript, March 16, 2004. This document was released in April
"Financial Crises of 2007–2010."
"History of the Federal Reserve System."
Frederic S. Mishkin (Fed Governor), "Exchange Rate Pass-Through and Monetary Policy," a
speech given at the Norges Bank Conference on Monetary Policy in Oslo, Norway
(March 7, 2008).
Pilon, "The Buying Power of a Dollar, on a Downswing."
 "The Economic Outlook," a
speech given at the National Association for Business Economics, St. Louis,
Missouri (October 13, 2009).
Liu (Research Associate, Federal Reserve Bank of St. Louis), "A New
Trend for US Household Spending."
eyes impact of dollar on mandate-Fed's Lacker"
(November 17, 2009).
Ludwig von Mises, Human Action, p. 763.
 The Ethics of Money Production, p.
C. Smith, The Rationale of Central Banking and the Free Banking Alternative, p.
p. 1 of Federal Reserve System: Purposes and Functions.
Browne, Why Government Doesn't Work.
Restoring American Financial Stability Act of 2010.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
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