From 2007.
People ask me,
“What should the Federal Reserve’s monetary policy be?” The answer,
theoretically and practically, is simple: paralysis.
Are prices
rising? The FED should cease buying or selling assets, e.g., U.S. Treasury
debt.
Are prices
falling? The FED should stop buying or selling assets.
Are prices
stable? The FED should cease buying or selling assets.
What about the
members of the Federal Open Market Committee (FOMC), who decide as a committee
how many assets to buy or sell? Offer them early retirement at 120% of their
present salaries.
Do the same for
their respective staffs.
What if
interest rates fall in a recession? Let them fall.
What if they
rise, due to a war? Let them rise.
In short, let
participants on a free market decide what the rate of interest should be.
Why is the
collective, competitive judgment of profit-seeking investors who put their own
money on the line inferior to a group of salaried bureaucrats who create money
out of nothing to be put on the line?
BANKRUPTCIES
There is a
serious possibility that, in a recession, some large banks might not be able to
stay in business.
This is true of
every line of business. Why should banks be exempt from the threat of
bankruptcy?
But, critics
may say, the government has promised to pay off depositors in insolvent banks.
How? Through its Federal Deposit Insurance Corporation (FDIC).
I respond: Why
not let Congress find the money needed, if any, to pay off depositors? Why call
on a privately owned, government-chartered central bank to counterfeit money in
order to pay off depositors? Congress made the promise. Let Congress bear the
responsibility.
That, of
course, is the whole point. Congress wants credit for a good economy. “Re-elect
us! We helped made things good!” It also wants to shift blame for a bad
economy. “Re-elect us! We’ll get to the bottom of all this!”
Political
promises should be paid for politically. But political promises are made by
politicians who want to avoid the bills when they come due. They rely on the
Federal Reserve System’s Board of Governors to keep the bills from ever coming
due. The FED does this by creating money and buying assets, especially U.S.
Treasury debt.
The result
since 1933 has been an increase in the supply of money, which helps political
debtors to meet their monthly payment schedules.
Instead of
bankrupting the political debtors, the FED has just about bankrupted the dollar
and all those creditors who have loaned long-term money at fixed interest
rates.
The bills keep
coming due. The FED keeps paying them off with depreciated money. “Shut up.
You’ve been paid.” So, creditors accept this and seek to get higher rates of
interest to compensate them for the depreciating dollar. They can’t always get
what they want.
At some point,
creditors look abroad in search of promises to pay, denominated in stable
money. But central banks are universal in our day, and they are all
inflationary. Fiat money is the standard of our era. The world’s economy rests
on promises to pay. Central banks back up these promises with fiat money. The
politically unsustainable promises become politically sustainable inflation.
Congress can blame something else for inflation. In contrast, it would have to
blame itself for default on promises.
The central
bank cartel in one nation is always threatened by stable money in other
economies. This is why central banking is a growing cartel. Every new nation is
told by central bankers to start a domestic central bank. All but two countries
today have a central bank. The two exceptions are Monaco, which has a casino
instead, and Andorra, which has mostly sheep. Since neither of them has an army
to pay for, they don’t need a central bank. (The old leftists Malvina Reynolds
and Pete Seeger wrote “I Want to Go to Andorra” in 1962. I have had that
song in my collection ever since 1963. I can still sing it. They were right.)
FOREIGN
EXCHANGE
If the FED were
to stabilize the monetary base by refusing to buy or sell assets, the value of
the dollar in relation to other nations’ currencies would be determined by
currency speculators’ competing assessments of the future effects of everything
that might conceivably affect the purchasing power of the dollar.
The best
economic forecasters on earth are currency speculators. The uncertainty is
enormous, the leverage is high, and the markets are relentless. You can make or
lose more money faster and with lower commissions in the currency futures
markets than any other. The market is essentially unregulated, since the assets
it trades are international. Any attempt by governments to regulate this market
has the effect of driving the computers off shore to some island nation that
doesn’t regulate it.
If the FED did
nothing for a year or two, world currency speculators would conclude that the
U.S. dollar had become the world’s only stable currency. It would become the
benchmark. For as long as the FED did nothing, the dollar would be established
as the world’s reserve currency even more than it is today.
This would
force any nation whose politicians wanted its currency to replace the dollar as
the world’s reserve currency to instruct its central bank to imitate the FED’s
policy of doing nothing.
Foreign
investors would soon recognize that their capital is safe from depreciation by
purchasing dollars and investing them at whatever market rate is available. The
dollar would become as close to immune from competition as any currency on
earth. The U.S. domestic capital markets are huge. The dollar’s role as the
world’s reserve currency makes the U.S. markets even more huge. Stable money
would make the U.S. dollar the best widely available currency unit.
What about the
trade deficit? That would depend on the comparative social rates of future
orientation. Americans’ future orientation, when lower than foreign investors’
future orientation, is what produces the trade deficit. With foreign investors
doing even more what they are doing today — buying assets denominated in
dollars — foreigners would buy up even more American capital and debt. But they
would do this at low rates of interest. If selling off income-producing assets
is what Americans want to do — and they seem to — then they could buy more of
what they want with stable money: more goods per dollar because the dollar
would increase in value in relation to foreign currencies, whose central banks
refuse to do nothing.
LAISSEZ
FAIRE IN MONEY
The policy I am
recommending is semi-laissez faire: “Let us alone.” The FED would let us alone
as users of its currency. Congress would let the FED alone as the taxer and
borrower of the FED’s currency.
Make no mistake
about this: the currency is the FED’s. The FED has a monopoly over it. Paper
bills are by law legal tender. Congress in 1913 passed sovereignty over money
to a privately owned agency.
This policy
recommendation is not pure laissez faire. Pure laissez faire in money would be
based on legally enforceable debt contracts. Banks would not be allowed to
promise two check-writers — the depositor and the borrower — the right to
withdraw their deposits at the same time. In other words, there would be no
fractional reserve banking.
Then it’s “Come
one, come all!” Anyone could set up a bank. Anyone could issue a warehouse
receipt for gold or silver or copper. The free market would allow money users
to assess the reliability of every bank’s IOUs. The banks would compete.
Congress would
get out of the money business entirely. It would merely identify the private
currency or currencies that it is willing to accept for the payment of taxes.
No more legal tender laws. No more government mint. No more monopoly central
bank. Congress would do what the FED ought to do: nothing.
This suggestion
is opposed by academic economists, commercial bankers, politicians, historians,
and all other inflationists, who are, like the demons of old, legion. This
would place the fate of every currency solely in the hands of the judges, who
would enforce contracts, and currency speculators, a group which ultimately
includes everyone who uses money. Such a view of money places sovereignty over
money into the same hands as sovereignty over chewing gum: owners.
This view of
money rests on a presupposition, best stated by Jesus in the parable of the
employer. "Is it not lawful for me to do what I will with mine own? Is
thine eye evil, because I am good?" (Matthew 20:15)
When it comes
to money, the evil eye is universal. Men do not trust the principle of
exclusive private ownership. They may say they do, but they really don’t. The
most flagrant masters of this evil eye are free market economists — Austrian
School economists excepted — who praise the free market to the skies until they
get to the chapter on money and banking. Then the free market needs the guiding
hand of — you guessed it — academically certified economists.
Three decades
ago, I knew a newly certified Austrian School economist. He showed considerable
promise academically. But then he got an offer from the FED to become a staff
economist. He disappeared into the bowels of the FED, never to reappear. He
ceased writing. He maintained, when the deal was first offered to him, that he
would write on the side. He never did. Somehow, his enthusiasm for the ideal of
the free market ceased to motivate him enough to sit down and write. That
monthly check from the world’s supreme monopoly undercut his ideology, which
had been opposed to government-licensed monopoly. “Let us alone” was replaced
by “fully vested pension.”
A free market
in money and the enforcement of contracts in banking are ideas so utterly
foreign to the modern world that they are simply not discussed in polite
circles.
The best way to
discover the heart, mind, and soul of a society is to discover those issues
that are so widely taken for granted that they are not discussed in public. I
don’t mean hate crimes. I don’t mean political correctness. Here, there have to
be negative sanctions to keep them from being discussed. I mean ideas that are
so off the mental radar of a society that they are essentially inconceivable.
A free market
in money and banking is such an idea.
THE
FUTILITY OF REFORM
People for four
decades have asked me, “How can we reform the FED?” I always tell them: “Let it
alone.” Laissez faire works both ways.
The FED is
immune to reform because central banking is a universal phenomenon. Ever since
the creation of the Bank of England in 1694, academics and opinion leaders have
supported the idea. It has spread ever since, but especially in the 20th
century. You cannot reform an institution that rests on a universally accepted
idea — so universally accepted that to think otherwise is to join the lunatic
fringe.
There have been
Congressmen over the years who have exposed the FED. Some have thought there
was hope. Others have used the FED as a whipping boy. Of all institutional boys
to be whipped, the FED is at the top of my list. But we should recognize the
difference between analysis and implementation.
To undermine
the public’s confidence in the FED is impossible, except for one factor: the
FED. Central banking is inherently immoral. It is inherently inflationary. It
is inherently de-stabilizing. Why? Because it is inherently statist. It rests
on coercion. It rests on the idea that a committee of tenured, salaried,
government-protected people possesses greater insight into supply and demand
than speculators who put their own money, or their clients’ money, on the line,
moment by moment. It rests on the idea that government-enforced central
planning is more efficient, more compassionate, and more profitable for a
society than market planning by owners of capital.
Central
planning is irrational. Ludwig von Mises proved this in 1920. In 1991, the
collapse of the Soviet Union finally verified what he had argued theoretically.
Central banking
is irrational. Ludwig von Mises showed why in 1912 in his book, The Theory of Money
and Credit. As yet, we have not seen a collapse comparable to
the fall of the Soviet Union, although the Great Depression was a good
first-stage early warning indicator. So is the decline of the dollar by 95%
since 1914. But, ultimately, either central banking will be replaced by market
institutions in a slow and steady way, or else there will be a replacement
after a worldwide collapse. I hope for the former, but the latter is possible.
If the latter
happens, I will want to be in Andorra.
CONCLUSION
For people who
have read about the Federal Reserve System’s monopolistic power over the
economy, it is frustrating to imagine that the voters can do nothing. Trust me:
the voters can do nothing. Most voters have not heard of the FED, do not
understand central banking, and do not have allies in Congress, other than Ron
Paul.
Yet the FED is
doomed, as is central banking in general. Government power cannot make the
irrational rational. It cannot make coercion productive. It cannot make
committees wise.
You might as
well use the system to profit from it. You can’t change it.
If you want a
good 42-minute introduction to the Federal Reserve System, watch the
video produced by the Mises Institute.
If you want a
simple introduction to the issue of central banking, read Murray Rothbard’s
book, What Has Government Done to Our Money? It’s
free.
For the most
detailed book on fractional reserve banking — law, practices, results — read
DeSoto’s 800-page book, Money, Bank Credit, and Economic Cycles. It’s
free.
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Published on
May 30, 2007. It's here.