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Should We Kill the Fed?

For the financial crisis that has wiped out trillions in wealth, many have felt the lash of public outrage.

Fannie and Freddie. The idiot-bankers. The AIG bonus babies. The Bush Republicans and Barney Frank Democrats who bullied banks into making mortgages to minorities who could not afford the houses they were moving into.

But the Big Kahuna has escaped.

The Federal Reserve.

“(T)he very people who devised the policies that produced the mess are now posing as the wise public servants who will show us the way out,” writes Thomas Woods in “Meltdown.”

Already in its sixth week on the New York Times best-seller list, this eminently readable book traces the Fed’s role in every financial crisis since this creature was spawned on Jekyl Island in 1913.

The “forgotten depression” of 1920-21 was caused by a huge increase in the money supply for President Wilson’s war. When the Fed started to tighten at war’s end, production fell 20 percent from mid-1920 to mid-1921, far more than today.

Why did we not read about that depression?

change_me

Because the much-maligned Warren Harding refused to intervene. He let businesses and banks fail and prices fall. Hence, the fever quickly broke, and we were off into “the Roaring Twenties.”

But, the Fed reverted, expanding the money supply by 55 percent, an average of 7.3 percent a year, not through an expansion of the currency, but through loans to businesses.

Thus, when the Fed tightened in the overheated economy, the Crash came, as the stock market bubble the Fed had created burst.

Herbert Hoover, contrary to the myth that he was a small-government conservative, renounced laissez-faire, raised taxes, launched public works projects, extended emergency loans to failing businesses and lent money to the states for relief programs.

Hoover did what Obama is doing.

Indeed, in 1932, FDR lacerated Hoover for having presided over the “greatest spending administration in peacetime in all of history.” His running mate, John Nance Garner, accused Hoover of “leading the country down the path to socialism.” And “Cactus Jack” was right.

Terrified of the bogeyman that causes Ben Bernanke sleepless nights — deflation, falling prices — FDR ordered crops destroyed, pigs slaughtered, and business cartels to cut production and fix prices.

FDR mistook the consequences of the Depression — falling prices — for the cause of the depression.
But prices were simply returning to where they belonged in a free market, the first step in any cure.

Obama is repeating the failed policies of Hoover and FDR, by refusing to let prices fall. Obama, with his intervention to prop up housing prices and Bernanke with his gushers of money to bail out bankrupt banks and businesses are creating a new bubble that will burst even more spectacularly.

The biggest myth, writes Woods, is that it was World War II that ended the Great Depression. He quotes Paul Krugman:

“What saved the economy and the New Deal was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”

This Nobel Prize winner’s analysis, writes Woods, is a “stupefying and bizarre misunderstanding of what actually happened,”

Undoubtedly, with 29 percent of the labor force conscripted at one time or another into the armed forces, and their jobs taken by elderly men, women and teenagers with little work experience, unemployment will fall.

But how can an economy be truly growing 13 percent a year, as the economists claim, when there is rationing, shortages everywhere, declining product quality, an inability to buy homes and cars, and a longer work week? When the cream of the labor force is in boot camps or military bases, or storming beaches, sailing ships, flying planes and marching with rifles, how can your real economy be booming?

It was 1946, a year economists predicted would result in a postwar depression because government spending fell by two-thirds, that proved the biggest boom year in all of American history.

Why? Because the real economy was producing what people wanted: cars, TVs, homes. Businesses were responding to consumers, not the clamor of a government run by dollar-a-year men who wanted planes, tanks, guns and ships to blow things up.

“The Fed was the greatest single contributor to the crisis that unfolds before us,” Woods writes of today, and “more dollars were created between 2000 and 2007 than in the rest of the republic’s history.”

After 9-11, the Fed kept interest rates low — in one year as low as 1 percent. That money flooded into the housing and stock markets. And in 2008, as the Fed tightened, the bubble burst.

Now the money supply is again expanding, to rescue us from a crisis created by the previous expansion. Of Nicholas Biddle’s Bank of the United States, the great Andrew Jackson was eloquent.

“It has tried to kill me,” he said. “But I will kill it.” And he did.

Should not this creature from Jekyl Island, for all its manifold crimes and sins against the republic, also be summarily put to death?

COPYRIGHT 2009 CREATORS SYNDICATE INC.

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#1 Comment By Jack Tracey On April 3, 2009 @ 9:11 am

Nice one, Mr Buchanan. You nailed it.

#2 Comment By MattSwartz On April 3, 2009 @ 1:24 pm

Buchanan is good here as usual. Conservatives will never be able to crack the hard shell that surrounds FDR’s unwarrantedly good name until they learn (and learn to convince others) that Hoover wasn’t a free marketeer at all.

#3 Comment By Patrick Smits On April 3, 2009 @ 1:36 pm

Should we kill the FED? YES, they have already killed so many of us. Why the hell are we funding a PRIVATE group of bankers to what the founding fathers said should be done by the Congress? All those billions of dollars that the FED is making off the public belongs to the public. WAKE UP AMERICA! The Federal Reserve is NEITHER FEDERAL nor a RESERVE, it is a damn privately held group of 12 Banks.

#4 Comment By TomB On April 3, 2009 @ 2:26 pm

I don’t know enough about economics to have a firm opinion about getting rid of the Fed; all I know is the one thing that would worry me about it is that presumably some other office would have to fill its function and makes its decisions, and if that office or body wouldn’t be as independent as the Fed that would worry me. Think about the pressure that would have been put on Volcker when he was the head of the Fed back in the 1980’s and was wringing inflation out. (For which he deserves a medal.) Could he have withstood it or could he have kept his job if the Fed was less independent?

In essence, isn’t the main job of the Fed to fight inflation? And given that this is so, and that inflation ain’t hardly our problem now at least, should we really be trying fixing what ain’t broke yet at least when there’s so many other things on our plate which are?

I will say one thing about both these Fed handouts/bailouts and those of the Treasury too that I wish would become viral: Before one more penny is given or loaned or whatever to any more institutions there ought to be a condition that so long as one penny is still owed back to the U.S.—and indeed maybe for another 10 years after that too—that institution cannot make a single political contribution and must cease all lobbying attempts. Elsewise how do we we know that our Congresspeople aren’t voting bailouts for some place (like AIG, or Fannie or Freddie, or Goldman Sachs) so that they continue to pump dough into their re-election efforts, just like they’ve done in the past.

In essence, we’d be paying for further lobbying and vote-buying for our further exploitation.

Seems could be made into a simple proposal/demand on Congress.

#5 Comment By MattSwartz On April 3, 2009 @ 3:12 pm

Coincidentally, last weekend I took a sightseeing trip to Toronto and chanced upon a museum dedicated to William Lyon Mackenzie, a politician from the old days dedicated to independence for Canada, and also the abolition of it’s central bank. I say this only to relate my pleasant surprise at a handbag sold in the gift shop there. It was emblazoned with this phrase:

Rags make paper

Paper makes money

Money makes banks

Banks make loans

Loans make beggars

Beggars make rags.

If it hadn’t been for that dadgum exchange rate, I’d have bought it.

#6 Pingback By Should We Kill the Fed? « Wonderland Wire On April 3, 2009 @ 5:32 pm

[…] 2 Apr 09 | The American Conservative […]

#7 Comment By JR On April 3, 2009 @ 6:40 pm

TomB:

“all I know is the one thing that would worry me about it is that presumably some other office would have to fill its function and makes its decisions, and if that office or body wouldn’t be as independent as the Fed that would worry me”

Under the gold standard, the market determined the price of credit. It’s a long story, but the Federal Reserve in essence fixes the price of credit to smooth economic cycles. I think the essential point that most Fed abolotionists argue is that if markets are so great, why are credit markets so completely under the control of the government?

“In essence, isn’t the main job of the Fed to fight inflation?”

NO!!! The Federal Reserve is the SOURCE of inflation. By allowing the money supply relative to the supply of goods in the economy to increase, inflation is created. That is, if there is more money chasing the same amount of goods, the price of those goods will increase.

If, for example, the supply of goods increases but the supply of money stays constant, the value of that money increases (deflation).

DEFLATION IS NOT BAD. In the 400 or so years that the UK pound was backed by silver (from about 1600 to the early 20th century), the TOTAL amount of inflation was 25%. Was the UK in a 400 year recession? No! It went from agrarian feudalism to industrial superpower.

The USA experienced somthing similar before the Fed was created. Huge economic growth but with miniscule inflation, and even deflation.

#8 Comment By George On April 3, 2009 @ 7:51 pm

The Fed (“We control inflation and print money”) are the good cop in
the good cop/bad cop scheme run by congress.

Congress threatens to spend/print too much and the Fed is the restraining
influence (and does the direct printing).

Congress created the Fed and if enough of Congress agreed they could
uncreate them. However, for now, Congress is too interested in spending
money they don’t have and will do anything to avoid having to end their
spending. [That’s what’s driving the Congressional push on the bailouts].

So “killing the Fed” won’t help (and anyway isn’t likely until the dollar
is dead).

#9 Comment By TomB On April 4, 2009 @ 3:20 am

JR, thank you for your response.

As I said I don’t know enough economics to have any strong opinions on this. But at bottom logic tells me it’s a question of how well or poorly one thinks things have gone under the Federal Reserve system. Although that’s also mixed up with the Gold Standard question too, in a complicated way because of course up until Nixon and even with the Fed we still did have a modified Gold Standard.

Now, I see that Buchanan essentially is blaming the Fed for the Great Depression and I know that Rothbard argued the same thing. But isn’t it the case that few others have done so too? And do you know what Milton Friedman said about same by any chance?

Regardless, from there, it seems to me, up until right before this appalling mess we’re in now, one can argue that things have not gone too badly, true? That is, unlike in the late 1800’s we didn’t seem to have the rather frequent recessions/depressions and panics and etc. that afflicted those folks. And perhaps the biggest event we had was the “stagflation” of the ’70’s with hyperinflation starting to peek out and what happened there? Well, it’s my sense of things, the recessionary part of that was very much helped by Reagan and his tax cuts and general fiscal policy. And then it was indeed the Fed under Volcker who stomped the hell out of inflation. (A true, unrecognized hero in my opinion.)

So, per a famous quote from Alan Greenspan way back when (when I was in undergrad), the Fed was thus essentially acting as a brake on inflation via acting as if there still *was* a Gold Standard. And the gen’l sense was, because in its modern fiscal policies Gov’t would *always* overspend and over-heat the economy, the modern role of the Fed was to reign in inflation, and you have to admit there’s been very little since the 1980’s, right?

So now we come to our modern mess and Buchanan essentially is arguing that the Fed caused this by too but I’m a little confused by his argument. In the first place he seems to say that the Fed *abandoned* that inflation-braking role by overly easy-money policies up until recently. (Which however did not lead to inflation.) But then he says the current crisis broke by … doing exactly what he seems to have wanted which is in contracting the money supply. And now he seems to say it’s doing the wrong thing by loosening again. So what did he want really?

Thus, I’m just confused by all this. Under a strict pure Gold Standard aren’t you essentially limiting economic activity to the pace at which new gold is minted? And do we really want that? And didn’t the Great Depression occur under the Gold Standard? (Not to mention many earlier ones still more severe than we have seen since we started backing away from that standard?) And in fact didn’t the Fed act as a wonderful inflation brake in the 1980’s at least?

Not having any good economic sense I can only suspect that the bottom line with the Fed/Gold Standard question is like most things in life: I.e., it’s a trade-off. Having a Fed and a Gold Standard gets you some benefits and some detriments, and not having them does so too, and in the end it just depends on what flaws you prefer to live with, no? After that it’s a history question that’s confusing to me because, for instance and again, we *did* have a Gold Standard back during the Great Depression so how did *that* happen?

In any event and on another note, I see that the one variety of hobby-horse I tried to get others to ride in my first post has gotten no attention which was the idea of getting Congress to bar bail-out recipients from making any future campaign contributions or to do any lobbying.

Well okay, nobody seems to like that. How about this then for the editors of TAC: What about your magazine keep track of future Congressional campaign contributions and publicly name whomever accepts any money from the most prominent bailout recipients such as AIG, Citibank, Goldman Sachs and etc.? Sure would smell like pay-off cash to me. Pay-off cash that the congresspeople had originally expropriated from us taxpayers.

Not hard to do, is it? All that info is on-line now I’d suppose. Shame the hell out of these folks. Maybe scare the hell out of them even from taking such dough in the first place, and thereby perhaps changing their stance on giving away this bailout dough.

C’mon, TAC! A periodic “List of Scoundrels!”

Cheers,

#10 Comment By DScott On April 4, 2009 @ 11:35 am

Gentlemen,

The desires driving the “dismantle the Fed” thesis are quite understandable given the severity of this crisis and the subsequent growth in M2 supply. However, an alternative system is difficult to synthesize in any monetary system- full faith and credit or gold backed. First, consider this point for context:

– In the US, our GDP is nearly three times greater than our closest competitor, Greater China. It is 71% consumption based (was 73% at the credit peak) with a 20 year average of roughly 65%. Those dollars spent for goods made overseas are then ‘recycled’ back into the US to fund our operating expenses ($3.5 TRILLION under our new Admin; in comparison, during Ike’s administration, it was roughly $100B) with debt, 1.8 Trillion this year, issued by the Treasury. Backed by the prospects of our children and our children’s children working hard, bidding up housing prices, playing by the rules and having 60-90% of their total property taxed.

Before the crisis, foreign institutions knew our debt was not backed by any tangible hard asset, but merely by the “full faith and credit” of America. That is, the ability for the American government to make good on its debts by taxing the hell out of an ever-growing property values and ever-increasing income levels. Hence, the “virtuous cycle” emerged. The Fed’s balance sheet had $900B in assets (mostly Treasuries, although interestingly, a fraction in gold).

Post crisis, it has expanded to $1.8 Trillion (ie, in the past 12mo it has doubled) as the un-elected Philosopher-Kings have taken on Bear Stern’s book of toxic assets, AIG’s book of garbage assets, commercial paper from GE and all kinds of crappy cash flows from mortgage and other consumer credit-backed structured securities. The stuff that could not get a bid in 2008 is now on Uncle Ben’s right side of the balance sheet and, sadly, on the backs of the American taxpayer.

In essence, The Fed has taken on these ‘assets’ to be able to print- or counterfeited, as some would say, trillions of new dollars to stuff into the trading desks of the bond market in hopes of getting them to continue the debt-on-debt ponzi scheme that the Fed has been running over the last half-century. The Fed has the audacity to hope that we can get back to the good old days of the early 2000s when the debt asset bubble was confused with actual economic growth. This is why Uncle Ben dreadfully fears deflation- without perpetual inflation, trillions of liabilities of cash flows (like the ones on its balance sheet as ‘assets’) simply won’t be met… and that won’t bode well for good relations with our Chinese and Arab coffers. Nor does it help the prospects of financing more years of deficit spending.

The Fed can hope, but now, however, that dream has been dashed as foreigners realize American economic growth during the 2000s– and their’s too as those buying our debt are dependent on us buying their exports– was merely an illusion. A perception faciliated by the supplanting of dollars as the new ‘gold standard’ of the world. The mighty military empire across the globe doesn’t hurt the dollar’s ascendancy either. The Fed has been a promoter of this effort over the years as it pretends to know how to control a piece of paper’s purchasing power and store of value by hosting secretive meetings, releasing cryptic Fed “Minutes” every couple of months and never giving any interviews except to select organizations, like CFR.

Gentlemen, what this credit crisis has revealed is that the emperor (the Fed) has no clothes. Without international confidence that they can control the perception of the ‘greenback’ as a valuable piece of paper, its monopoly on counterfeiting value will be questioned. We already got a glimpse of it last week with a Chinese Central Banker, Zhou Xiaochuan, advocating the world move to a non-dollar dominated reserve system. China is catching on. What does this mean for our Republic?

As someone who deals with hundreds of millions of bonds per week, I am not particular too thrilled on the long-term potential of a Federal ‘Reserve’ owned America. The problem is that the main alternatives of moving our dollar back to gold or silver is just are not viable. The problem with such a framework is that Americans don’t really own nor produce much gold/silver, thus we CANNOT control its perception of value; rather, “the market” (ie, speculating traders in Hong Kong, London, San Francisco, Sao Paulo, Frankfurt, Shanghai and Greenwich) will determine its value. Thus, changing our dollar system from one that backed by the illusionary wisdom of the Philosopher-King Fed Reserves, to one that would be convertible to gold/silver, would usher a generation of poppers and serfs. Under a gold/silver based dollar, traders across the world would short sell dollar backed assets all day long and by up gold, oil and country’s who produce/own those type of real assets.

Why? Imagine the dollar backed by gold which is finite and controlled by non-Americans. Or better yet, let’s say it was backed by something much more useful than gold, say it was backed by oil. Since we do not control the production of most of these hard commodities, the store of our dollar would be subject to the “market.” In other words, it would be subject to Arabs, Russians, Australians and Brazilians. For those civil war buffs, you may recall the confederacy attempted to back their currency with cotton at pre-war prices (ie, through convertible Confederacy bonds). Thus, as long as the South remained King Cotton, they could manipulate the value of their dollar. But then came along Admiral Farragut and a year later Vicksburg, thus destroying the Confederate means to control the supply of cotton as they lost control of the Mississippi River to the Yankees. Thus the value of their bonds and ultimately the purchasing power of their Rebel Dollar was decimated. The South was destroyed not at Gettysburg, but rather by the destruction of its money’s purchasing power. Saved up $25,000 for your kid’s college? Too bad, that now has 1/32nd of the purchasing power; the Admission Office will gladly except 27 Troy ounce gold bars though.

I do find it ironic that Mr. Buchanan, a supporter of Alexander Hamilton, who was the original architect of the American Central Banking System and debt based economy, is now moving away from that Founding Father’s economic model. Possibly, Mr. Buchanan will be moving over to Thomas Jefferson’s paradigm of a “yeomen farmer” based economy, de-centralized and barter based: old times forgotten, indeed. In the meantime, gentlemen, please buy land, gold and guns for your family and your posterity and learn to hunt/farm as they way things are going, we will be bankrupt in 10-15 years. Godspeed.

#11 Comment By TomT On April 5, 2009 @ 1:03 am

Mr Buchanan, you said, “The Bush Republicans and Barney Frank Democrats”. Not ALL people who voted for, or worked for, Bush agreed with the excesses of Fannie and Freddie, or approved of the “community activists’ shakedown” of community banks, or participated in the congress and senate members personal enrichment.

You were allowing confusion between people who supported Bush, and those other people who:
– backed the liberal agenda for idealogical reasons
– backed the liberal agenda for illegal personal financial gain
– warned of the danger, but didn’t do enough about it

Many of the people you would denigrate, while backing Bush, were also deeply disappointed in some of his actions.

But more importantly, you have correctly pointed out that the recovery from the great depression did not truly start until AFTER the war:
– the war period introduced many new people to the workforce
– the war period shortages created a “pent up demand”, materializing as the service members returned home
– during hostilities, much of the US capital was tied up overseas
– wages and prices were frozen during hostilities, deflating and correcting the excesses of preceding decades, without allowing the public to vote itself union raises in wages, benefits, and entitlements

This is important because some disingenuous conservatives have blithely said that FDR’s government spending did not buy us out of the depression, but rather, it was the WAR. This has left many of us to hang our heads in embarrassment, realizing that war IS government spending. But this new model squares with our assertion that the government cannot spend it’s way out of debt.

“… It was 1946, a year economists predicted would result in a postwar depression because government spending fell by two-thirds, that proved the biggest boom year in all of American history.

Why? Because the real economy was producing what people wanted: cars, TVs, homes. …”

So many educated economists. For the rest of us, it is easier to understand economics by picturing how the government is stealing from us:

– inflation. Ten people each hold a dollar. A dollar buys a loaf of bread. The government comes and cuts each dollar in half, retaining half of each dollar, and declaring each of these “the new SMALL dollar”. Now the government holds ten new dollars, and each of the ten people find that a loaf of bread now costs TWO of the new SMALL DOLLARs.

– “tax the rich”. This illusion pushes the tax collection under the radar. Make it more expensive to MAKE a loaf of bread, and the loaf of bread BECOMEs more expensive. However, the average voter is provided the ILLUSION that taxes have somehow been pushed off onto the “rich”.

– “quid pro quo”. Lawmaking favors in exchange for donations. It often takes even professional attornies years to understand why a certain law has benefitted some major contributor.

– “pretending to be a bank”. The government is holding social security funds, and they started out by loaning these funds to the private sector. This degenerated into spending the funds they were responsible for, and just tossing an IOU into the bucket, and passing a law that our grandchildren have to pay the debts.

– “borrowing in name of future generations”. In addition to stealing the Social Security, these same crooks are writing bad checks to foreign financial institutions. The whole TARP 1 was about keeping those institutions from hauling our corrupt politicians in front of some court.

“…’The Fed was the greatest single contributor to the crisis that unfolds before us,’ Woods writes of today, and ‘more dollars were created between 2000 and 2007 than in the rest of the republic’s history.’

After 9-11, the Fed kept interest rates low — in one year as low as 1 percent. That money flooded into the housing and stock markets. And in 2008, as the Fed tightened, the bubble burst. …”

To say “fed tightened and bubble burst” is to ignore other more important factors at work. Like some politician who doesn’t realize that not everybody gets a car and driver donated to them, many of the ELITE simply do not realize what was causing the carnage on mainstreet.

As the Demos (DEMOCRATs, or DEMOLITION EXPERTs, take your pick) worked to deliver the standard OCTOBER SURPRISE to the fat and self-satisfied McCain candidacy, they hit us on two fronts:

– oil speculation (this effects transportation, fertilizer, plastic parts and synthetic fabrics, power production, lubricants, and chemical products, to name a few – part of the liberal lie that alternative personal transportation will significantly cut demand for petrolium)

– removing corn from food supply/farming chain. If you can’t feed your animals, and you can’t fertilize your land, you start telling the bank of impending failure. The first major loan defaults were from the trucking and farming industries.

The libs didn’t intend for this to spill over into the international financial arena, they just had wanted to destroy McCain. This started the world’s biggest coverup. It started with the farmers and truckers simply throwing up their hands, and walking away in droves from lifetime businesses. It ends with politicians and other criminals worldwide, learning to chant, “This is just too complicated for y’all to understand”, and scurrying for cover under the mountains of STIMULOUS PAPERWORK.

TomB – You are echoing what many of us, even on the conservative side, are calling for. Eg, Sen Tom Coburn, R, Okla – porkbusters

My suggestion – similar to TomB’s, plus a provision for reward to whistleblowers:

[1]

DScott – you are a triple gift. You are knowledgeable, you are easy to understand, and your goal seems to be truth over partisan agenda. I believe in the next few years, your bretheran will discover what Hamas discovered: that a population of terrorists is a population that is hard to govern.

We remember that “…any monetary system- full faith and credit or gold backed…” is essentially a way to quantify “a promise to pay”. That population that we wish to saddle with a debt, will be increasingly amoral, relativistic, and increasingly less technical. Look at the smoldering wastelands of California’s silicon valley, or Detroit. While voting themselves more entitlements, this new generation will lack the capacity to carry the load we would hand them. This is our country’s future.

#12 Comment By RD On April 5, 2009 @ 5:28 pm

I would like to address DScott, but first TomB. Tom, I appreciate your candor about lack of economic understanding, which is the same place most Americans find themselves. The fox is guarding the hen house. Our fed has always had a duel mandate, unlike the ECB, and one of those mandates is “fighting inflation.” But this is an illusion as JB pointed out, the fed creates inflation. Two important points to understand is 1) inflation is not the increase in prices, but rather the increase in the money supply. When more money chases the same amount of goods, the market adjusts and dollars lose purchasing power, which results in price inflation. 2) deflation is a good thing. Under a gold standard, a general price deflation should occur as GDP increases but the money stock stays about the same (except for the small % of newly mined gold entering currency) and so then same amount of money is chasing more goods. Deflation is great! It increases the wealth of a nation as savings grows in value. Imagine your portfolio if it gained 3% automatically instead of losing 7% annually to inflation? The whole arguement against price deflation is a function of misunderstanding – we have always had deflation on a micro level and its been healthy (ie think how much a new plasma cost 5 yrs ago and how much a plasma TV costs today).
So the fed creates monetary inflation, which leads to price inflation, which always causes booms and busts. It is important to note that the damage does not occur during the bust, but rather the boom. Besides screwing with our purchasing power by inflating our fiat currency, the fed creates artifical booms by messing with interest rates. In a healthy free economy there will always be business failures and there malinvestments will be soaked up and the capital will be used by the market more efficiently somewhere else and the economy won’t miss a beat. The question to ask with depression is: What leads most every business in an economy to misfire at the same time? The comon link is money. Tom B, to better understand this, please study the Austrian Trade Cycle (Mises, Hayek, Rothbard). It is the only coherent theory that explains booms/busts. So yes, the fed is the sole cause of our recession, which Obama/helicopter Ben are doing everything they can to turn into depression. And yes, there was greed with the lenders and the securitization of asset originated debt. But 1) the govt pushed lenders to lend to uncreditworthy people and 2) the free market would NEVER have moved so much capital from one part of the economy to housing to create malivestment. It only happened because the fed created new capital out of thin air and gave it to the bankers to use. Pointing a figure at regulation is to blame a classroom of 1st graders for eating pixie sticks when the teacher left a carton of them in the classroom and left for 3 hours. In fact, there is a great article on this website called “Unatural disaster: how the fed creates booms and busts” – you should read it.

DScott – very interesting reading and I tracked with you until you disparaged the gold standard. Remember the continential dollar? Like voltaire said (this may be the only thing I agree w/ him) “fiat currencies will always return to their intrisic value, zero.” What you are witnessing is a failure of fiat currencies on a massive scale across the world. With fiats, the currency is really only worth the countries net worth – ie balance sheet. And right now, China, with its surpluses, true free market (which is ironic considering its communistic, it has a far freer market than the U.S.), and net exports, role as creditor, is probably the last country left who can make a run at a fiat currency that will hold value. I expect it to get there by 2020. Nonetheless, it will eventually fail too. As soon as there is an alternative to the U.S. dollar, ie, true competition (and the euro is not it) the U.S. dollar is done. I expect that competition to come from China and not some come back of SDRs on a global scale. Anyhow, I digrest. DScott, you are talking about bills of credit (paper money) backed by gold. What we should do is return to gold money. The U.S. has plenty of gold. And really, its very easy. You devide the feds outstanding liabilities by the gold reserves, but trade in their paper money and gold money (coins) are issued. Rothbard, among many others, wrote extensively about this. To return to stable economic development and prosperity (based on production and not consumption consumption consumption) do the following:
Abolish the fed
reintroduce the gold standard thru gold money
end fractional reserve banking (this would be a whole other topic of conversation, but it is completely necessary to stop bank counterfeiting).

#13 Comment By TomB On April 6, 2009 @ 8:19 am

RD:

I much appreciate your post. Very informative. I still have some questions however, with perhaps the big one centering around what seems your main point which is that the Fed and/or fiat currency causes inflation. In the first place even if one accepts that, isn’t it still true that inflation is hardly our problem now and indeed hasn’t been since the mid-1980’s?

Beyond that some further questions and observations:

Is it *really* the Fed that’s behind inflation, or just fiat currency? After all we had a Fed back when the Great Depression started, and were on the Gold Standard. So what happened there?

You say that the Fed creates inflation, but isn’t it true that inflation can be created other than just via putting too many paper dollars out there? I.e., isn’t the definition of inflation simply too much money chasing too few goods? Therefore even if the Fed were to not increase the money supply at all, you’d still have inflation if for whatever reason (“irrational exuberance”?), such as people—aided and abetted by government doing the same thing via it’s fiscal policies— going on a debt-fueled buying spree that outstrips supply and drives up prices, right?

And what about that experience in the ’80’s with Volcker as Fed chair; isn’t it clear that even though Reagan didn’t manage to cut gov’t spending (and thus inflationary pressures) that Volcker and the Fed *did* stomp out inflation?

You say “[s]o the fed creates monetary inflation, which leads to price inflation, which always causes booms and busts,” but my understanding is that before the Fed—back in the 1800’s and esp. in the late 1800’s—booms and busts were almost chronic, and they were very very serious, and indeed that’s one of the reasons why the Fed was created. And then you look at, say, the experience since the end of WWII under the Fed and with the Gold Standard being phased out and then killed under Nixon, and that period doesn’t seem so “boom and busty,” does it?

So here’s where I’m at:

Just via it’s own borrowing and buying gov’t alone can influence the economy. I.e., via its fiscal policy, or lack thereof. And you can have inflation even under a Gold Standard.

With a Gold Standard gov’t has a hard if not impossible time influencing the economy via monetary policy, since it’s the minting of new gold that determines the added money supply and not merely someone more arbitrarily saying “run the presses.”

If you have a fiat currency however you then have monetary tools to influence the economy, being able to tighten money when the economy seems to be over-heating (inflation), or loosen it when the economy seems to be contracting.

The question then since we have had a pure fiat currency for a long time and even a pure one since Nixon is whether we’ve done better since than before. And right now it seems to me that answer may well be yes, although if we do indeed melt down in our current situation that might change.

My sense is that most economists would agree with this very possibly mistaken sense, and would point to any number of instances where monetary policy was valuable, such as the Volcker period esp.

My further sense is that they would also agree however that if the Fed gets monetary policy wrong, we are really screwed.

However, given our more recent and, to-date at least, happier history, and given my sense that the BIG central concern of our age is unrestrained gov’t spending and thus inflation, I wonder whether it isn’t smart to *have* a Fed and a fiat currency because at least theoretically we want *do* want monetary tools to fight inflation with, no?

So in a big way I’m still confused. Like you and like most conservatives I think I see inflation as being the Big Baddie really. And yet it seems to me the idea of going to a Gold Standard just means taking away a big tool to fight that with, as Volcker did. So why do it?

It also gives us a tool to fight too much deflation with, although I’ll admit that it’s ability to do that is questionable.

I would say however all this is dependent on the role of the Fed, if any, in causing this current crisis, and indeed on the nature of this crisis. I started out saying that it isn’t “inflation” at all so who cares about the Fed as regards that, but, you know, I don’t know. While it didn’t *seem* like inflation leading up to what we see now, it sure *smelled* like it with all the frenzied buying and selling of crappy assets on Wall Street for unbelievable sums whose crappines is now apparent.

So maybe your overall sense is right; even though it didn’t *look* like inflation something “inflation-like” was going on that could not have gone on under a Gold Standard. But I don’t know for sure because of all the questions that I laid out beforehand that puzzle the hell out of me.

Cheers,

#14 Comment By Thomas Schiro On April 6, 2009 @ 7:17 pm

H.R. 1207 is a good start.

#15 Pingback By First We Must Kill the Fed « This Ringing Bell On April 7, 2009 @ 2:54 pm

[…] We Must Kill the Fed According to Pat Buchanan in this American Conservative article, the Fed is responsible for the major economic ills of the last century or so.  I don’t […]

#16 Comment By Andy M. On April 9, 2009 @ 10:46 am

Tom B.

I appreciate your views. Instead of my writing a book, this link might answer some of your concerns, while perhaps rasing others.

[2]

#17 Comment By roland On April 21, 2009 @ 12:07 pm

Abolishing the Fed will do nothing. It is a pointless exercise. They would be back anyway again. The Fed is just a tiny part of a monopolistic bureaucracy that rules America and much of the rest of the world today.
Obama already signed off on the creation of an international regulatory “authority” at the G20 meeting.
Who is this “authority” you ask? It is the same authority that will manufacture fiat currency for the World:
[3].

Anyway, the Fed is just a printing house that answers to their headquarters in London where the Fed’s owners are. In any case, the fact that Rothshields have a monopoly on printing fiat currencies in their respective markets is an example of business strategy well executed.

In my opinion, every businessman and/or corporation strives to compete, conquer and eliminate competitors and become a monopoly that controls its markets.
There is nothing unnatural about that process. And it is ‘natural’ for the monopoly to be depicted, by its customers, as sinister, evil, conspiratory, taking over the World, etc. We don’t have to look too far for examples, i.e. that evil Bill Gates and Microsoft taking over the entire World to seize control of digital information
and enslave all of us in his grip to control our minds and communication.

The fact that Rothshield et. al. had enough business acumen to turn a private bank headquartered in London into a global monopoly on the manufacture of fiat
currency is admirable. Central banks, i.e. Federal Reserve, in each country are Rothshield’s local manufacturing (printing) facilities whose products (dollars, euros, kronas, etc.) are freely traded in forex markets.

The success of Rothshield business model should be an exemplary case study in every reputable business and economics university as that is one, if not ‘the’
most successful conglomerate in human history. Rothshield had firmly established his vision for his company, goals, plans, ideology, long term strategy and mission. It is a classic business case to be analyzed and admired for its success.

Sure the Rothshields used questionable and unethical means to achieve their goals; however, as is said “It’s nothing personal, just business”.
Needless to say, Gates/Microsoft wasn’t exactly the poster boy for ethical business practices once Microsoft attained enough size and momentum. And it would have gotten a lot worse had Microsoft not been tamed in time.

What is really unfortunate is that instead of Rothshield banking monopoly being admired, he is depicted as an evil conspirator with sinister goals and intentions, i.e.:
[4]

as that is a huge dis-service to all of us.

Anyway, my point is that the present state of political affairs was necessary and required to advance Rothshield’s business plan. There were no two ways
around it.
It may be that individual states will be allowed to secede (Vermont) but God help them if they attempt to use their own currency, let alone gold/silver coins!