A World Without the Fed: Why Opposition to the Central Bank is Growing

“How is the Fed’s performance in the present economy,” asks The Citizen Economists’ Poll. “They’re doing excellent,” say a sarcastic and/or deranged 5 percent of respondents. Twenty-one percent say they’re “doing okay,” and another 12 percent say “pretty good.” But the most popular answer is “horrible,” which leads polling with 30 percent, and the second-place answer is more radical yet: 25 percent of respondents say, “We should get rid of them.”

Support for abolishing the Federal Reserve System is mounting every day. Hundreds of anti-Fed protesters convened on the Federal Reserve Bank of Detroit, where they joined former Governor Jesse Ventura, The Creature of Jeckyll Island author G. Edward Griffin, and Libertarian Scotty Boman in calling for a return to the gold standard. Eleven thousand people broke into several impromptu chants of “End the Fed!” at Ron Paul’s Minneapolis counter-convention this past September, and Google searches for “Austrian Economics”—the school of economic thought most vociferous against fiat money and central banking—are have spiked dramatically in the past year. This all begs the question: Why are so many people suddenly interested in what has for years been considered a “boring” subject? Well, it wasn’t always viewed that way.

Monetary Policy: Once a Burning Issue

The presidential elections of 1896 and 1900 were almost entirely about monetary policy. The “conservatives,” for lack of a better term, were the “hard money” camp—they supported a strong gold standard. The “radicals” wanted a government-managed fiat-money system much like we have today—only they were naïve enough to believe it would be to the benefit of the working man, rather than a vehicle to serve the interests of the elite. And finally, there were the “moderates”—those who favored a middle-of-the-road position in which silver would be coined in addition to gold, thereby causing inflation which, believe it or not, the moderates and the radicals thought was a good thing.

All three of these constituencies existed primarily within the Democratic Party. The “conservatives” were in fact the classical-liberal wing, led by staunch gold man Grover Cleveland. The “radicals” were Midwestern farmers who had broken with the Dems in the previous election and formed the Populist Party, winning 5 percent of the electoral vote in 1892 and nearly costing Grover Cleveland the election. Stepping in to “unify” the party was William Jennings Bryan, a staunchly anti-gold populist but loyal Democrat who did not go as far as the Populist Party. Instead, he was a “silver fusionist.” Bryan won the Democratic nomination in 1896 and 1900, losing in the general election both times to William McKinely (who was nominally pro-gold), and changing the Democratic Party forever, for the worse.

Now think about how much has changed since the turn of the 20th century: disputes over monetary policy were the basis of a third-party presidential campaign that grabbed 8 percent of the vote and won five states, led to a civil war within the Democratic Party and the realignment of the two-party system, and were the major issue discussed in at least two consecutive presidential elections. The American people were engaged and educated, and didn’t fall for bogus platitudes about “change,” “mavericks,” “yes, we can,” and “country first,” etc.—they understood the real issues that affected their daily lives, and nothing could possibly be more critical than the money question.

Why The Monetary System is So Important

And why is that? Well, when the government has control of the monetary system, it can manipulate it for the benefit of some and to the detriment of others. Ultimately, this government manipulation is always to its own benefit and at the expense of the people.

For example, under a hard-money gold standard, paper dollars can only be created if there were real gold coins to back them. Thus, unless there is new gold, there can be no new money. Inflation—which is correctly defined as the expansion of the money supply—did occur under the gold standard as new gold was mined, but only very slowly. As a result, there was no “price inflation” whatsoever. That’s because the advances in technology and accumulated capital more than offset the rate of monetary expansion, and thus, consumer prices went down a little year after year.

But when the government claims for itself the right to print paper money out of thin air—notes that aren’t backed by gold—and uses its military might to force people to accept those notes, there is a recipe for exploitation.

Inflation = Theft

Think of it this way: Imagine there is $1 trillion in total world currency. Paper money itself, of course, is worthless—it’s what you can exchange the money for that’s important. So if the total money supply was $1 trillion, then all of the world’s wealth—all the factories, the natural resources, the finished goods, etc.—would be worth $1 trillion. Now what happens when the government creates $0.1 trillion new dollars? It doesn’t expand the supply of factories, resources, and goods—only the money that the values of those items are denominated in. All existing wealth would now be worth $1.1 trillion, since the total wealth would still be equal to the total money supply. Only now, the $1 bill in your pocket would be worth $1/$1.1 trillion instead of $1/$1 trillion—you’d have just been robbed of 10 percent of your purchasing power.

And that purchasing power doesn’t just disintegrate—it’s redistributed. First, it goes from you to the government, just like a (hidden) tax. And then it goes from the government to its favored industries. This is why corporations spend so much time and money lobbying Congress instead of developing more competitive products: it’s easier to bribe the government to give them your money than it is to convince you to part with it willingly in exchange for better products and services.

Clearly, the intelligence of the average American has fallen precipitously since the elections of 1896 and 1900. But the fact that people are beginning to wake up to the problems caused by the Federal Reserve System is a hopeful sign. The only question is: is it too late? Can the dollar be saved by the political action of the president and the Congress, or must we wait for the entire global financial system to completely melt down so we can start over? If you’re an optimist you can hope for the former, but as a realist, I think the latter is the better bet.

18 comments to A World Without the Fed: Why Opposition to the Central Bank is Growing

  • GABE N TX

    Great article!! It’s sad that I might live in a world where the dollar no longer exists. I have a sentimental attachment to my green paper.

  • Well written. This author can slice through the fog of the unknown.

  • Awesome Article. I also agree we need to abolish the Federal Reserve and give the power back to the Treasury.

    Ron Paul just introduced a bill to eliminate the Federal Reserve:

    H.R. 833: — (Introduced: Feb 3, 2009)
    To abolish the Board of Governors of the Federal Reserve System and the Federal reserve banks, to repeal the Federal Reserve Act, and for other purposes.

    Link:
    http://www.govtrack.us/congress/bill.xpd?bill=h111-833

  • NJNan

    Why would any American want to have a non-government entity (Federal Reserve), which the American voters have NO say, NO vote on, to be in total control of their money/wealth? Now give that a thought, and just imagine what has happened over the last 96 years in which most taxpayers have been kept in the dark about this wealth transfer scam. I think we need a VERY BIG refund! …most likely it will be by an uprising though, as the rest of the world is currently engaged in where their government has also stolen their citizens hard earned nest eggs. When this pain gets real, as Americans wake to no job, no food, no TV brainwashing….time to duck!

  • Lance

    I am still trying to wrap my head around all of this, but there are two flaws here.

    First, if, for theoretical sake, there is an immutable $1 trillion in money supply, then to buy everything in the world would cost $1 trillion, in which case you would have somebody who owns everything but has no money, and then the people with the money. So there is a $2 trillion net worth.

    Second, this only works if nothing new is created. There is no incentive to create any new factories, finished goods, etc. if the money supply does not increase. If we increase the goods by 10% then shouldn’t increase the money supply by 10%. Even this has problems, though.

  • Tolley Jenkins

    Good article, except this really undermines your entire credibility:

    “Clearly, the intelligence of the average American has fallen precipitously since the elections of 1896 and 1900.”

    You can’t seriously argue that people are dumber today, as a whole, than they were 100 years ago. This issue just hasn’t had the immediacy that it did 100 years ago.

  • DavidR

    Nice article. I try daily to expose this scam to my fellow citizens. I think more people are waking up. I compliment you, and Dr. Ron Paul, who has a unique ability to take a complicated subject, and make it understandable for the average citizen. WAKE UP PEOPLE! YOU ARE BEING ROBBED BLIND! Our Gubbinment is out of control, and running off a cliff. Be prepared.

    RON PAUL IS MY PRESIDENT!!!

  • Dirk

    I am certainly no fan of the Fed. Their ability to create global financial crisis every 8 years is unparalleled.

    On the other hand, the reason so many Americans understood money supply issues in 1896 was the same more people are questioning how money works today- because it was screwed up. Constrictive money supply in the face of the Industrial Revolution, the chase to extend railroads across the nation, and the growth of agricultural productivity was producing crushing deflation that cause farmers to starve, railroads to go bankrupt, and an unprecidented concentration of wealth. Names like Carnegie, Morgan, Vanderbilt gained prominence as did the image of the evil banker kicking the poor out of their house. Money supply has to grow with productive capacity- the addition .1 Trillion is not bad if there is additional .1 Trillion of capacity, and I’d propose there’s many tens of Trillions of productive capacity idle in the world today (and growing), which is why we’re seeing deflation now.

    When GDP growth slows below interest, consumers, debtors, creditors- everyone- becomes more conservative, producing and risking less. If we didn’t live in a world with 3 billion people living on $2.50 a day and a majority of people in this country ready to vote to confiscate your wealth if you won’t share it- we better keep our eye on the ball of producing. Or else.

  • Athan

    Dirk, you should know that the panic of 1893 (not 1896) was directly caused because of the government passing the McKinley Tariff of 1890 which caused the railroad implosion. Again, caused by government interference with the economy.

    Even if we are getting paid 2 silver dollars an hour, we will ALWAYS be able to buy stuff by saving and the fact that the more production of an item will cause that item like a big screen plasma TV’s to reach low prices such as 50-60 dollars as they would be at this trading level.

  • Raymond

    The change we need candidate Obama was speaking of during the presidential election may come from overseas.

    The foreigners are sitting on huge piles of US dollars and debt used as reserves in which they pyramid their own currencies. As the US congress is poised to launch a monstrous spending bill, they read: the US central bank printing press is about to rev up to full throttle and flood the world with tons of additional US paper dollars, again.

    But unlike under the post World War ll monetary agreement called Bretton Woods, this time the foreign central bankers cannot exchange their rapidly debasing dollars for US gold.
    Which is what they did then forcing Nixon to violate agreement terms to halt gold exodus from the US. ending Bretton Woods. It is the US overprinting that eventually lead to the demise of that monetary agreement.

    And we are about to repeat the performance.

    This could force foreign monetary authorities under domestic political pressure to break away from the established dollar-as-reserve-currency regime. Unthinkable?

    I doubt if they will just sit around and watch the US debase their dollar holdings from afar. They didn’t before. And whatever alternate course they take will have repercussions here. So the change will come but not from here.

  • dev

    if ron pauls bill passes i will just start using

    http://www.opencurrency.com

    or

    http://www.freelakotabank.com

  • Tore Toivicco

    Who controls Federal reserve?

    Submitted by Tore Toivicco

    Who controls Federal reserve?

    http://www.youtube.com/watch?v=NzLIz27GqWs

    Most important question in US history?

    http://www.usagold.com/federalreserve.html

    Federal reserve controls US income/ finance?

    http://library.thinkquest.org/03oct/00921/governmenttaxes.htm

    Is Ron Paul talking about this?

    -Tore Toivicco

  • barry crowley

    How can this info be put before the American public? Mainstream media almost boycotts this subject, much in the same way they ignored Ron Paul, the most viable and authentic candidate in the pres. election. The oscars are receiving more coverage than this ominous group known as the Fed. Res.

  • Steve C

    The Federal Reserve isn’t the problem. Debt is a form of money that isn’t included in M0, M1, M2, or M3. For a thorough discussion of debt-as-money, see:
    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

    The money supply isn’t expanding, it’s collapsing.

    Few will agree with that, because M0, M1, M2 are all moving upwards. But none of these include newer debt instruments.

    Debt is traded and transferred like other forms of money. Over 60 TRILLION dollars of credit default swaps (CDS) alone existed at their peak. The value of this form of money is plummetting, and this represents a rapid collapse of the effective money supply that is an order of magnitude greater in the downward direction than the upwards movement of M2 and other measures.

    The Federal Reserve is expanding the more traditional measures of money supply to compensate for the collapse of the total real money supply. The seemingly-reckless expansion of M2 is a result of attempting to compensate for the far-larger collapse of the real money supply.

    Thus, the “asset deflation” is really no different from price deflation and reflects the contraction of the money supply. Welcome to 1929, relived.

    What the Federal Reserve is doing (quantitative easing) is absolutely correct, but probably still too small to achieve the needed effect.

    The fiscal stimulus of big federal budget deficits is also perfectly appropriate, but probably too small to achieve the needed effect.

    Steve

  • peter

    Steve, you know a good deal, but what you argue glosses over several realities.

    To start, the credit default swap market is not a money supply, except insofar as it effected balance sheets of financial institutions. CDSs are in fact one of several “innovative” accounting practices heralded by Barney Frank as a boon to our financial system. I shouldn’t have to explain how wrong that was, or why insurance type transactions (which swaps are in practice if not name) are not part of the money supply.

    A more egregious error is your discussion of deflation. Asset deflation is very different from price deflation. For example, they have opposite affects on consumer wealth in real terms(and thus spending, and thus the economy). Asset deflation decreases the wealth investors have in real terms (depending of course which asset group we’re refering to, which would in the current crisis include homes, financial instruments, and stocks). Price deflation increases everyones purchasing power and thus quality of life

    The fed is “doing the right thing” with it’s current policies, but that is only true because of the dangerously unstable and inherently insolvent fractional reserve banking practices. Abolishing those practices would prevent future crises, or at least reduce its severity and pervasiveness. Proping up the system of the status quo by every means possible only delays disaster until the next bubble creates the next credit crisis while birthing the spectre of inflation. If this seems suspect to you, then read some Austrian School economists, particularly Murray Rothbard (”The Case Against the Fed” by him would be a great place to start.

    As for the federal governments fiscal responce, I could write a thesis detailing the myriad reasons a well planned one still wouldn’t work, and worse, why the one recently passed is “stimulus” in name only. We can leave it for the purpose of this diatribe with the empirical examples most prominent historically. The New Deal failed miserably at reversing the great depression, alowing 10 percent unemployment to drag on for a decade. Even more telling, the great society and nearly 20 years of responding to recessions with spending and credit boosts created the worst peacetime inflation this country has ever experienced, and a concurrent series of progressively worsening recessions with increasing frequency. Those who believe government spending (Keynesians, I’m looking @ you) helps ought to read “The Great Inflation”, which details the failures of these policies and the terrible social cost of (and hence political resistance to) the solution to the inevitable inflation.

    Essentially, we have started down the path of 60’s and 70’s style semi-socialist keynseyian policy, and it will end the same way

  • Steve

    While certainly I favor more accountability and transparency in the Fed. But to those who support getting rid of the Fed, I ask the reasonable next question: Then what? 
     
    The Fed has flaws but before we had the Fed, we had depressions, inflation and all the same ills and worse with greater frequency. Should we: 
     
    1) Make a central bank government agency? Gee that will work further politicizing our money system.  As bad as the Fed might be in some people’s minds, the crap in Congress with its focus on special interests and reelection campaigns is FAR worse.
     
    2) Go to a gold standard? Firstly I don’t see how it is possible to transition to that, Secondly, there isn’t enough gold in the world (generally those who support a “gold standard” are gold bugs who are long gold, what a surprise?) or what would happen with a gold standard would be our economy would become enslaved to gold producing nations who would cartel like OPEC—wouldn’t that be fun?  Finally, has everyone seen how gold has moved this year? How would you like the value of your currency to move the same way with the volatility of gold pricing during same 12-18 month period.
     

    Lets start talking about better solutions or better controls but to talk about getting rid of the Fed without a reasonable alternative is ridiculous. I simply don’t see how another system would have served us any better. Ron Paul talks about abolishing the Fed to “…restore financial stability to America’s economy… ” Huh? By all historical standards, our economy is ridiculously stable. It is government policy in trade, banking and labor that creates far more problems for us than the Fed. I cannot imagine how going to a gold standard will give us more stability when a big gold strike in Russia (or the bogus announcement of one) will cause our currency to drop like a rock or a boycott of gold shipments by Russia in response to some foreign policy sleight sends gold spiking. If you think the control that our Arab “allies” has over our economy under OPEC is bad, imagine a gold producers’ cartel. Under the gold standards, the supply and to a significant degree the demand of our “currency” would be both outside our control and driven by random factors.

  • Monetary Policy Guy

    I wonder how you reconcile the idea that the central bank was created for the profit of a small elite with the fact that the mid/late 30’s saw the creation of an actual middle class?

  • How certain are you, Policy Guy, that one is the result of the other?

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