Kill the Fed? – Then what?
By: Les Dunaway
The subject of the Federal Reserve has generated a lot of smoke, but little light. In my opinion, the Federal Reserve must be changed, a LOT.
However, it performs required functions not related to the creation of imaginary wealth which has caused such suffering. Those who shout ”Kill the Fed!” with no understanding of or consideration for those functions and their absolute necessity make the rest of us who share the belief that the Fed is a “clear and present danger” look like members of the tinfoil hat brigade. I resent that and I hope, somehow, all that energy can be channeled to solving the problem rather than just ranting.
There’s no question that change is needed. There is also no question that it will be a big, nasty job. It will take time – time to work out how and time to implement. In the meantime, there are immediate steps that can reduce the danger (below).
Part of the nastiness of the job comes from the need to, once and for all, drive a stake through the heart of Keynesianism. Read Milton Freidman’s Money Mischief: Episodes in Monetary History . If anyone wants to see Keynesianism in action take a look at Greece, Spain, Italy, … and read about how “austerity won’t work, we need to spend more to help growth” – how’s that working out?
There are two bills to start the process -Rep. Ken Brady’s “Sound Dollar Act” and Sen. Mike Lee’s “Federal Reserve Modernization Act (FRMA)”. Both start with what, in the opinion of leading economists, is the cause of much of havoc wrought by the Fed in recent times – the dual mandate. In 1977, Congress first gave the Federal Reserve a dual mandate to promote both “maximum employment” and “stable prices.” Chasing these two unaligned goals has often caused unemployment to increase. Other provisions would increase transparency. Ron Paul has been shouting “Audit the Fed!” for some time. He’s right! This is another part of transparency. Other, and more important changes, address the Fed’s “lender of last resort” role.
I’ve done a lot of reading and searching and I’ve found no concrete, step-by-step proposal replace the Federal Reserve. There’s lots of rants about how “evil” the Fed is, mostly by people without the first clue about how the financial system works. These writings have a common thread “The Fed has caused more problems than its solved”. Right! Government meddling in business always does.
We are seeing noises coming out of Washington that tax-code rewriting must happen. Good! We’ll need to watch carefully how that’s done. The Fed issue is, at least, as complex. We need a national leader who will stand up and say “It’s not working, let’s fix it!”. It will take someone with las bolas de latón to do so.
Our new President and the 113th Congress will have an opportunity to excel. They will have to deal with tax-code rewrite, entitlement reform and Federal Reserve reform/replacement. Oh and by the way, doing all that while Europe melts down and the Middle East is in flames.
As I’ve said before, we must be good parents to our elected officials – hug them when they do good and spank them when they don’t. And, like any good parent, watch them very closely.
More reading
Books
The Fatal Conceit: The Errors of Socialism (The Collected Works of F. A. Hayek)
Free to Choose: A Personal Statement
Money Mischief: Episodes in Monetary History
Papers
Board of Governors of the Federal Reserve System
HowStuffWorks “How the Fed Works”
What We Do – Federal Reserve Bank of New York
The Federal Reserve: Duties | Investopedia
FAQs: Fed Basics – Federal Reserve Education
The Federal Reserve Bank of San Francisco: Economic Research
2 Responses to “Kill the Fed? – Then what?”
Les,
Then what? Here’s a BIG CLUE from a fellow Georgian!
(I have loads MORE on this topic but will spare you at this time. If you don’t understand why Nunn’s office sent this to me, I’ll send what Everett Dirksen called “…the whole load.”
Dick
In early 1983, I wrote Senator Sam Nunn of Georgia
to ask about the redeemability of Federal Reserve
Notes. His reply arrived on March 11 and read (in
part) as posted below.
It would APPEAR that either:
1. Sam Nunn ACTUALLY gets it about what happens when man
(or certain men) play God with “money;”
2. Nunn DOESN’T get it — and some staffer sent this out
without actually READING it or running it by the boss (in
which case said staffer now works for the DC Sanitation
Department.
3. None of the above. Because nearly every American is an
economic illiterate, what possible harm could it do to send it?
In which case, you economic illiterates who read this will mutter
“So what?” and flip back to MTV.
In any event, for the edification of you non-economic illiterates
out there, here it is.
“Dear Richard:
Thank you for your letter requesting information on
redeemability of Federal Reserve Notes for lawful
money. I have enclosed information from the
Congressional Research Service that I hope will be of
assistance.”
The enclosure was 4 pages from something called
“The Gold Standard: Its history and record against
inflation. A Study prepared for the use of the
Subcommittee on Monetary and Fiscal Policy of the Joint
Economic Committee, Congress of The United States.” It
was printed September 18, 1981. I was sent only the
England and U.S. portions of the study. What they
revealed was most interesting. From the England study:
(Emphasis added)
“England has had 350 years of experience with
various forms of the gold standard. She first went on
the gold coin standard, de facto, in 1717. This was
done by Sir Isaac Newton, then Master of the Mint (and we all know what a dumb ass HE was). It
was done by pricing gold at the mint more favorably,
relative to silver, than in the marketplace. An Act of
Parliament in 1816 gave formal recognition to this
‘new’ monetary standard that had been operational for a
century in promoting England to a world power.
“Between 1797 and 1821, England temporarily
suspended the gold standard because of the economic
disruptions of the Napoleonic Wars. With no gold
backing to the currency, the supply of money had no
discipline except that imposed by the Board of
Governors of the Bank of England (analogous to our Fed
of today).
The result was that wholesale commodity prices shot up
nearly 50% in 4 years-a momentous inflation.
The ‘Bullion Committee’ was formed by parliament
to investigate. Their findings read in part as follows:
‘The suspension of cash payments has had the
effect of committing into the hands of the Directors of
the Bank of England, to be exercised by their sole
discretion the immediate charge of supplying the
country with that quantity of circulating medium which
exactly proportioned to the wants and occasions of
the Public. In the judgment of the Committee, that is
a trust which it is unreasonable to expect that the
Directors of the Bank of England should ever be able to
discharge. The most detailed knowledge of the actual
trade of the Country, combined with the profound
Science in all principles of Money and circulation,
would not allow any man or set of men to adjust, and
keep always adjusted, the right proportion of
circulating medium in a country to the wants of trade.’
“Gold convertibility of the currency was resumed
in 1821. It is a matter of record that wholesale
prices came back down immediately to the level
preceding the hiatus in the gold standard.
“England was again off the gold standard between
1919 and 1925. When she resumed gold convertibility it
was on a gold bullion standard where she remained until
1931, when she went off the gold standard altogether in
the midst of the Great Depression.”
Under the United States, we find the following:
“The long period of the gold standard in the
United States was not an economic nirvana. The most
severe inflationary period reaching completion under
the gold standard was from 1897 to 1920. But from
trough to peak, the average annual compound rate
was 5.4%–mild by present experience. And most of this
occurred from 1914 to 1920 when the European war and
its aftermath bore so heavily on the domestic economy.
If we look at the period between 1897 and 1914, the
average annual rate of inflation was 2.6% — enviable
from the perspective of today.”
The book “Woodrow Wilson and the Progressive Era” by Arthur Link 1954, indicates the Fed was created by conservative Republicans and opposed by Progressives (Republicans had many Progressives back in the day).
The Fed was a response to the bankers panic of 1907 according to Link. Everyone apparently believed the banking system was a mess at the time. The Progressives wanted a government issued currency, the Conservatives wanted currency controled by a private bank and the Fed was a compromise of these positions and denounced by Progressives and only reluctantly passed by Wilson. My question is when did it shift to conservatives disliking the Fed? I know None Dare Call It Conspiracy back in the day dealt with the issue, was the 1960′s? I have not read the Creature book that seems the most popular on the Fed, how reliable is it compared to standard history works?