"If a nation expects to be ignorant
and free in a state of civilization, it expects what never was
and never will be." Thomas Jefferson
If the Fed didn't existů
Profits might. There may
have been a tech boom, only profit, rather than "too much money"
would have driven it. The difference is that in one case economic
actors are making the correct choices.
If there were no Fed, consumers might
save more of their money, and the economy might be less prone to
the unintended imbalances between consumption and savings. In fact,
the economy may not need to depend on foreign savings at all.
If there were no Fed, bureaucracy
and debt could not outgrow the contributions that are made by capitalism.
Neither could ignorance and corruption.
If there were no Fed, our bank deposits
couldn't be insured by the government. But maybe they wouldn't need
to if the market quickly disciplined reckless banks. There certainly
would be no petty cash fund for the bankers and government to dip
into as the result of their own screw-ups.
If there were no Fed, over hedging
might not be possible. But then, it may not even be necessary.
If there were no Fed, the value of
our money would not necessitate its management, and the layperson
wouldn't have to worry about debasement and excessive taxation.
If there were no Fed, deflation would
be possible even in terms of money substitutes.
If there were no Fed, investors would
have nobody to subsidize their stupidity, and thus wouldn't be so
keen to offer themselves up as a sacrifice for the big wealth transfer.
What I mean here is that the stock market isn't for everyone, but
the Fed makes it seem so, for a while anyway.
If there were no Fed, the invisible
hand wouldn't have arthritis and markets wouldn't be "inherently
If there were no Fed, Bush would
really be the President, and Gore would have been too afraid to
If there were no Fed, other countries
would not need a central bank of their own to finance the accumulation
of dollar reserves so that they can trade and sustain the US dependent
global economy (or inflation scheme).
If there were no Fed, the same nations
might finally be persuaded to legislate private property rights
as a means to achieve the same ends they only think they are today.
If there were no Fed, OPEC wouldn't
need to exist to protect its monetary interests, and the world might
never run out of oil.
If there were no Fed, we wouldn't
have to save the stock market to keep the country from going to
war, or from being fully employed.
If there were no Fed, the individual's
word might be as good as gold, in business or in politics. Maybe
even in law (joking here).
That's fifteen benefits the Fed interferes
with and there are more, but time is limited.
I can think of no convincing justification
for the existence of a central bank except for in its role as lender
of last resort. But I can think of no compelling reason that would
necessitate a lender of last resort, save where monetary policies
or lending becomes profligate.
Sure, some believe markets are inherently
unstable. We disagree, and propose that those claiming so have helped
to justify the Fed. How does a lender of last resort ply its trade?
Does it have an inexhaustible source of funds? It does, in our collective
Nearly every time the Fed whisks
its safety net onto the economy it leads to a new financial boom.
Hmmm. I wonder what we should make of that?
I'll tell you what I think. Those
condemning the market for its instability, completely disregarding
the Fed's influence in this drama, provide the main support for
the Fed's charter, and they may even benefit from the volatility
or wealth transfer.
soon learn to make interested uses of every right and power which
they possess or may assume. The public money and public liberty,
intended to have been deposited with three branches of magistracy
but found inadvertently to be in the hands of one only, will soon
be discovered to be sources of wealth and dominion to those who
hold them; distinguished, too, by this tempting circumstance:
that they are the instrument as well as the object of acquisition.
With money we will get men, said Caesar, and with men we will
get money." --Thomas Jefferson:
Notes on Virginia, 1782.
Think about that quote the next time
there is a crisis worthy of the Fed's help, in so far as it is only
too happy to help. I wonder
at what point they will get the idea to initiate the crises? It's
only logical after all. Did I say that out loud...
The Greenspan Horse
A central bank can in theory act in the capacity of a gold standard
(using the term loosely), but then why would we need the central
bank at all? Well for one, a central bank that claims to be acting
in such a capacity is asserting its superiority to gold-as-money.
It claims to be better. It may or may not see gold as its natural
enemy. In a perfect world it could even be an ally. But the central
bank that does not strive to better gold-as-money must by definition
be its enemy, if gold is in fact the better money. Else, how else
could it survive?
Some people may need to beat up on
other people to feel better about themselves. If gold is the better
money, a central bank's survival would depend on its ability to
either demonstrate its superiority, or to beat up on gold. If it
chooses to employ the latter, it is no longer simply an opponent
of gold. It becomes an enemy of money, and thus by extension, to
If a central bank refutes the principles
of sound money should we be surprised it is in support of too much
of it? Should we be surprised at the legitimacy of terms such as
elastic money, fractional reserve lending, or that growth requires
Money doesn't breed greed and corruption
by itself. Too much money does. It also breeds malinvestment. It
should be no surprise who is ultimately responsible for that. It
is the same institution we all are most afraid to banish. It is
the institution whose currency we are trained to need.
Among the many
confused enemies of money there is one group that fights with
other theoretical weapons than those used by its usual associates.
These enemies of money take their arguments from the prevailing
theory of banking and propose to cure all human ills by means
of an "elastic credit system, automatically adapted to the need
for currency." It will surprise no one acquainted with the unsatisfactory
state of banking theory to find that scientific criticism has
not dealt with such proposals, as it should have done, and that
it has in fact been incapable of doing so - Mises in "The
Theory of Money and Credit," pp. 112, in the section, "The Enemies
of Money; Money Cranks."
Mises spent the next page or two
doing so - by summarizing the illegitimacy of this concept - and
also devoted several hundred pages to it along with the many other
banking theories of the day. The point is that many of today's popular
generalist economic doctrines have already been scientifically rejected
at least 75 years ago. It's just that most people are too lazy to
know it. I hate that conclusion just as much as you may, but it's
Ignorance is not bliss. On the contrary,
our leaders count on it.
Federal Reserve Chairman Greenspan
is not ignorant. He was, or is a student of von Mises', and it is
more than likely his mastery of the subject is what makes him such
a worthy opponent to gold, capitalism, and money. Who better to
take charge of the agents of inflation than one who knows why gold
is consistently the better money?
A central bank is to capitalism what
the Trojan horse was to the mythological city of Troy. It's not
a safety net, but rather a tool for plunder. It's certainly not
a gift, but then, neither was the big wooden horse.
It's Value Not Quantity
In a final note on inflation I'd like to share with you an email
that I'd sent to a friend of mine asking our take on the (overall)
debt issue and its consequences for prices. I've edited it a little
since sending it originally:
I think most everyone perceives this
debt issue as ultimately deflationary due to the quantitative
aspects of currency and money that determines their values. As
the credit cycle busts the money supply is expected contract,
etc. Only, the proper phrase should be "currency supply,"
not money supply, because applying the latter term to
M1, M2, M3, etc, is what convinces us that deflation is the natural
consequence to an unbridled credit expansion, as if the value
of the so called money only depended on its supply. If it did,
the Fed would've been out of business long ago.
Thus, as these aggregates decrease
in quantity we are persuaded to believe that the 'money' has become
scarcer. Some of us contend that as the deflation becomes an increasing
threat the rate of growth in this 'money' supply will be forced
to grow and eventually result in hyperinflation as an unintended
overreaction. We don't really disagree with that scenario, but
I think it will happen as the Fed becomes increasingly desperate.
Not about deflation, but about the value of the currency its banks
produce in profligate quantities.
Mises showed years ago that the monetary
aggregates were really only money substitutes. The value of those
money substitutes is what we believe will fall against most everything
else, and the supply of them will not matter because people will
simply not want them (remember all talk about supply and demand
is relative to each other) if they no longer qualify as money.
An economy has certain requirements of money, and at some point
during any inflation in it the substitute currency no longer does
that job. The money is no good, if you will.
Despite the fact that process is
ultimately set off by inflation it will matter increasingly less
that the supply increases or decreases except to the extent those
changes sway or lag a deterioration in the value of the currency
or the demand for it relative to whatever qualifies as real money.
In the end, it's all about the value of the dollar, not simply
its supply, which is why I have become so convinced the inflation
breakdown is upon us - almost regardless of what happens to money
The reason is that the value of the
assets that kept demand alive for the currency has been falling
for 2 years, finally uprooting the value of the currency itself.
The next stage (after the attempted manipulation to save the day)
is panic. And not just by the market. But predominantly in the
highest offices of our land, when they find that the value of
the dollar lies outside their control and when they are convinced
it will devalue regardless of what they do. At the moment I think
they still believe they can do something to prevent that outcome.
I believe the final decisions that
will be made will involve creative ways to increase the so-called
money supply for many reasons. But it will I think least involve
desperation about deflation at the time. It will probably just
be simple blank desperation - the kind that comes when you don't
know what else can be done. In other words, the kind that will
result when they realize that even less of the currency won't
help it from becoming worth less.
Imagine the value of your own 'money'
falling and there is nothing you can do about it. I mean nothing.
Assume you have zero options except to control the supply of it,
but you know that even decreasing its supply will not support
its value. You might find that a large part of its utility was
in how generally available it was and that by decreasing its quantity
you'll simply help it become less desired, if anything.
That's what I believe the Fed will
one day feel.
So they will increase its supply,
and increase it, hoping that they can still come out ahead. At
that point in the monetary cycle you've got something that looks
like 1920 Germany.
There is no end to the ways the money
supply can be persuaded to grow. It is true that we can't really
push on a string. But the string analogy doesn't apply in the new
economy. The reason is there are many strings and some of them are
designed to pull along the value of certain assets, and thus push
(influence) the demand for new currency.
The "money" supply is an important
gauge to the extent too much of it undermines the prevailing system
of production, for it's the efficacy of that system which ultimately
determines demand for the currency. The current state of the system
of production is such that it has been corrupted by too much currency.
And more of it isn't going to make it all better.
Productivity can't save a society
or system corrupted by easy money any more than it could've helped
the city of Troy defend itself against the quiet army hidden in
the belly of the wooden horse.