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Rothbard on the FED: He Told Us So

Written by Gary North on October 9, 2013

The news that President Obama will nominate Janet Yellen as Chairman of the Board of Governors of the Federal Reserve System should remind us of the disaster that the Federal Reserve is and has been.

It was not quite 100 years ago that the Federal Reserve Act was signed into law by President Wilson. This was on December 23, shortly after the Senate voted for it. There was no serious opposition in either the House or the Senate.

I have created a short link to the inflation calculator of the Bureau of Labor Statistics. We can see what it would take today to buy $100 worth of consumer goods in 1913. The number is $2,362. The link is here: www.bit.ly/BLScalc.

Back in 1964, Murray Rothbard’s little book appeared: What Has Government Done to Our Money? I read it that year. I regarded it then as the best short introduction to money theory I had ever read. My opinion has not changed. It even has a Wikipedia entry, which is well deserved. You can download a free copy here: http://mises.org/money.asp.

The inflation calculator tells us that it would have taken $313 in 1964 to buy $100 worth of goods in 1913.

Rothbard blamed the Federal Reserve System and the abolition of the gold coin standard for the depreciation of the dollar. The FED is the guarantor of the fractional reserve banking system. Central banking guarantees the survival of fractional reserve banking. Once the nations went off the gold standard, he wrote, the age of inflation was assured.

In the twentieth century, governments, rather than deflate or limit their own inflation, have simply “gone off the gold standard” when confronted with heavy demands for gold. This, of course, insures that the Central Bank cannot fail, since its notes now become the standard money. In short, government has finally refused to pay its debts, and has virtually absolved the banking system from that onerous duty.

The debate today over the raising of the federal government’s debt ceiling is all sound and fury, signifying nothing. When Franklin Roosevelt unilaterally took this nation off the gold coin standard in 1933, that was the end of the debt ceiling limitation. In 1933, it cost $131 to buy $100 worth of goods in 1913. It would take $1,799 today to buy what $100 bought in 1933.

Rothbard saw clearly the great evil of central banking. It increases the public’s confidence in the banking system. This confidence has made inflation inevitable. Faith in central banking has undermined the public’s confidence in the gold coin standard, where the public holds the hammer on monetary policy, because bank depositors can launch a run on the banks to demand cold coins. That threat restrains commercial banks from inflating.

One of the reasons the public could be lured from gold to bank notes was the great confidence everyone had in the Central Bank. Surely, the Central Bank, possessed of almost all the gold in the realm, backed by the might and prestige of government, could not fail and go bankrupt! And it is certainly true that no Central Bank in recorded history has ever failed. But why not? Because of the sometimes unwritten but very clear rule that it could not be permitted to fail! If governments sometimes allowed private banks to suspend payment, how much more readily would it permit the Central Bank—its own organ—to suspend when in trouble! The precedent was set in Central Banking history when England permitted the Bank of England to suspend in the late eighteenth century, and allowed this suspension for over twenty years.

The Central Bank thus became armed with the almost unlimited confidence of the public. By this time, the public could not see that the Central Bank was being allowed to counterfeit at will, and yet remain immune from any liability if its bona fides should be questioned. It came to see the Central Bank as simply a great national bank, performing a public service, and protected from failure by being a virtual arm of the government.

The public still trusts the Federal Reserve. It still rejects the gold coin standard. So, we see the Federal Reserve creating $1 trillion a year in counterfeit money, and almost no one protests. The investing world fears a return to the pre-2008 levels of monetary expansion. Say the word “taper,” and the stock market tumbles.

Rothbard sounded the warning 49 years ago. Congress still ignores it. Academia still ignores it. Wall Street still ignores it.

Janet Yellen will be confirmed. But before her term ends, she will face the horrendous consequences of what she has voted for as Vice Chairman. So will you. So will I.

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17 thoughts on “Rothbard on the FED: He Told Us So

  1. Texas Chris says:

    I will not. No, sir, Dr. North.

    I took your advice in 1999 and bought gold. When the dollar collapses, I will still have all that value stored up in 1oz gold and silver coins. And food. And guns. And a nice little cabin in the woods…

  2. I was a little late to the party…..2002 when I saw the light and started buying gold…thank GOD!!!!! It's hard to really imagine what the true outcome will be……anyone garner a guess as to when the collapse will actually happen? How long can the can be kicked down the road?

  3. Good luck to those folks that bought gold. If there is a true and almighty, right down to the bottom, crash, what will you do with that gold? This is not gold rush California where merchants had scales to handle gold dust or nuggets. Going to the Walmart or Stop and Shop with ounces of gold tucked in your pocket. If the economy goes that sour you will need armed guards and there will be no place to trade your gold. Sorry. You shouldn't have believed those commercials. But as long as the fed stays alive the people will continue to have faith in paper money. The problem is, how much will the dollar be worth in goods? See my blog at http://cranky-conservative.blogspot.com

  4. Bill Smith says:

    I started buying big-time in 1975, and I'm ALL in now. Welcome to the party…good luck and keep your powder dry!

  5. Won't gold be confiscated?

  6. @ R Owen: You miss the point of owning gold. Go back and do some research on the subject, When Money Dies is a good place to start, and you will see that gold has rarely been used as a medium of exchange. Gold is a store of value. Will people be walking around with one ounce gold coins to buy bread? No, not likely. Will people convert gold coins into a new medium of exchange to purchase bread? More likely. Gold is not spending, it is for saving. Even the Romans didn't spend gold, they used it to settle accounts after they spent an agreed upon medium of exchange. I highly doubt gold will flow like dollars but there could very well be a time when people will not trade with you unless you can settle your transactions with real money – gold.

  7. The entire purpose of the federal reserve was to rob trhe American people. Almost every government organiation set up since 1900 has been designed to do so.

  8. only if the motherf*ckers can find it

    or pry it from my cold, dead hands

  9. 1baronrichsnot1 says:

    Why are all these defacto appointees named Janet? One thing about having the world reserve currency, you have to finance the world! Helicopter Ben, Fiat Yeller! In the movie ole yeller, he died of rabies, wonder if it will drive her mad or more mad. I believe a little oblivion is good to fall into, rest a sick mind.
    I wish her a happy term of printing, electronic transfer, bail outs, banking, and such. It must be a demanding job, you have to attend world monetary meetings, make sure everybody has plenty of money, and that entreprenuers have access to the funds to start a business, if you are politically connected enough. I think the rest of the business is less stressful, all you do is come on t.v once a month. and say, no change in interest rates, and QE1-103 whichever is functional will remain the same ! The printing presses are singing like a clock, no problems. The stock market will soar like a bird, the people will cheer and dance, everyone will quit their jobs, or work 30 hr. weeks, a great utopia, and life is good! How long does have to work? Is there even a remote chance that SSA will default or go broke?
    A great article by the way,

  10. The FIRST woman, the FIRST negro, the first this the first that will actually lead the the LAST of something!!!

    Something creepy about putting the first of everything without testing it, uhhh first!

  11. Yeah well it's to satisfy the politically correct bots and special interest groups which act like parasites on our tax dollars and lives.

  12. If it gets that bad there won't be anything to buy with that gold or anything else.

  13. The historical phrase "Not worth a Continental" comes to mind…

  14. Um, "those who bought gold" generally bought it in coins marked 1 oz or some fraction thereof. Where did you get the idea that anyone will need "scales to handle gold dust or nuggets"? Although in any town, there are businesses that have scales and tests for gold purity; they have "will buy gold" signs out front. I agree that the question is "how much will the dollar be worth in goods?" in the future. Whether a slow grinding collapse (like the last 99 years) or a quick crash (from the dollar being replaced as the world reserve currency), the dollar is, long term, going down, as all fiat currencies have always gone down. Gold is just an alternate currency that doesn't have that problem.

    The biggest issue with spending gold coins in the future is that they have become so valuable over the last decade that most purchases require only a fraction of a gold coin. Which is a "problem" that other investments could use — it has relentlessly risen in value.

    You don't need armed guards to carry a few gold or silver coins in your pocket. That is the advantage of money in general — it is small enough to carry around privately. Actually, with the $20 bill being the largest denomination universally accepted, it takes much more bulk to carry money in federal reserve notes than in gold or silver coins.

    What I believe you are referring to is that if the dollar is widely abandoned as being worthless, there will be a period during which there is no single replacement. Not having a single universally accepted currency brings an economy to its knees as pricing mechanisms break down. It this happens, everyone will suffer greatly until a single replacement is adopted. Those will gold and silver will suffer as well. But not as much as those without.

    I agree that the dollar will very likely remain the currency in even the worst scenario, simply because the advantages of having a universally accepted currency outweigh the disadvantages of having a depreciating currency. But that doesn't mean that gold can't function as a parallel currency that has the advantage of retaining value but the disadvantage of not being universally accepted. Which, if you think about it, isn't a Mad Max future. It is the situation right now. Keep a minimum amount in dollars as they will continue to depreciate. Convert gold to dollars prior to spending at "Walmart of Stop and Shop".

  15. Why would we need armed guards unless gold is a valuable and useful asset? You undercut your own argument. BTW, I'll bet the guards would take payment in gold.

  16. RonWillison says:

    Do a youtube search for "RT Switzerland" view the one near the top of list with. Considering giving everyone a set amount of money. Working or not. If you want to see the value of gold coins. You will also understand where all the gold is these days.

  17. Victor Barney says:

    Note: Those that have gold: Reminder: What happened to the gold for all those under Hitler regime, not to mention the 100,000,000 Chinese murdered by Obama's idol Mao Tse Tung & the Chinese would not have said s… if they had a mouth full; but then, the Marxist manifesto must be carried out; right, "women alone" who elected the "fundamental transformation" guy into Marxism? p.s. I do know that the women who use these cites, except the Marxist moles, are not included in my statement, but I'll wager with anyone that 100% of blacks will stay the course no matter what & women, "gatherer's" by their own biology, will not be far behind! Watch…