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.