Wednesday, June 23, 2010

A Quick Lesson In Understanding the Fed

My students at the University of Iowa must understand how the Fed operates. We study books and articles by great Austrian economists, such as The Mystery of Banking by Murray N. Rothbard. Even though Professor Rothbard presents his subject in about as clear and concise terms as one can imagine, it takes some serious application of one’s time and energy to comprehend all that the Fed does and how it does it. It then takes even more time and energy to comprehend the Fed’s impact on the economy to arrive at a conclusion that is greatly at odds with mainstream economists. Mainstream economists revere the Fed as the “All-wise, All-knowing Great Oz” that stabilizes the economy, prevents depressions, ensures full employment, etc. And, they have formulas and econometric models to prove it! By contrast we Rothbardian Austrians conclude that the Fed causes the boom/bust business cycle by expanding the money supply and encouraging malinvestment that must later be liquidated. This is known as the Austrian theory of the business cycle. After studying the Fed’s operation, students dive into the study of this equally serious and time-consuming subject.

The Fed as a Monopoly Counterfeiter

Well, I have come up with a much simpler way to understand what the Fed does and its impact on the economy. There are no books to read or equations to memorize. Simply think of the Fed as a counterfeiter, but a very special kind of counterfeiter. Real counterfeiters operate in secrecy, knowing that their paper money amounts to theft and that their discovery would result in jail time. Printing money does not create a resource; it merely redistributes it. But, curiously, the Fed does the same thing and, except for us Austrians, engenders great respect from both the citizens and the government. Unlike a real counterfeiter, the Fed operates in the light of day. It has nothing to fear, because it has a legal monopoly on its counterfeiting activities. This makes all the difference and makes it easy to explain its operation.

The Police Power of the State Protects the Fed…for a Price

The Fed is the only entity that is allowed to manufacture money in America. The full police power of the federal government ensures its monopoly. The federal government forces everyone in America to use the Fed’s product—the dollar—for all monetary transactions. Even if we agree with one another to use some more desirable money, such as the yuan or the Euro, we are prevented from doings so under penalty of law. Furthermore, if we refuse to accept the dollar to satisfy a debt, the debtor is released from his obligation ever to pay us! This state-enforced monetary regime is known as “legal tender law”.

Holding the monopoly of money production in America makes the Fed a very popular entity, to say the least. As a semi-independent agency, the Fed can print money in just about any amount it wishes and can give it to just about anyone it wishes. But it gives most of its money production to the government itself, and it is not hard to understand why. A symbiotic relationship exists between the Fed and the federal government. Each gives the other something that it cannot have on its own. As already mentioned, the Fed gets protection from the federal government for its monopoly counterfeiting operation. Without this protection Gresham’s law would operate to drive the Fed’s fiat currency out of circulation; i.e., no one would want to use a currency that lacks intrinsic value.

But the Fed has the full coercive power of the federal government to force the dollar upon us, because the federal government gets an equally important benefit. It gets as much newly manufactured money as it requires, without going to the people via taxation or honest borrowing. When the government must appeal to the people for the money it wishes to spend, its insatiable appetite for spending meets the reality of the marketplace. There is only so much that the government can tax and/or borrow before the people either revolt or are driven to destitution and have nothing more to give up. But when the federal government can “sell” its debt to the Fed and receive as many dollars as it desires…and its desire is unlimited…it need not appeal to the people at all!

“Shill” Economists Provide Theoretical Cover

The economics profession should be solidly against this well-known scam, as Dr. Mark Thornton, Senior Fellow at the Ludwig von Mises Institute, calls it. But Dr. Thornton has discovered why so many economists and academic publishers support this legalized theft—they are on the payroll, literally! As Dr. Thornton explained at this year’s Rothbard Memorial Lecture, held in March at the Mises Institute, both get lucrative grants to produce and publish monetary studies for the Fed, and their Keynesian outlook provides amply scope for research into the arcania of fiat money. To quote Dr. Thornton, “…government money dominates the whole process.” Like the priestly class who supported the divine right of kings in days of old, academics and publishers receive support and public recognition from the state in return for providing theoretical justification for the state’s parasitic activities. As the bought-and-paid-for shills of the Fed itself, this group provides the third leg of support for this grand-theft-auto of a system.

So don’t be impressed with all the theater of complicated sounding Fed programs that authorize the Fed to buy this asset or that asset or lend to this bank or that insurance company. These are simply the huckster’s sales pitches for disguising the Fed’s real operation—manufacturing money for the federal government in exchange for the government’s protection of its counterfeiting operation. This evil, destructive relationship is the most ingenious method ever devised for fleecing the people of their wealth and, eventually, destroying our society.

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