But Now You Know

The search for truth in human action

Forget the Fed


End the DEBT

The Federal Reserve, though bad, is a scapegoat, and ending it would neither reduce the deficit, nor rein in the printing of money

Among my political companions, “End the Fed” has been the hot, trendy thing for a while. This is mainly because Ron Paul correctly distrusts it, and has sponsored a bill to have it audited.

Now, I almost named this article Eff the Fed, because I, too, dislike it, and know it can never manage money properly…no government agency ever could. Instead of the a fiat dollar, we should have a free market in currency, like the Austrian economist Friedrich Hayek advocated . But when it comes to the fight to end it, there’s a problem.

The End the Fed crowd seems to think that getting rid of it is some magic bullet, that will accomplish all kinds of different things.

They believe it will:

  • Bring back “sound money”, by imposing a gold standard.
  • End the printing of new, extra money
  • Restrain runaway government spending
  • Prevent budget deficits

The problem is that ending it will accomplish none of those things.

In fact, it would probably make them worse.

Why?

Because the Fed isn’t what started those things happening, and none of them depend on the Fed’s existence.

Axe the IRS

In effect, fighting those things by attacking the Fed is like wanting  to fight the income tax, and high taxes, by demanding “Ax the IRS”.

Obviously, we had taxes before the IRS, and we’d have taxes after it. In fact, the IRS was not created by the 16th amendment establishing the income tax, but five decades earlier, by Abraham Lincoln.

If we got rid of the IRS, we’d still have the income tax, and high taxes. Putting our time, energy, and money into attacking the IRS would be a waste of time, when we could have fought for actual tax reduction, reforming or ending the income tax, et cetera, directly.

What’s worse, the government would still want to oversee the taxes we failed to actually fix, and would probably end up using something worse than the IRS.

Well, all of this is true of the Fed, as well:

The Feds Don’t Need the Fed

The Fed and a Gold Standard are Compatible

Trade Dollars, coins minted in the US during the gold standard, in an attempt to offset a shortage of money

Ending the Fed won’t bring back a forced gold standard, because they are two unrelated issues.

We had both at the same time for decades, anyhow.

The US had a fiat gold standard from 1873, through 1934.

The Fed, of course, was established in 1913. It existed alongside the gold standard for over two decades. It helped cause the Great Depression while the US was on a gold standard. It created floods of new money in the 1920s, and drew down the money supply by 30% (which would cause any economy, at any time, to collapse) in 1929…both of these things while we were on the gold standard.

Congress Would Just Print More Money

Not only did we have a gold standard while we had the Fed, but we also printed fiat paper money when we did not have the Fed. The reason the dollar is sometimes called the Greenback, is that this was the nickname commonly used for the paper money common in the United States in the 1860s and 1870s, printed to finance the Civil War, known for its green ink .

Right now, the Federal Reserve is a bureaucratic middleman, standing between Congress and simply printing money willy-nilly. The Fed uses what are ironically called “mechanical” means, to create its electronic, funny money for banks. In other words, it has a set of rules that cause the money to be created according to some specific set of conditions, not simply all the money the government wants.

An actual Greenback, fiat paper money printed in the US before the Federal Reserve

Without it, Congress will simply mandate the printing of more money, on its own, surely in accordance to its bloated, and ever-snowballing spending. They printed floods of extra money before the Fed, and would print it after.

As with the IRS, however it replaces the Fed (and, in a sense, it will have to) will probably be with a mechanism that is even worse.

The US government issued treasury notes, and created deficits in other ways, for the majority of US history where there was no Federal Reserve Bank, and would do it again without it.

Restrain the Deficits…How?

This is the silliest one, and speaks to an ignorance of how the Fed works.

The Federal Reserve certainly responds to some deficit spending by selling more treasury notes…but as with printing money and collecting taxes, this would happen whether the Fed existed or not. It simply is the middleman, again.

You might as well blame the mailman for delivering your bills.

A Big, Fat Windmill

The problem with Don Quixote attacking windmills wasn’t just that the windmills wasn’t only that the windmills weren’t actually dragons, harming people.

It was also that he was wasting the energy and time that could have gone into fighting actual bad causes.

And that’s what the End the Fed noise is doing. This energy could be spent fighting deficit spending directly, which has run rampant under Democrat and RiNO alike…or any of dozens of other issues of government abuse.

It’s Going Nowhere

Of course the last problem with tilting at windmills was that it was never going to get rid of them, anyhow.

The Federal Reserve is in no danger of being “ended”. Ron Paul is actually only sponsoring a bill to audit the Fed, which (unfortunately) will not even permanently open its records to the public, the way they need to be. It will do even less to “end” it, since government self-investigations only ever are used to create a pretense that a few new regulations have “put the problem behind us”, and things usually just get worse, thereafter.

A majority of Americans oppose the drug war. Nearly all Americans not directly on the government teat oppose its massive spending and deficits. But the mechanisms for keeping the Fed in place, on both the private and public side, are massive. Not only would getting rid of it have no more effect than axing the IRS, but it’s no more likely to happen.

How To Actually Fix Things

What we need to do, rather than waste our time tilting at the Fed, is to directly address the problems we’re using it as a whipping boy to attack, or at least focus on their actual sources.

For example:

Balance the Budget; A balanced budget amendment would stop massive deficits, rein in government spending, and eliminate much of the incentive to print money and treasury notes, under the current system.

Line-Item Veto; Giving the President the power to veto any specific detail in any spending bill would be a step in that direction, as well. This may need to be an amendment, too, in order to override corrupt Federal courts claiming that it’s somehow unconstitutional.

Pull the Pork; Rules against pork, against Congress specifying projects in detail intended just to send money to their own cronies in their district, would be devastating not only to spending (which, unfortunately, is more centered on entitlements), but also to motives to give officials legalized bribes like campaign contributions.

Or maybe something else, entirely…but, whatever is done, it needs to be done. We need to choose surmountable obstacles that will actually matter, not waste our effort and attention on some scapegoat, however undesirable it is. The Fed is a poster child for government’s destruction of finance and economy, but what we need now is real solutions, not symbolic gestures, however satisfying this one would be.

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July 5, 2010 - Posted by | Economy, liberty, Philosophy, Politics | , , , , , , , , , , , , , , , , , , , ,

5 Comments »

  1. Balancing the budget sounds nice, but without sound money, that will just mean resorting to hyperinflation for Congress-critters. A line-item veto sounds nice, but Constitutional amendments (like all top-down approaches) are devastatingly expensive and time-consuming, killing such efforts almost before they begin. Ending pork-barrel bills sounds nice, but it would entail convincing Congress-critters to cut their own private parts off (politically speaking), and that ain’t likely to happen.

    The Fed needs to be ended, but it’s likely that efforts at the Congressional level are, indeed, tilting at windmills.

    Like almost everything else that the federal government does wrong, it CAN be countered Constitutionally — at the State level. Dr. Woods’ new book on “Nullification” is a great guide and will likely open the door wide in this area; but when it comes to the Fed (and the economy in general), what needs to be done is for the States to implement Constitutional Tender Acts: http://www.constitutionaltender.com/

    This will have the effect of ending the Fed from the bottom up, while also restoring the use of sound money by the people themselves, and returning power to the people. See: http://ssrn.com/abstract=1570108 for how this can be accomplished.

    Comment by Bill Greene | July 7, 2010 | Reply

    • > Balancing the budget sounds nice, but without sound money,
      > that will just mean resorting to hyperinflation for Congress-critters.

      That’s exactly what ending the Fed would mean, too.

      If you think “sound money” means a fiat gold standard, note that we had a gold standard WHILE we had the Fed, and we had paper money WITHOUT the Fed. There’s no relationship between the Fed and paper money, per se.

      Congress would just print paper money FASTER, without the Fed.

      > A line-item veto sounds nice, but Constitutional amendments (like all top-down approaches)
      > are devastatingly expensive and time-consuming, killing such efforts almost before they begin.

      That’s a great argument against the top-down approach of getting rid of the massive Federal Reserve, especially since it would create no actual change that you seek.

      > Ending pork-barrel bills sounds nice, but it would entail convincing Congress-critters
      > to cut their own private parts off (politically speaking), and that ain’t likely to happen.

      It’s much easier to get them to vote for a rule against pork, than to get them to vote to meaninglessly piss off entities even more powerful than their constituencies.

      > The Fed needs to be ended, but it’s likely that efforts
      > at the Congressional level are, indeed, tilting at windmills.

      There’s no sense in which it’s not, regardless of your method.

      That guy’s suggestions are interesting, but they won’t work, either.

      Getting the states to dissent on immediate, practical issues that matter to them individually is one thing…Arizona being hardest hit by illegal immigration is a great example. But this is a huge, nebulous, meaningless gesture, that will never happen.

      Woods also has a lot of things wrong:

      > Since its inception, the U.S. Federal Reserve’s monetary policies have led to a
      > decline of over 90% in the purchasing power of the U.S. dollar.

      > Since its inception, the U.S. Federal Reserve’s monetary policies
      > have led to a decline of over 90% in the purchasing power of the U.S. dollar.

      This is untrue. People tend to have this Magical Thinking obsession with imagining gold to be stable in value…but, in fact, gold declines in value faster than the dollar has. Get an inflation-adjusted chart of the price of gold since it became free market in 1971, and you’ll see what I mean. It only rises in value temporarily, during economic downturns, because of speculators. But it’s a price bubble, and when the economy recovers, it ALWAYS bursts, falling even lower than before the bubble.

      Therefore, if you check the value of the dollar from 1873-1971, when it was fixed to the price of gold, you see that the dollar declined in overall value, too. It didn’t just magically start declining in value in 1971, when we left the Breton Woods standard, or in 1934, when we left the gold standard, or 1914, when the Fed was founded…but it has ALWAYS declined.

      Comment by kazvorpal | July 7, 2010 | Reply

  2. This article correctly calls bullshit on “end the fed” as a solution, then proposes equally fantastical solutions that will also never be implemented, and wouldn’t do any good if they were.

    Really, things become much clearer once you let go of the myth that government is a necessary evil. The only solution is the final solution – abolish government.

    Comment by Ofer Nave | July 5, 2010 | Reply

    • Whether government is necessary is irrelevant, because there isn’t the slightest chance of it being abolished all at one time, if ever at all.

      People aren’t just going to suddenly comprehend that liberty works without government, all at one time, when they haven’t even had a chance to learn that they didn’t need government to regulate the size of their toilet tanks.

      Calling for pure anarchy shares one self-defeating trait with calling for ending the Fed, cubed:

      There’s no chance of it ever happening.

      All you do is bleed off energy that could be invested in fixing the problem gradually, which is the only way it’ll ever be done.

      Comment by kazvorpal | July 6, 2010 | Reply

  3. As countries around the world scramble to shore up their economies by implementing severe austerity plans (in an effort to salvage what they have left of their financial houses), the global markets will continue their slide downward into no-man’s land, as if caught up in some type of melancholy or malaise.

    Some say that we are headed into a recession or depression. I wholeheartedly disagree. What we are witnessing now is something newly created and born of corporate greed. It is a monster that we have never seen before and one in which we are ill-prepared to handle.

    For example, during the Depression, the United States was able to withstand the financial storm because it had American businesses at the ready to hire American workers back at a moment’s notice. Knowing that, it was for most, a psychological security blanket: an underlying assurance that no matter how bad times got, jobs would always be there once the economy improved. Unfortunately, that’s not the case today. Many American businesses have carted their factories and jobs off to other countries in an effort to reduce their overhead and labor costs. Without these jobs to fall back upon, as in times past, there is no real way for America to financially recover from a recession or depression.

    Some will balk at the assertion, claiming that the small ‘mom and pop’ stores will eventually see us through these hard financial times. But to them I ask, “Have you ever heard of Wal-Mart… With low, low prices, every day? How do you expect the common mom and pop stores to compete against such behemoths?” …Simply put, they can’t.
    This situation is not just happening here in America, but around the globe. Corporations are playing it fast and loose with their allegiances on every front; with no care at all to the country or the people that fostered their growth or prosperity. (If it’s cheaper for them to move jobs to some foreign country that pays its workers only .50 an hour, trust me, they’ll do it.) Business is cold and uncaring. Business does not care who suffers, just as long as there is a profit for their shareholders during every quarter. Business should be regulated to prevent such financial catastrophes from happening in the future.

    In closing, I understand that there are many other forces at work here that are contributing to the global economic crisis, but far beyond all others, corporate greed seems to be the thread that ties them together.

    Expect the Dow to continue on its downward slide.

    Comment by The Destructionist | July 5, 2010 | Reply


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