Dictatorship is unlimited rule. Collective dictatorship is unlimited rule by an assembly. National government in the U.S. has tended toward collective dictatorship over its entire history.
No new alarm bell is rung when I say that the U.S. collective dictatorship is now enlarging, for that is its usual tendency. We recognize this tendency at the grass-roots level by the increasing control that government has over our personal lives. There is almost nothing that we do that is not touched by government rules and power. We cannot work, play, invest, obtain medical care, drive a car, eat, smoke, speak, gesture, wash, have a baby, buy or sell a good, or even have a bowel movement without encountering the government.
Yet the alarm bell needs now more than ever to be rung loudly and vigorously, for the most recent enlargement is coming in the area of financial control over the banking system and thus the economy. What is left of liberty in America faces an extremely dangerous threat. It is all the more serious because it is not widely recognized as a threat.
To understand what is happening now in the U.S., it is useful to compare the parallel developments that occurred in Nazi Germany. The German central bank, the Reichsbank, was far more restricted by law (before 1939) than our central bank, the Federal Reserve (Fed) in the kinds and amounts of loans it could make. The Fed, in this sense, is far more powerful than the Reichsbank was before 1939. The Reichsbank was, like the Fed, independent of the government. The German government could not order it to make loans to the government, for example. This situation changed in 1939 when the Nazi government needed more funds to finance its armament build-up. At that point, the government basically absorbed the Reichsbank.
It helps to read the words of Hjalmar Schacht, who headed the Reichsbank between 1933 and the time of his dismissal in early 1939. Schacht is something of a controversial figure in history. In 1946 he was tried as a war criminal at Nuremberg where he testified. Dr. Schacht, who was acquitted, had ended up in a concentration camp. An extended discussion of Schacht’s activities that brings out the negatives is contained here. A less critical account is here.
Here is some of what Schacht testified that is germane today:
"Consequently, when it became clear that Hitler was working toward a further increase in rearmament — and I spoke about that yesterday in connection with the conversation of the 2nd of January, 1939 — when we became aware of that, we wrote the memorandum which has been quoted here and is in the hands of this Tribunal as an exhibit. It indicates clearly that we opposed every further increase of State expenditure and would not assume responsibility for it. From that, Hitler gathered that he would in no event be able to use the Reichsbank with its present directorate and president for any future financial purposes. Therefore, there remained only one alternative; to change the directorate, because without the Reichsbank he could not go on. And he had to take a second step; he had to change the Reichsbank Law. That is to say, an end had to be put to the independence of the Reichsbank from governmental decrees. At first he did that in a secret law — we had such things — of 19th or 20th January, 1939. That law was published only about six months later. That law abolished the independence of the Reichsbank, and the president of the Reichsbank became a mere bank teller for the credit demands of the Reich or, that is to say, of Hitler."
Schacht makes crystal clear that the central bank was essential for the government to be able to arm the country and make war. Without the bank, Hitler "could not go on." He would not be able to use the bank "for any future financial purpose" such as paying for armaments. Furthermore, if the bank would not cooperate, then "an end had to be put to the independence of the Reichsbank from governmental decrees." That having been done by Hitler, the president of the bank "became a mere bank teller for the credit demands of the Reich or, that is to say, of Hitler."
These observations about the role and necessity of the central bank in supporting the government, usually in its war efforts, and of the threat to the bank’s independence are as true of the United States as they were of Nazi Germany. As bad as the Fed is, our liberty declines even more when, as, and if the Fed becomes a direct arm of the government. This has happened before. The Fed supported the U.S. government bond market during World War II, which laid the foundation for the resulting inflation:
"The Federal Reserve System formally committed to maintaining a low interest rate peg on government bonds in 1942 after the United States entered World War II. It did so at the request of the Treasury to allow the federal government to engage in cheaper debt financing of the war. To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock."
Central banks are brought into being and allowed extraordinary powers with the overriding aim of supporting government borrowing, often for purposes of making war, and with inflation being the accompanying method by which this support is rendered. I quote: "Many on the Board of Governors, including Marriner Eccles, understood that the forced obligation to maintain the low peg on interest rates produced an excessive monetary expansion that caused the inflation." Similarly, we are told concerning Schacht: "Schacht had always feared an inflation in Germany. As early as 8 May 1936, he emphatically stated that he would u2018never be party to an inflation’ (1301-PS). In January 1939, Schacht was convinced that ruinous inflation was, in fact, imminent (EC-369). There was, it appears, ample basis for his fear. The Finance Minister, von Krosigk, had already recognized the situation in September 1938, and had written to Hitler warning that we are steering towards a serious financial crisis…"
Because Schacht’s official central banking powers were not as great as the Fed’s, he hid what he did to get around the law and help finance Hitler. In the U.S., the Fed has so much power that it can do openly what Schacht did secretly. In that sense, we are further along the path of collective dictatorship than Germany in the 1930s. Schacht set up a dummy corporation, called MEFO for short, that "bought" arms from the arms manufacturers. It accepted the (mefo) bills of these manufacturers who then were able to discount them at banks and get paid. The banks then discounted them with the Reichsbank. Lo and behold, inflationary finance paid for the arms production in huge amounts, circumventing the law’s prohibitions.
Bernanke makes Schacht look like a piker. In the U.S., the Fed has no statutory limits on its finance! It is openly financing whatever institutions it pleases. It has extended $56 billion to AIG company, another $298 billion for the commercial paper of various companies, and $407 billion to banks using its own holdings of Treasury securities. The critics of these loans are vastly outnumbered by those applauding the Fed’s inflation as the means of saving America. The sycophants eagerly await the Fed’s next moves. The Fed is preparing the way by leaking to the press hints of "unconventional steps." These will involve interventions in markets such as mortgage markets. Bernanke and Company seem to have none of the fear that Schacht had of inflation or being held responsible for inflation.
When the dictatorship, embodied in one person or in a collective, obtains the unlimited ability to finance its purposes, there is no stopping it except by restraining its powers; and that takes a revolution or, at a bare minimum, the deposition of persons from the government and replacement by those willing to abridge the government’s powers, if such a thing is possible.
Hitler ended the independence of the Reichsbank by secret decree. Such matters are handled slightly differently in the U.S. Secrecy does not seem to be necessary, inasmuch as the mainstream media do not understand what is going on and, in any event, promote the party line, that is, the official interpretation of official acts. If the Treasury absorbed the Federal Reserve, it would no doubt be treated as a welcome event rather than an enlargement of the collective dictatorship.
The President of the Federal Reserve Bank of New York, Timothy Geithner, has been appointed as the new Secretary of the Treasury. Geithner is a government man through and through. He believes in intervention and bailouts. His name comes up again and again in accounts of the various programs. There could not be much more of an incestuous relation between Treasury and Fed than this one, short of Bernanke becoming chief teller of the Fed for the Government, which he already appears to be.
The Treasury has taken preferred stock positions in the largest banks in America. This is part and parcel of Emergency Economic Stabilization Act of 2008, which is openly dictatorial.
We are entering upon a sequence of events that will, in the end, transform the American economy even more than now into a slow-growth, no-growth, inflationary, regulated, stalled, and inefficient economy. It will be a miracle if the Fed’s expansion is brought under control and reduced. The Fed will maintain its lending and even expand it. This can only atrophy both the banking system and the capital markets. Inflationary pressures are bound to build up, and that will lead to economic controls. The Treasury will look for ways to regulate capital markets still further, and this will undermine them. There is no worse signal than the Treasury’s intrusion into maintaining zombie institutions that should fail and be re-organized. This has already happened in the cases of Fannie Mae and Freddie Mac
This all means that efficient institutions, companies, and persons will be penalized at the expense of the inefficient ones or the deadbeats. More and more will buy tickets to Washington to beg for relief. The end of the road is government control of the means of production. When companies can no longer finance themselves through the standard private means of capital markets and banks, they turn to government. When government can no longer handle the bankruptcies, it seizes the means of production.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.