To End the Federal Reserve System
by Gary North: You
Could Become an Amateur Historian . . . and Get a Promotion
not always as complicated as they seem. With respect to the Federal
Reserve System, it is a deliberate mystery. It was deliberately
designed in 1910 to deceive the public, who were opposed the idea
of a central bank. The conspirators who met on Jekyll Island in
November 1910 knew this. They did good work from their point of
view. They concealed the beast.
public today knows little about the FED. Prior to Ron Paul's Presidential
run in 2007-8, far fewer people understood it.
I have been
asked: "How could we get rid of the Federal Reserve? What will replace
it?" The answer: either the free market or Congress.
think of themselves as free market people often are not. The tax-funded
public schools and the state-regulated and accredited university
faculties have taught that the modern system of intrusive civil
government is necessary for an orderly society. People cannot imagine
a market-based society.
There is an
old saying, "You can't beat something with nothing." But the free
market social order is not nothing. It is expanding around the world,
which is why the world is getting richer.
At the Federal
level, a free market social order in banking existed prior to 1914.
That was back when the dollar was worth over 20 times what it is
worth today. On this point, see
the inflation calculator of the Bureau of Labor Statistics.
We can go back
to that system. We will go back to it. The question is: When? The
other question is: At what price?
THE FED BY LAW
Ron Paul could
introduce a bill to end the Federal Reserve System. He could call
it: "The Monetary Liberty Act." It would get known as the "End the
Fed Act." Here is what the text might say.
Federal Reserve Act of 1913 is hereby repealed. So are all subsequent
acts based on the Federal Reserve Act of 1913.
of the Federal Reserve System to act in the name of the United
States government is hereby revoked.
of the Board of Governors of the Federal Reserve System, which
are already the property of the United States Government, are
hereby transferred to the Department of the Treasury. This includes
all of the assets listed on the balance sheet of the Federal Reserve
(12) privately owned Federal Reserve Banks will return all assets
held in trust for the United States government within thirty (30)
calendar days of the signing of this bill into law.
reserves of the United States government that are held in storage
by the Federal Reserve Bank of New York will be transferred to
the Government's depository at Ft. Knox, Kentucky, within one
calendar year after this bill becomes law. The Government Accountability
Office will conduct an inventory of the gold held in storage by
the Federal Reserve Bank of New York before and after this transfer.
of Governors will vacate the premises of the Federal Reserve building
within thirty (30) calendar days of the signing of this bill into
fund assets of the employees of the various Federal Reserve Banks
will remain under the control of those banks. All pension obligations
under the authority of the Board of Governors of the Federal Reserve
System are hereby transferred to the Department of the Treasury,
to be administered under the retirement program of the Department
of the Treasury.
This is simple.
The Board of Governors of the Federal Reserve System is a government
agency. Its authority would be transferred to the U.S. Treasury.
The dozen Federal
Reserve Banks are privately owned. All authority of these 12 banks
that derives from their connection to the Board of Governors will
cease. If they can make a profit, fine. If not, equally fine. The
free market will determine which will survive and which will not.
Is this radical?
Not at all. There are two historical precedents: the refusal of
Congress to renew the charter of the Bank of the United States in
1811, and the refusal of Congress to renew the charter of the Second
Bank of the United States in 1836. Both of them went bust.
response is that there must be independence between the Federal
Reserve System and the U.S. government. Let us apply this to other
Department of Defense
The Department of the Treasury
The Department of State
The Department of Education
I could go
on, one by one, to list all of the thousands of agencies that are
funded by Federal taxes and which operate by means of the authority
of the U.S. government. Only one government agency is defended by
publicists, both on and off the payroll of the Federal Reserve System,
as deserving to be independent of the government that has transferred
authority to it: the Board of Governors of the Federal Reserve System.
"the independence of the Federal Reserve System," is a code phrase
for "the independence of the four largest U.S. banks from the threat
of losses." A growing number of voters has figured this out since
the fall of 2008. This is why the Federal Reserve System is facing
public criticism for the first time since 1914. This criticism will
All of this
may seem Utopian. Ron Paul could not get Congress to audit the FED,
which by law possesses this authority. The Congress has been in
the hip pocket of the FED for almost a century. The Congress lets
the FED run the nation's economy.
But as criticism
spreads, there will be more voters who figure out what the FED is
and has always been: a government-created cartel of the banks. It
operates for the benefit of the largest banks.
Will Ron Paul
get such a law passed by Congress and signed into law? No. Does
this mean that the FED is forever untouchable? No.
We need the
A wave of price inflation caused by the FED
2. A subsequent recession caused by the FED
3. A depression caused by the FED
4. A wave of outage in response to the FED
5. An endless series of criticisms of the FED
This will result,
ultimately, in the abolition of the FED. Whatever replaces it will
decide the economic fate of Americans: Congress (hyperinflation)
or the free market (economic stability).
But could the
free market replace the FED without a catastrophe following? Yes.
We are already seeing this in another sector of the economy.
GOT ALMOST NO MAIL!"
From the days
of America's most famous postmaster, Benjamin Franklin, two decades
before the American Revolution, residents of North America have
thought that the country could not do without a government-funded
postal system. In the past 15 years, this faith has quietly died.
The United States Postal Service now delivers mostly subsidized
opportunity mail. (I hate the work "junk mail," for I built my business
on opportunity mail. But I have not used it for 15 years.) With
email, UPS, FedEx, and text messaging, the first class letter is
an anachronism. Historians will not be able to trace much after
1998 based on copies of letters.
With no fanfare,
the postal system has become optional. The public does not go to
the local Post Office often. If it were not for Netflix, a lot of
people would not check their mailboxes daily.
All of this
has happened without any new legislation. The once unbreakable monopoly
of the Post Office is a rusted-out shell, staffed by union-protected
workers who probably know their jobs are peripheral. Its volume
declined by over 12% in 2010. This is expected to continue. That
would cut volume by 50% by 2017. About 40,000 employees were fired
in 2010. Saturday
delivery will be dropped soon. There is another rate hike scheduled.
Yet the outfit will lose $10 billion this year.
All this has
happened without any enabling legislation. It has happened quietly.
Market competition has reduced the USPS to an anachronism. It is
a leftover shell of a bygone era.
In an essay
about his youth, sociologist Robert Nisbet remarked that in the
year he was born, 1913, the only contact that most Americans had
with the Federal government was the Post Office. Later that year,
the Federal Reserve Act was passed in a late session, just before
Christmas break. Also in that year, the income tax came into effect.
The expansion of the Federal government has been relentless ever
the Post Office is slowly dying. No one planned this. The free market
has replaced it, despite its official monopoly.
hope. It means that free market solutions can come into existence
before a government entity is shut down by law. The Post Office
officially is a monopoly, yet its monopoly status has been eroded
over the last four decades. It has been almost entirely replaced
over the last two decades.
I think of
a TV commercial
that did not directly attack the Post Office. It was targeted at
UPS. But UPS responded much faster than the Post Office could.
of the postal monopoly had for decades tried to get Congress to
revoke the Post Office's monopoly, all attempts failed. They were
associated with the fringe. Yet, year by year, the Post Office fell
behind. It is irrelevant in American life today.
This was not
planned by any political group. It was the result of new technologies.
People made decisions, day by day, to bypass the Post Office.
RUN AROUND THE FED
I do not expect
Congress to revoke the Federal Reserve Act of 1913 in this decade.
The powers that be who run this country do so by means of the Federal
Reserve System more than by any other semi-private institution.
It is at the center of control, because the monetary system is at
the center of the economy.
But the central
bank faces a problem. To maintain the boom, the FED must inflate.
To cease inflating would allow the credit bubble to implode on a
scale far more devastating than what happened in 2008. The FED has
placed us all on the back of the tiger.
Yet if it does
not reverse its policy, it must produce hyperinflation at some point.
That will destroy the FED's ability to guide the economy. Hyperinflation
will lead to alternative currencies. Digital technology is now international.
If buying and selling digital U.S. dollars is no longer profitable,
because long-term contracts are not possible under hyperinflation,
then the citizens of the United States will do what citizens of
Zimbabwe did. They will use other currencies.
If the FED
produces a Third World economy through hyperinflation, then people
will do what Third World citizens do: find reliable currencies elsewhere.
This can be done on-line nearly for free. The Internet has reduced
the transaction costs of using rival currencies.
The FED economists
know this. They know that transaction costs for using other currencies
are low. If the FED's policies undermine long-term contracts, the
citizens are not helpless. They can switch.
It will not
take legislation to end the FED. All it will take is the FED. If
the FED continues to inflate, it will destroy its base: the monetary
system based on the FED. But if it ceases to inflate, by ceasing
to buy Treasury debt, it will create Great Depression 2.
get away with QE2 today only because commercial banks are not lending.
If they start lending, M1 will rise, the M1 money multiplier will
rise, and price inflation will return.
He has bought
time with QE2, but he has not bought a way out of the credit bubble
that Greenspan created and he created.
He can play
hide and go seek with Ron Paul, refusing to show up at the hearings
of the Monetary Policy Subcommittee. Congress cooperates. But he
cannot play hide and go seek with the business cycle. Greenspan
did, but he got out in 2006. He passed on the Old Maid to Bernanke.
Reserve System bases its power on its ability to control the monetary
base. It swapped T-bills for toxic assets to save the big banks,
but to replenish its supply of swappable liquid assets, it has to
inflate, as it is now doing. QE2 is replenishing the supply of Treasury
debt to swap with large banks.
The FED did
not bail out any small banks in 2008. It never has. Its unofficial
mandate is to bail out the largest commercial banks. This it has
I think Bernanke
sees another banking crisis coming. This is why he has pushed QE2.
Only Hoenig has voted against it. Bernanke has his way with the
other members of the Board of Governors and the Federal Open Market
Committee. He has not said why this massive increase in the monetary
base is mandatory for the economy. To talk about this would create
doubts. He does not want to rock the boat. So, he gets away with
another $600 billion in monetary base creation.
This is working
for now. But the results are unavoidable: either price inflation
or continued high unemployment and stagnation, because commercial
banks thwart the stimulation. He is on the tiger's back. So are
The Post Office
looked unbeatable for over 250 years. Technology has made it peripheral.
The same will happen to the Federal Reserve System. It looks unbeatable.
But the Internet can beat it. There are ways out of the FED's trap.
A lot of people
will pay a heavy price for Bernanke's policies. That will be the
price of persuading those people with the bulk of their assets in
digital dollars to sell those assets and replace them with other
This is why
I do not think the FED will resort to hyperinflation. The economists
know that the FED's victims can escape. The FED will risk mass inflation,
but at some point it must say: "We will buy no more Treasury debt."
That will be the moment of truth. That will be the day it climbs
off the back of the tiger.
So will we
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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