at the New York Times
by Gary North: The
Foundational Economic Myth of Our Era: 'Government Cured the Great Depression'
15, 1971, a Sunday, President Nixon unilaterally suspended the last
traces of the gold standard. He "closed the gold window" on his
own authority. From that time on, no government or central bank
has been able to exchange dollars for Treasury gold at a fixed price.
Nixon broke the Bretton Woods agreement of 1944. He broke the nation's
word. He cheated. That was his way. Ever since that day, American
monetary policy has been Nixonomics.
earlier, he had announced his conversion to Keynesianism. This
passage is from the amazingly good documentary on PBS, "Commanding
one thing, whatever the effects of the Vietnam War on the national
consensus in the 1960s, confidence had risen in the ability of government
to manage the economy and to reach out to solve big social problems
through such programs as the War on Poverty. Nixon shared in these
beliefs, at least in part. "Now I am a Keynesian," he declared in
January 1971 leaving his aides to draft replies to the angry
letters that flowed into the White House from conservative supporters.
He introduced a Keynesian "full employment" budget, which provided
for deficit spending to reduce unemployment.
If you think
I am trying to tar and feather critics of the gold standard and
defenders of Keynesian economics by connecting their ideas to a
pragmatic, lying politician, then you're brighter than your brother-in-law
NEW YORK TIMES
It should come
as no surprise that the premier mouthpiece of American Establishment
official opinion, The New York Times, is hostile to the traditional
gold coin standard or any state-guaranteed version of the gold standard.
York Times used to be called "the gold standard of journalism."
But it was always a fiat standard. And like the fiat United States
dollar, its value keeps sinking.
The gold coin
standard places limits on a central bank's ability to create money
out of nothing, meaning counterfeiting. This is why its critics
At the center
of almost every national economy today is a central bank that has
been granted the government-sanctioned authority to intervene in
the financial sector on behalf of large multinational banks. In
the city of over-leveraged multinational banks, the New York
Times wants no limits placed on the ability of the Federal Reserve
System to bail out over-leveraged multinational banks.
is well aware of the fact that Ron Paul is most famous for his position,
which is also his book's title, to end the FED. This position was
considered crackpot, even within conservative political circles,
prior to Paul's run for the Republican Party's nomination for President
in late 2007. His was a well-timed candidacy. The economy went into
a recession in December of 2007.
His stand against
the FED spread rapidly in late 2008, after the FED and the U.S.
government bailed out the biggest banks. The anti-FED genie is out
of the bottle. Never before in America's post-1913 history has there
been this much public opposition to the FED.
can do nothing about this, other than to publish an occasional
obligatory article that announces: "You know where we stand." Of
course we know. We
also know that the fiscally besieged Times is going bankrupt.
We know that
its influence is fading, along with all print media. We know that
there will not be enough paying online subscribers to offset the
declining revenues from advertising, which the Times cannot
command these days in the face of its declining readership.
So, for old
Times sake, I offer my critique of its recent piece, "Be
Careful Wishing for the Fed's End." That warning makes about
as much sense to me as this one: "Be Careful Wishing for the Times'
End." The author is the company's in-house financial columnist,
OF CONFIDENCE IN THE FED
leads off with one of the most heart-warming paragraphs of my intellectual
S. Bernanke, the Federal Reserve chairman, faces a crisis of confidence.
He is excoriated on the right for debasing the currency, and blasted
on the left for failing to stimulate more than he has. It has gotten
so bad that last week Mr. Bernanke, who prefers to discuss monetary
policy with erudite professors like himself, submitted to the indignity
of a news conference. Among the uninvited was Representative Ron
Paul, who is flirting with a presidential run, and who, if he took
office in 2013, would like nothing more than to celebrate the Fed's
centennial by ... abolishing it.
this paragraph. Never before in the FED's history has any chairman
faced this kind of opposition.
that got me to thinking: What if there were no Fed? Don't laugh;
it has happened before. The United States had a primitive central
bank, conceived by Alexander Hamilton, but President James Madison
let its charter lapse in 1811.
nothing of the kind. By the terms of its incorporation, it automatically
lapsed, and no President had any authority to keep it from lapsing.
does not mention that, during the long fight over the re-chartering
of the Bank, Albert Gallatin, the Secretary of the Treasury, had
favored the Bank's re-chartering from 1809 to 1811. At no time did
Madison fire him or suggest that he did not speak for Madison on
this issue. Madison had two years to do so; Gallatin repeatedly
lobbied Congress for the renewed charter. In 1811, the vote to re-charter
failed by one vote in the House. In the Senate, the vote was tied;
Vice President Clinton voted against it. Therefore, Madison did
not let the First Bank's charter lapse. Congress did, just barely.
If Madison had publicly opposed the re-chartering, the votes would
not have been close. But he kept silent. He let Gallatin speak for
him. In 1816, Madison favored the creation of the Second Bank of
the U.S. He signed it into law.
his readers regarding the First Bank of the United States, Lowenstein
goes on to mislead them about the second Bank, i.e., Madison's Bank.
second such bank became the target of President Andrew Jackson,
who viewed it as a "hydra" and a "curse" upon the nation. Jackson
sought to decertify the bank and, in 1836, succeeded. Never mind
that the following year, the United States was plunged into a serious
financial panic. The curse had been lifted, not to reappear for
nearly a century.
Here is what he wants his readers not to mind. The president of
the Bank, Nicholas Biddle, filed for re-chartering in 1831, five
years early. The election of 1832 was fought mainly over the re-chartering
of the Bank. Jackson vetoed the bill to re-charter. Congress failed
to override the veto. Jackson's Party had a smashing victory in
November. The government ceased depositing funds in the Second Bank.
Biddle's bank began calling in loans, to pressure Jackson to comply.
This action failed. The
panic of 1837 was the result of an expansion of fractional reserve
banking at the state level, 1833-36, over which the U.S. government
had no constitutional control.
If the U.S.
government had simply refused to deposit tax receipts in the banks,
calling in specie and holding it as "excess reserves," to use the
nomenclature of today's Federal Reserve System, there would have
been no boom or bust, 1833-37. This idea was well known. It was
called the independent Treasury system.
There was an
inflow of silver, 1833-37, because of the inflationary policies
of Santa Anna's government. It was the result of Gresham's law:
a fixed exchange rate on silver. This inflow had nothing to do with
Jackson or the Second Bank. The monetary base grew. Reserve requirements
were not raised by state banks, including the Bank of the United
States, still run by Biddle. The problem was fractional reserve
commercial banking, as always: the state-granted license to counterfeit
WERE NO FEDERAL RESERVE
can no more conceive of money without a central bank than it could
conceive of television programming standards without the Federal
Communications Commission in 1970 or airline ticket pricing without
the Civil Aeronautics Board in 1977.
in 1913, the Fed was to be a banker to the nation's banks, controlling
the money supply and, thus, the value of the currency. Without
a Fed, someone else would have to handle these (and other) tasks
of central banking.
Under the FED,
there was monetary inflation in the World War I era, then the recession
of 1920-21, and then the monetary inflation and bust of 1926-30,
followed by the Great Depression. Stability? There was none.
observes the Fed historian Allan H. Meltzer, "does not take care
of itself." But who else could regulate the value of money? And
regulate its value in relation to what?
money "take care of itself"? Because governments want to control
it. Contract law serves the other markets. Why not money? Why should
money be under the control of a system of 12 privately owned banks
that are under a government board?
its founding days, the United States defined the dollar by an explicit
weight of gold or silver.
No, it didn't.
The dollar was always a silver standard. Then a price control with
gold was set by the government, which led to Gresham's law. Sometimes
gold would be in short supply, sometimes silver. That is what price
controls produce: gluts and shortages.
the first half of the 19th century, state-chartered banks issued
notes, preferably backed by metal, that circulated much as dollar
bills do today. But since these banks were private, and differed
widely in their standards, their notes were accorded different values.
In effect, the country had lots of "monies."
set the value of these notes, just as the free market does in the
currency markets today. With computerization in our day, this is
no problem. The government can set what currency it requires for
tax payments. Gold would be a good choice. The government does not
need to set currency ratios. It does not need to monopolize money.
But politicians want to.
United States moved to normalize the situation during the Civil
War. It restricted the issuance of notes to more uniform, federally
chartered banks, which were required to hold Treasury bonds (as
well as gold) in reserve.
did this to gain more control over the money supply. It had suspended
payment in gold in late 1861 a violation of contract. Then
it created "greenbacks" unbacked paper money in a
wave of price inflation. The South did the same, only much worse.
It was theft: first the suspension of specie payments, then from
the people through inflation.
the Fed be interred, this abbreviated history provides some clues
about alternatives. One solution would be for private banks to issue
money perhaps bearing the likeness of Jamie Dimon and the
seal of his bank, JPMorgan Chase. Alternatively, the Treasury could
of all kinds could issue money. The market would decide which to
use. Money tied to gold or silver would enjoy a great advantage.
Banks do this now, but without being tied to gold. Their digits
If the government
ever does this, then hyperinflation is a sure thing. This would
be greenback economics, which is always political and inflationary
in modern times. On greenback economics, click
As long as
contracts are not violated, private money would work far better
than the Federal Reserve's legalized counterfeiting does. Any firm
could issue an IOU for gold or silver or platinum coins of a specific
weight and fineness. Just be sure it has the metals in reserve.
what will the money represent? Gold is the first obvious answer.
James Grant, the newsletter writer, author and gold bug par excellence,
asserts that gold money is superior to the "fiat" money of the Fed.
By fiat, he means that it has value only because the Fed says it
does. (Representative Paul, less diplomatically, refers to Federal
Reserve notes as "counterfeits" and to the Fed as a price fixer.)
Grant is correct.
Paul is correct. Fiat money is counterfeit money. Let the banks
issue warehouse receipts 100% backed by gold. Contract law will
take over. There will be a market for gold coins.
us interject that in any monetary system, some authority must fix
either the price of money or the supply. McDonald's can either set
the price of a hamburger and let the market consume the quantity
it will or, it can insist on selling a specified quantity,
in which case consumer demand will determine the price.
I will not
let "us" interject anything of the kind. There is no logic to it.
Gold, silver, and platinum are limited by mining costs, but there
is no fixed money supply. There never has been in man's history.
The statement is conceptually ludicrous and historically ludicrous.
No authority need fix either the supply or the price of anything.
Fed has a similar choice with money. The Bernanke Fed, which is
trying to stimulate the economy, regulates the price of money
the interest rate presently 0.0 percent. Paul Volcker, who
assumed command of the Fed in 1979, when inflation was rampant,
chose the opposite tactic. Mr. Volcker provided a specific (and,
dare I say, miserly) quantity of liquidity, letting interest rates
go where the market directed ultimately 20 percent. There
is an element of arbitrary choice either way.
of arbitrary choice is the heart of the problem: it will eventually
be misused. Central banking's cheerleaders want us to believe that
wise, salaried bureaucrats should control the monetary base. There
is a problem here: these bureaucrats then must let commercial bankers,
speculators, and governments decide what the money is worth. They
cannot determine this on their own authority.
gold standard, in effect, replaces the Fed chief with the collective
wisdom (or luck) of the mining industry. Rather than entrust the
money supply to a guru or a professor, money is limited by the quantity
He's got it!
The private property rights system restricts the money supply, so
that neither politicians nor central bank committees are in charge
of our money. We can trust mining costs with greater confidence
than politicians with badges and guns and a printing press.
law in the early 20th century stipulated that dollars be backed
40 percent in gold. This fixed the dollar in relation to metal but
not in relation to things, like shoes or yarn, that dollars could
buy. This was because the quantity of bullion that banks had in
reserve, relative to the size of the economy, fluctuated. As a historian
noted, it was as if "the yardstick of value was 36 inches long in
1879 ... 46 inches in 1896, 13 and a half inches in 1920."
unnamed historian was, he was an economic ignoramus. Money is not
a measure. It is a social institution based on contract. The government
wants to get control over it, so that it can create fiat money and
thereby impose an inflation tax rather than tax voters directly.
standard which John Maynard Keynes termed a "barbarous
relic" led to ruinous deflations.
never been any ruinous deflations based on a contracting supply
of gold. Gold's supply constantly increases, though slowly. There
were many deflations based on fractional reserve banking
fiat money allowed to commercial bankers by the state when
the over-leveraged (over-counterfeited) banks got hit by bank runs.
gold reserves contracted, so did the money supply. David Moss, a
Harvard Business School professor, asserts that the United States
experienced more banking panics in the years without a central bank
than any other industrial nation, often when people feared for the
quality of paper; specifically, it experienced them in 1837, 1839,
1857, 1873 and 1907.
commercial bank counterfeiting. The Constitution does not authorize
the U.S. government to intervene to stop this practice. That is
what federalism is all about. That is what the Tenth Amendment used
to be about, before it was gutted by the Supreme Court.
CREATURE FROM JEKYLL ISLAND
occasionally admits that the November 1910 meeting on Jekyll Island
was a quiet gathering. But it was not a conspiracy. Not at all.
The difference is this. . . There must be a difference. . . Anyway,
it was all for the public's good.
Fed was conceived to alleviate such crises; that is, to be "the
lender of last resort." This function was fulfilled, ad hoc, by
the financier J. P. Morgan in the panic of 1907. But Morgan was
old, destined to die the year the Fed was created; some institution
was needed. Hostility toward central banks, an American tradition,
was such that in 1910, lawmakers and bankers convened at Jekyll
Island, Ga. under the ruse of going duck hunting to
sketch a blueprint.
The FED was
conceived to bail out the big New York banks. It was justified as
a tool to alleviate crises. And, yes, it was a conspiracy consummated
on Jekyll Island by a group of bankers and Senator Nelson Aldrich,
John D. Rockefeller, Jr.'s father-in-law.
of the aim of the new central bank was a more flexible money supply
for instance, to lend to farmers in the winter. Another was
to lend into the teeth of a panic though only to solvent
institutions and on sound collateral. The insurance giant American
International Group a controversial bailout recipient in
2008 would not have qualified.
qualified in 2008. That is what "flexibility" is for: to bail out
the winter. Right! As if the FED cared a whit about farmers, back
then or now. Did the FED save farms in the 1920s? No. Did it save
farm area banks, 1930-33? No. In any case, prices for grain adjust
in winter. That is what pricing is for. That is also why interest
rates change. Conditions change. You don't need counterfeiting to
smooth out supply and demand based on seasons.
its early days, the Fed maintained the gold standard forcing
it to maintain tight money even in 1931, in the midst of the Great
Depression. Economists today regard this as a mistake.
This is Milton
Friedman's misleading intellectual legacy. The FED did not tighten
money, 1930-31. See the
chart provided by a vice president of the St. Louis Federal Reserve
Bank. The monetary base was flat.
because 9,000 banks went under. That ceased in 1934, when the FDIC
was set up. The FED had no authority or ability to save 9,000 banks.
circumstances are relevant to those who envision a Fed-less future.
England had departed from the gold standard; worried that the United
States would follow suit, people demanded to trade dollars for gold.
Professor Meltzer deduces that the gold standard doesn't work for
one country alone; the bad paper money corrupts the good.
This is the
ill-informed person's view of Gresham's law: that the free market
rewards bad money. It doesn't. When there are government-imposed
fixed exchange rates price controls on money the artificially
overvalued money drives out the artificially undervalued money.
In other words, price controls create gluts and shortages. Every
economist knows this. Any economist who promotes Gresham's law without
explaining this price control factor is trying to put the shuck
on the rubes. Lowenstein is one of the rubes who got shucked.
Here is where
Lowenstein lets his imagination soar.
alternative to gold, and to the Fed, was suggested by Mr. Bernanke's
hero, Milton Friedman: let a computer govern the money supply. John
Taylor, a former Treasury official, has derived a formula, the Taylor
Rule, which Fed policy often agrees with. Adopting the formula in
a mechanical way would trim the deficit a bit, since the Fed could
dismiss every one of its 200 economists. The problem with a formula
(also its virtue) is its lack of flexibility. Alan S. Blinder, a
former Fed vice chairman, notes that strict adherence to the Taylor
Rule during the recent crisis would have mandated an interest rate
of negative 5 percent. (That is, the economy was so weak, and people
so unwilling to borrow money, the computer would have paid people
5 percent a year to accept it.) This being impractical, Mr. Bernanke
was moved to improvise a remedy other than negative rates.
This is academic
self-puffery. There is no Taylor rule at the FED. That is my point
and Ron Paul's point. There are no rules. You know: "flexibility,"
as Lowenstein calls it. There is only ad-hockery, such as: (1) double
the monetary base, (2) swap T-bills at face value for toxic assets
held by large New York banks, and (3) lend billions to large foreign
the computer is out and the Fed shuttered, Professor Meltzer suggests
that the dollar be backed by euros, pounds and yen (and, eventually,
the renminbi). This new money would require that each of the financial
powers commits to a targeted rate of inflation say, 2 percent
a year. People who didn't trust the dollar to maintain its value
could trade them for euros. Now there's an idea that would delight
the Tea Party American money backed by France.
can say anything he wants. Nobody has to believe him. I surely don't.
is not backed by anything, and has not been ever since August 15,
1971, when Nixon without authorization suspended payments in gold
to foreign central banks. Nixon was a petty tyrant, but here the
Congress and business cheered. He imposed price and wage controls.
More cheering. Ben Bernanke presides over Nixonomics, as have all
subsequent chairmen of the Board of Governors of the FED. But no
one in the Establishment wants to call the system what it really
this system is not terribly different from today's. We have, indeed,
fiat money, convertible into foreign exchange and regulated, not
always successfully, with the intent of maintaining (or not too
quickly depreciating) the dollar's purchasing power. And if money
is a unit of value, it is hard to conceive of a yardstick better
than purchasing power.
I see. A yardstick.
This "yardstick" has shrunk by over 95% since 1914, the year the
FED opened for business. You can check this with the inflation
calculator of the Bureau of Labor Statistics.
the Fed, thanks to an act of Congress in 1978, and perhaps to America's
suspicious anti-central banking culture, has a dual mission
protecting the value of the dollar and promoting long-term growth
and employment. In this, it differs (at least in degree) from Europe's
and other central banks. In many ways, this mission creep
the Fed's expanded power and role in the economy lies at
the root of the animus that Americans feel for it.
This is not
a dual mission. It is a dual public relations statement. Congress
did not specify any numbers. The FED gets to make them up as it
goes along . . . and does.
purists would like, if not to abolish the institution, to return
it to the job envisaged on Jekyll Island. They are, in a sense,
the financial equivalent to strict constitutionalists. Nostalgia
has its place, but so does pragmatism. Mr. Bernanke and his colleagues
may be flawed, but democracy trusts in the power to elect, appoint
and, if need be, remove. It is fine to lament their alleged excesses
for instance, the Fed's swollen balance sheet in the name
of stimulation, or "quantitative easing." It is another to imagine
that regulating the money could be as simple as it was in 1913,
or that a formula, or a barbarous relic, could do the job.
In his view,
defenders of the gold coin standard are quaint relics of the past,
just as gold is. He writes: "They are, in a sense, the financial
equivalent to strict constitutionalists. Nostalgia has its place,
but so does pragmatism." So, adhering to the Constitution is nostalgia.
So is the idea of a world without the creature from Jekyll Island.
wants is pragmatism. You know: flexibility.
This is what
every central banker always wants. Also, every dictator.
surely wanted it.
It is what
Ron Paul does not want. Neither do I.
End the FED.
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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