Freedom From the FED
Michael S. Rozeff
by Michael S. Rozeff: Juan
Williams Wrong on Iraq and Wrong on Libya
exist for a single reason – to inflate the supply of paper currency.
They are a currency-creating and currency-inflating institution.
This serves two interest groups in the main. One is the fractional-reserve
banks that they regulate. The other is the government that created
For the banks,
the alternative to a central bank is to be subject to the forces
of market competition. This is something they are striving to avoid.
Without a central bank to issue paper currency to them at critical
times when they become overextended, the fractional-reserve banks
would compete for the safety of funds deposited with them. Gold
would be an important currency. Banks that overexpanded into unsafe
lending would face customer withdrawals that they could not meet.
Competition would restrain bank lending. The central bank relaxes
the constraints placed upon banks by competition. It organizes the
banks into a banking cartel.
For the government,
the alternatives are two. Either it must compete for funds in the
market along side all other borrowers, or else it can directly (via
its treasury department) inflate the supply of paper currency itself.
The government does not want to compete in the market. It wants
as much power and freedom of action as it can get. So the first
alternative is anathema to it. The second alternative has been tried
and found wanting many times historically. The problem with it is
that most governments cannot control their own currency issues when
they have direct control. They inflate too much. Usually, they destroy
their currencies altogether.
fractional-reserve banks nor the government have an alternative
to achieve their ends but a central bank. Central banks exist because
these two interest groups are behind them. Neither wants market
competition. Central banks are an anti-competitive institution.
exist to inflate paper currencies. That is their mission. That is
their reason for being. If the currency in use in a country were
gold, a central bank could not inflate. The supply of gold currency
would be subject to market forces. It could not be inflated at the
will of central bankers. Since neither banks nor the government
want to be subject to market forces, they do not want the currency
to be gold.
is also not in their interest to have hyperinflation. Neither the
banks nor the governments have complete freedom of currency issue,
if they wish to survive. Therefore, many central banks still maintain
holdings of gold and vary them through time. The reason for this
is to restrain the issuance of paper currency to some extent. It
is to influence the value of a currency in a direction that the
central bank desires. Central banks do not hold gold merely as an
historical relic or out of inertia or because they have nothing
better to hold or because of time-honored custom. They hold it because
it supports or backs the value of a paper currency.
banks exist to inflate paper currencies, they do so within limits.
When central bankers decide on how much to inflate, they are optimizing
some sort of utility. They have value scales and they are making
choices according to these value scales. Although there will be
many influences on their choices, varying over time and from case
to case, still the reason for their possessing the power to issue
currency remains that they are at the helm of an anti-competitive
institution designed to serve banks and the government.
were gold, there would be no need for a central bank among those
willing to compete in markets. Central bankers owe their livelihoods
and power to the replacement of gold by paper currencies that they
can issue at will, within limits that they themselves impose so
as not utterly to destroy their currencies and their own livelihoods.
Most of the
economists that attain positions of power in the central bank of
the U.S., which is the Federal Reserve (the FED), have been trained
and selected to be stupid, at least publically, when it comes to
the central bank. In that way, they can convincingly deliver lies
and misconceptions as if they were truths. They can avoid confronting
the fact of why their central bank exists.
22, 2011, Federal Reserve Governor Elizabeth A. Duke said
Federal Reserve System's structure was designed by Congress to
give it a broad perspective on the U.S. economy. Most of the Fed's
actions are indeed focused on the whole economy."
The first sentence
is myth. The idea that Congress created and designed the FED as
a benign institution that might benefit the U.S. economy is myth.
sentence is at best a half-truth. Yes, the Fed’s employees spend
a great deal of time concocting economic models and examining economic
data. They believe themselves to be wrestling with all sorts of
difficulties and economic issues. Some no doubt see themselves as
beleaguered figures and heroes struggling to do right and arrive
at policies that benefit or even save the American economy. They
realize that their actions will have economic effects, even if they
have been trained minutely and in great detail to be stupid as to
what these effects are.
But what they
believe and mythologize about the FED and themselves pales in comparison
with the reality. In the end, they buy and sell securities. They
make loans. They intervene on behalf of chosen banks, central banks,
and governments. They control the supply of bank reserves and paper
currency. In the end, the amorphous and ill-defined thing called
"the economy", which to them is only a long and ever-varying
list of assorted statistics, is not their focus. They serve the
banks and the government.
A recent example
of the FED serving the banks is the case of derivatives losses at
Bank of America (BAC). BAC wanted to move losses from its Merrill
Lynch subsidiary into its banking unit, whose deposits are FDIC
insured. The FDIC objected. The FED overruled the FDIC. This loads
the risk onto taxpayers rather than the stockholders of Bank of
In the 2008
financial difficulties, the FED served (bailed out) certain large
investment bankers and insurance companies and assorted others.
Preserving certain of these was essential in order to preserve the
financial system over which the FED presides. That was its way of
saving the banks and the government. It was its way of saving itself
Now that the
FED exists, it has another major reason for its existence, which
is to preserve itself and expand its own powers. It now exists,
not only to serve banks and the government, but to serve itself.
This means to serve its membership, staff and bureaucracy. It will
strive to enhance its jurisdiction among the competing regulatory
agencies of government.
The FED is
a political and politicized institution. It is not some sort of
objective economic policy-implementing institution. For this reason,
it can be expected to maneuver in order to deflect criticism and
insulate itself from accountability. At times it will release trial
balloons so as to influence opinion and place itself in a more favorable
light. The FED will attempt to make itself look progressive and
open to change and improvement. Do not be fooled. These maneuvers
do not change the basic reality. The FED is not a benign institution
that has arisen in a free market in order to increase the welfare
of Americans. It is a malign, self-serving, bank-serving, government-serving
institution designed to thwart competition among banks and enhance
the size and powers of government.
S. Bernanke, in his speech of October 18, 2011, tries to position
the FED as an institution beneficially responding to the events
of recent years:
remarks will focus on how central banks responded to recent challenges
related to the conduct of both monetary policy and the promotion
of financial stability and how, as a result of that experience,
the analysis and execution of these two key functions may change."
We can always
expect a self-serving spiel from Bernanke, dressed up in academic
language. He doesn’t disappoint us. In Bernanke’s hands, inflation
becomes "innovative". He wraps central banking in the
hoary myth of the central banker as cavalry – always riding to the
as central banks were innovative in the operation of their monetary
policies, they were forced to be equally innovative in restoring
and maintaining financial stability. Serving as a lender of last
resort--standing ready in a crisis to lend to solvent but illiquid
financial institutions that have adequate collateral--is, of course,
a traditional function of central banks. Indeed, the need for
an institution that could serve this function was a primary motivation
for the creation of the Federal Reserve in 1913."
believe that the FED was created to serve as a "lender of last
resort"? Yes, he does. He has been trained to be stupid. He
has been chosen to head the FED because he exemplifies that stupidity.
He has been trained not to understand what this last resort lending
actually means and does. Every dollar of currency creation is a
theft of value from existing currency holders. It is like splitting
a stock 2 for 1, in which case the price of each share falls by
half. For Bernanke to understand the Austrian view of business cycles
as induced by monetary excess would be far beyond his present capabilities.
That has literally been educated out of him by his economics training.
The previous chairman, Alan Greenspan, comes across as quite a different
case. He understands. As chairman, he seems to have come to the
belief that the markets were stupid and could be manipulated indefinitely.
has advised Occupy Wall Street to Occupy Liberty Street, on which
the Federal Reserve Bank of New York is located. This is good advice.
FED exists as a privileged institution. Those privileges should
be terminated. But since the FED serves government as well as banks,
the government does not want to end the FED. Can that be done by
confronting local police? Such confrontations show that there is
a problem. They make politicians take note. But determined and articulate
political movements that demand an end to FED privileges are essential.
Ron Paul and/or a mere handful of elected officials should not be
the sole voices heard in Washington that are demanding an end to
I think even
better advice is to Occupy Capitol Hill. Let it be in peace and
non-violently. Is that even possible in this day and age? I think
not. Then confrontation has to be in mind and spirit. It has to
be in words. It has to be in media of communication. It has to be
in formal declarations. It has to be through organizations making
formal demands. It has to be in all sorts of ways that people devise.
In Estonia in 1987-1991, it was partly through the Singing Revolution.
Street protests are all right as far as they go, but confronting
police is not a complete solution. Confronting power with demands
is essential. What demands? Liberty, liberty, and more liberty.
Freedom from the FED is one such demand.
S. Rozeff [send him mail]
is a retired Professor of Finance living in East Amherst, New York.
He is the author of the free e-book Essays
on American Empire: Liberty vs. Domination and the free e-book
The U.S. Constitution
and Money: Corruption and Decline.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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