11 Myths About the Fed, Refuted
by Thomas E. Woods, Jr. and
by Thomas E. Woods, Jr.: Without
College Everyone Would Be an Idiot, Right?
The other day
the Huffington Post ran an article by a Bonnie Kavoussi called “11
Lies About the Federal Reserve.” And you’ll never
guess: these aren’t lies or myths spread in the financial
press by Fed apologists. These are “lies” being told
by you and me, opponents of the Fed. Bonnie Kavoussi calls us “Fed-haters.”
So she, a Fed-lover, is at pains to correct these alleged misconceptions.
She must stop us stupid ingrates from poisoning our countrymen’s
minds against this benevolent array of experts innocently pursuing
Here are the
11 so-called lies (she calls them “myths” in the actual
rendering), and our responses.
Myth #1: “The Fed actually prints money.”
She leads off
with this? As if this is some big discovery that will refute
the end-the-Fed people? When we talk about Fed money-printing, we
are speaking in shorthand. We’re pretty certain someone like
Ron Paul knows the Fed doesn’t actually print money. But he,
along with pretty much the whole financial world, speaks of the
Fed as printing money. You know why? Because it’s a teensy
bit more convenient than saying, “We need the Fed to credit
some banks’ accounts with increased balances, which it does
by means of a computer, though if these balances are lent out and
the borrowers prefer to use some of this lent money as cash, the
Treasury will go ahead and print the cash.”
Myth #2: “The Federal Reserve is spending
You may think
the Federal Reserve is throwing around money like crazy, just like
the federal government. But you’re wrong! As Kavoussi explains,
the Fed doesn’t spend money like the federal government does;
it creates money! That’s just totally different!
And so we read, “Both CNN anchor Erin Burnett and Republican
vice presidential nominee Paul Ryan have compared the Federal Reserve’s
quantitative easing to government spending. But the Federal Reserve
actually has created new money by expanding its balance sheet.”
She then points
out that hey, the Fed earned a profit of $77.4 billion last year.
We are supposed to be impressed. But if you can create money out
of thin air and buy bonds with it, and then earn interest on those
bonds, wouldn’t it be pretty hard to lose money?
(But they just might, if interest rates should spike.)
Myth #3: “The Fed is causing hyperinflation.”
Is it just
us, or does Bonnie Kavoussi word things awkwardly? Do you know of
anyone who says the Fed is causing – as in present
progressive tense — hyperinflation?
goes on to tell us that the CPI is showing low price inflation —
again, as if she’s reporting some extraordinary revelation
that will put all Fed critics to shame. There is no hyperinflation
because the banks are holding the newly created money as excess
reserves with the Fed. If the banks begin lending and the money
multiplier is enacted, an inflationary spiral could easily occur
— trillions of dollars of high-powered money would expand
via the fractional-reserve banking system into tens of trillions
of dollars. The only way for the government to stay ahead of the
curve would be for the Fed to keep creating boatloads of new money
— which is how hyperinflation happens, after all.
If that were to happen, we rather doubt Kavoussi would want
to come tell us how the CPI is doing.
Myth #4: “The amount of cash available has grown tremendously.”
Federal Reserve critics claim that the Fed has devalued the U.S.
dollar through a massive expansion of the amount of currency in
circulation,” says Kavoussi. “But not only is inflation
low; currency growth also has not really changed since the Fed started
its stimulus measures, as noted by Business Insider’s Joe
like another silly gotcha with definitions, like the “printing money”
canard. The graph below shows that the currency component of M1
hasn’t shot up like a rocket, it’s true; but M1 itself (which consists
of not just physical paper but also checking account deposits) has
indeed risen sharply, notwithstanding the insights of Business Insider’s
Myth #5: “The gold standard would make prices more stable.”
“Rep. Ron Paul (R-Tex.) has claimed that bringing back the
gold standard would make prices more stable. But prices actually
were much less stable under the gold standard than they are today,
as The Atlantic’s Matthew O’Brien and Business Insider’s
Joe Weisenthal have noted.”
Does our critic
even read the things she links to? Her two authors’ blog posts
depict a very brief period in the twentieth century, after the classical
gold standard had already given way to the gold exchange standard.
What is that supposed to prove?
Bonnie Kavoussi’s two blog posts that examine the gold exchange
standard and only for a period of about 15 years at that, all we
have in reply is only the most meticulous study of gold and its
purchasing power ever written, Roy Jastram’s The
Golden Constant: The English and American Experience 1560-2007,
which finds gold to be extraordinarily stable over four and a half
Even John Kenneth
Galbraith, not exactly gold’s biggest fan, conceded that once
someone had gold, there was little uncertainty about what he would
be able to get with it. “In the last [19th] century in the
industrial countries there was much uncertainty as to whether a
man could get money but very little as to what it would do for him
once he had it. In this [20th] century the problem of getting money,
though it remains considerable, has diminished. In its place has
come a new uncertainty as to what money, however acquired and accumulated,
will be worth. Once, to have an income reliably denominated in money
was thought…to be very comfortable. Of late, to have a fixed
income is to be thought liable to impoverishment that may not be
slow. What has happened to money?”
gold standard advocates, at least in the Austrian tradition, are
fixated on price stability in the first place.
Myth #6: “The Fed is causing food and gas prices to rise.”
be, Kavoussi says, since some sources deny it. Bob
Murphy testified before Congress on this very issue. He thinks
the Fed does play a role. Where is the flaw in his reasoning?
Myth #7: “Quantitative easing has not helped job growth.”
How could we
think such a thing? Why, we should be satisfied to know, as Bonnie
Kavoussi assures us, that “the Fed’s quantitative easing
measures actually have saved or created more than 2 million jobs,
according to the Fed’s economists.” Gee, the Fed’s
economists think the Fed contributes to job growth? How about that!
On the same grounds, we might say there was no housing bubble in
2005 and that the fundamentals of real estate were sound —
after all, we could find a whole bunch of “Fed economists”
who were saying just that.
In fact, these
models build in the very assumptions about purchases helping the
economy that they then spit out, just like with the ex post “analysis”
of the Obama stimulus package. No matter what numbers one fed
into such models, it would be impossible for them to say that QE
(or the Obama stimulus) hindered
economic growth; the worst they would show is a build-up of price
inflation once “full employment” had been achieved.
Myth #8: “Tying the U.S. dollar to commodities would solve
hear a mocking writer like Bonnie Kavoussi say something like, “My
opponents think X would solve everything,” you can be sure
her opponents have said no such thing. Why, as a matter of simple
courtesy, could she not simply have described this alleged myth
as, “Tying the U.S. dollar to commodities would improve the
American monetary system”? Because that might sound reasonable,
and it’s Bonnie Kavoussi’s job to make her opponents
sound like troglodytes.
all we have to say about this myth, though, since we are not interested
in tying the dollar to a basket of commodities. Here
is our preferred monetary reform.
the rest of the article
E. Woods, Jr. [send him
mail; visit his
website], a senior fellow of the Ludwig von Mises Institute,
is the creator of Tom
Woods’s Liberty Classroom, a libertarian educational
resource. He is the author of eleven books, including the New
York Times bestsellers Meltdown
(on the financial crisis; read Ron Paul’s foreword)
Politically Incorrect Guide to American History, and most
Murphy [send him mail],
adjunct scholar of the Mises Institute,
is the author of The
Politically Incorrect Guide to Capitalism,
Human Action Study Guide,
Man, Economy, and State Study Guide.
His latest book is The
Politically Incorrect Guide to the Great Depression and the New
© 2012 Thomas
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