The Case Against the Fed Book Review

     

The Case Against the Fed By Murray N. Rothbard Ludwig von Mises Institute 2007 158 pages.

In The Decline of the West, Oswald Spengler wrote, “With money-traffic there appears between producer and consumer, as though between two separate worlds, the third party, the middleman, whose thought is dominated a priori by the business side of life. He elevates mediation to a monopoly and thereafter to economic primacy, and forces the other two to be ‘in form’ in his interest … He who commands this mode of thinking is the master of money.”

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And no, Spengler was not referring to the Fed. But he very well could have been, for the Fed certainly fits the definition of a monopolistic middleman, who is the master of money. Which is the subject of Murray Rothbard’s book – The Case Against the Fed.

Like many books, The Case Against the Fed starts out with an introduction. But that’s where the similarity ends. For Rothbard’s introduction is a real humdinger. He gets right to his thesis, which is that the Fed is super-secretive, accountable to no one, has no budget, and is subject to no audit. And whenever anyone broaches changing this situation, the “standard reply of the Fed and its partisans is that any such measures, however marginal, would encroach on the Fed’s ‘independence from politics,’ which is invoked as a kind of self-evident absolute.”

In other words, only by means of absolute power and no accountability can the Fed wage its holy war “against inflation.” According to the Fed’s line of reasoning, the public is responsible for inflating the money supply. Which means the Fed is all that stands between the public and the temptation of inflation. In Rothbard’s opinion, “this mythology is the very reverse of the truth.”

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Rothbard’s analysis and explanation of the real truth is wonderfully wrought. “If,” says Rothbard, “chronic inflation is caused by the continuing creation of new money, and if [the Central Banking System] is the sole monopoly source and creator of all money, who then is responsible for the blight of inflation?” The answer of course is “the Fed itself.”

A History of Money and... Murray N. Rothbard Best Price: $5.31 Buy New $5.31 (as of 02:35 EST - Details)

This fact, according to Rothbard, explains why the Fed requires secrecy. “If the public knew what was going on,” it would know that the Fed is “itself the heart and cause of the problem.”

After this blistering opening, Rothbard moves on to discuss how money and banking developed. This discussion segues naturally into the ‘optimum amount of money.’ And as Rothbard demonstrates, “any quantity of money in society is ‘optimal.’” Increasing the supply of money in a society is unnecessary and not beneficial. Any increase that occurs is purely and simply inflation, which, in Rothbard’s opinion, is tantamount to counterfeiting.

Counterfeiting increases the money supply, which simultaneously pushes up the cost of goods and services and decreases the buying power of money. The other thing counterfeiting does – and this is an important point – is put more money into the “hands of the counterfeiters.” In other words, the people printing the counterfeit money get richer.

Rothbard points out that historically, there “have been two kinds of legalized counterfeiting.” The first is government printed paper money. The second is “fractional-reserve banking.” And Rothbard’s explanation of fractional-reserve banking is one of the best around. For it is simple and clear, eschewing technical jargon and convoluted models.

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May 19, 2010