Those Lying Textbooks

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The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

The paragraph (italicized) introduces a booklet published by the Federal Reserve, The Federal Reserve System: Purposes and Functions (9th edition, 2005). It has been in print continuously since 1939.

This paragraph is universally believed among the intellectual elite in the United States. It is believed by virtually all academics, in every social science. You cannot find a college textbook published by any major publishing firm in either introductory economics or American history that does not rest on the acceptance of the truth of this paragraph.

One of the difficulties that critics of central banking have, all over the world, is that academic economists are almost universally supportive of central banking.

To understand why this is the case, we must understand the economics of banking as an aspect of the economics of cartels.

All modern banking systems are based on government licensing and regulation.All licensing and regulation systems create barriers to entry.All government-created barriers to entry create cartels.All central banks are enforcement agents of the national banking cartel.

No chapter on central banking in any introductory or upper division economics textbook published by a mainstream publisher discusses central banking in this light. The chapter on central banking is kept several chapters away from the chapter on money and banking. The two chapters are not cross-referenced.

This has gone on ever since the end of World War II. It may have gone on before, but the textbooks of that era are difficult to locate. University libraries throw out old textbooks. This makes it difficult for historians of thought in any field to write histories of college-level opinion.

[Note: libraries also do not bind popular journals. It would be impossible to write an accurate history of American social thought without access to the Reader’s Digest, the Saturday Evening Post, the Ladies Home Journal, and Cosmopolitan. Yet there is no easy access to any of them. This is why books on American social thought are mostly histories of what academics have written about what they perceive as important trends marked by best-selling books, movies, and a few public opinion polls.]


All schools of economic opinion have much the same criticism of cartels. Read the chapter on cartels in any college-level introductory economics textbook. The analyses in all of them will be about the same. Cartels are presented as organized groups of self-interested producers who use government intervention to keep more efficient producers out of the market. These associations oppose price cutting by individual firms. They seek to create agreements within the industry to refrain from price cutting. All schools of economic opinion regard this as being against the interests of consumers. Cartels promote actions in restraint of trade.

The standard chapter on cartels identifies the cartel as an aspect of monopoly. A monopoly is defined as a single seller that extracts an economic surplus by restricting production, thereby enabling it to charge a price higher than that which it would charge if it sold all that it could produce. A cartel is a monopoly system based on more than one producer.

Economists recognize that few if any monopolies can exist without government intervention. (The perennial exception, Arm & Hammer’s baking soda, is never discussed. It deserves at least a master’s thesis.)

No cartel comes to legislatures with this message:

We want you to pass laws against companies that offer lower-priced goods to buyers. Such offers reduce our profit margins. We want to maximize our net profit by keeping retail prices high. We cannot keep innovative forms out of the market, but you can. We want you to pass laws against the sale of goods unless these firms agree not to sell at prices lower than those set by our organization.

Instead, it comes with this message:

The public is being exposed to low-quality goods that put people in danger. If the legislature stands idly by, allowing inexperienced and unqualified producers to exploit the ignorance of the public, the common man will be exposed to serious risks. The best way to protect the public is to require all products to meet basic standards of quality, and to require all producers to be certified by law. The government should set basic standards and require all producers to meet them.

The cartel then writes the standards, so that new, under-funded competitors are kept out. The legal fees for getting authorization to sell a low-cost product will keep most new firms out of the market.

The chapter on cartels offers a detailed account of how the cartel seeks government intervention in its program to restrain trade by restricting entry into the market. The textbook encourages the student to think through the implications of the cartel’s argument in favor of restricting entry. It presents this appeal as a self-interested quest for higher profits at the expense of consumer choice.

None of this analysis is applied to central banking.


Consider the 5th edition of Roger Leroy Miller’s pro-free market textbook, Economics Today (1985). It was published in the midst of the savings and loan crisis and bailout by the Federal government.

Chapter 28 is devoted to “Labor: Monopoly Supply, Monopoly Demand.” There is a brief discussion of a cartel. The chapter is aimed at American college students. This discussion relates to the economics of the NCAA, the National Collegiate Athletics Association. It is quite accurate. The NCAA is a cartel devoted to keeping down labor costs: athletes. The author offers this definition of cartels:

Any arrangement or agreement made by a member of independent entities to coordinate buying or selling decisions, so that all of them will earn either monopsony or monopoly profits (p. 638).

Hundreds of pages earlier, Chapter 14 is “Money and the Banking System.” It ends with a description – with no economic analysis – of the Federal Reserve System. The student has not yet been provided with the conceptual tools necessary to understand the banking system, namely, the economics of cartels. That presentation comes months later, presumably in the second semester.

Chapter 15, “The Process of Money Creation,” includes a description – without economic analysis – of the creation of commercial bank reserves under the Federal Reserve’s supervision. There is no discussion of the wealth-transfer effects of increases in the money supply. The phrase “fiat money” does not appear. There is no presentation of the international gold standard, 1815 to 1914. There is a section on the FDIC, entirely laudatory, but without any analysis of the effect of compulsory government insurance on either the distribution of risk or information costs.

There is a description of the gold standard in Chapter 35. It is a little over two pages long. It describes how the system worked prior to 1933. The section ends with these words:

Every country wants to control its own money supply. Even a modified gold standard would fall apart sooner or later because of this desire, and, indeed, it did in the 1930s (p. 784).

Notice the non-economic category, “country.” It is left undefined in the book. Miller wrote “country,” but he means – or should have meant – the banking cartel’s senior bankers, the system enforced by the Federal Reserve, which persuaded Franklin Roosevelt to unilaterally confiscate all of the gold coins and gold-denominated debt certificates of all residents of the United States and all American citizens, no matter where they lived. Then, in 1934, Roosevelt increased the price of gold by 75% ($20 to $35 per ounce), which the Federal Reserve immediately spent into circulation by purchasing Treasury debt.

This is what “countries” want, because this is what academic economists want: fiat money, with advice supplied by academic economists.

Chapter 16 is on “The Federal Reserve and Monetary Policy.” There is a section on Milton Friedman and also (without attribution) the famous (and tautological) equation of exchange: MV-PQ, which Friedman and his peers got from Irving Fisher, the Yale economist who famously predicted in September 1929 that the stock market was at a permanently high plateau and who then lost his fortune in the crash.

The textbook’s only criticism of the FED is the standard account, based on Friedman’s Monetary History of the United States (1963), that the FED failed to create enough money, 1930-33 (p. 351).

The textbook does raise the question of whether the FED should be independent of Congress. The author does not say categorically “no.” He does not mention that the FED, created by the government, should therefore be under the authority of government. He never mentions the supposedly legitimate independence of any other government-created entity. Only the FED gets this potential Kings-X.

There is no discussion of the fact that the economics of central banking conforms exactly to the economics of a cartel.

There is no discussion of bank chartering by governments as a barrier to entry, with inevitable monopoly returns.

There is no mention of free banking: open entry into the market by private entrepreneurs.

There is only the suggestion that Congress could establish a “monetary rule.” This is defined as follows: “A type of monetary policy in which there is a rule specifying the annual rate of growth of some monetary aggregate” (p. 354). This is an oblique reference to Friedman’s famous – and universally ignored – recommendation of a 3% to 5% annual increase. For M-1? M-2? What? The author does not say.

Needless to say, there is no reference to Ludwig von Mises’ support of free banking – a world without government licensing of banks in restraint of trade. There is no reference to Murray Rothbard’s 100% gold reserve standard. There is no reference to Rothbard’s explanation of the Great Depression, America’s Great Depression (1963): the prior inflating of the money supply, 1926-29. There is no reference to his textbook on money and banking, The Mystery of Banking (1984), which shows the compulsory wealth-transfer effects of fractional reserve banking. That book shows that the FED is a government-created cartel.

In all of this, Miller’s textbook conformed to all college-level textbooks, which steadfastly avoid references to the Austrian theory of the business cycle.

In one of those delightful serendipitous events of life, the book includes a glossary. Because of alphabetical order, “Central bank” follows “Cartel.” The entry for “Cartel” refers to reader to page 638, where we read:

Any arrangement or agreement made by a member of independent entities to coordinate buying or selling decisions, so that all of them will earn either monopsony or monopoly profits.

The entry for “Central bank” refers the reader to page 309, where we read in a side note:

Central bank. A banker’s bank, usually an official institution that also serves as each country’s Treasury’s bank. Central banks regulate commercial banks.

There is no economic definition here, unlike the definition of a cartel. There is only a description – a description fully in accord with the one provided by the Federal Reserve System, beginning in 1913.


Any economics textbook that provided only a description of what a cartel does, based on the publications of the cartel, would not be published by a mainstream publisher. Classroom economists would not accept such an obviously self-serving description of a cartel’s economic operations and goals.

In contrast, any textbook that described the operation of the central bank as a cartel, with a detailed economic analysis to provide clear answers to three economic questions – “Who wins? Who loses? How?” – would also not be published. Classroom economists would not accept such an obviously Austrian School-based presentation.

For over a century, the overwhelming majority of the economics guild has maintained a “Kings-X” position of safety for central banking. The economic questions that are the foundation of economic analysis for every other institution – “Who wins? Who loses? How?” – are never applied to central banks. Descriptions provided by the central bank are substituted for an analysis based on the economic concepts of supply and demand under conditions of government regulation.

In short, the central bank gets a free ride from the main schools of economists: Keynesians, monetarists, public choice theorists, rational expectations theorists, and supply-siders. The exceptions are fringe interpretations: Marxism and Austrianism. There are not many members of either school who teach in economics departments, and there is no Marxist or Austrian economics textbook published by any major textbook publisher.

I am not saying that the banking system is the only cartel that has Kings-X protection from the economists. One other does: university education.

These two exceptions can be explained in terms of the fundamental economic category of individual self-interest. It is not in the self-interest of salaried economists teaching inside the educational cartel to apply the economics of cartels to their employers. “Don’t bite the hand that feeds you.”

Every Ph.D.-holding academic has paid a high price for his degree: years of forfeited income, the struggle to master obvious intellectual piffle, tuition fees, textbook fees, and groveling for years to their professors to one degree or another and for one degree or another. Like apprentices in some medieval urban guild, they seek above-market income through entry into a cartel. Once in, they do not want the guild to lose its ability to enforce barriers to entry. To lose this power would be to face free market competition. They have worked too hard for too long to accept this outcome.

Academics are, in the language of mainstream economics, rent-seekers.

So, economists do not apply economic analysis to the academic cartel. To the NCAA, maybe, but not the academic cartel itself.

Then what of the Federal Reserve System? Why is it also immune?


In the world of crime syndicates, a bagman runs errands for the syndicate, handing out money to politicians and others who can help the syndicate gain immunity from public criticism. Keep this in mind.

[Note: the most famous bagman in American history was Anthony Ulasewicz, the Bagman Of Watergate.]

The Huffington Post in 2009 published an indispensable article, “Priceless: How the Federal Reserve Bought the Economics Profession.”

In 1993, we are informed, Greenspan informed the House Banking Committee that 189 economists worked for the Board of Governors (a government operation) and 171 worked for the 12 regional Federal Reserve banks (privately owned). Then there were 703 support staff and statisticians. These came from the ranks of economists.

This was only part of the story: the proverbial tip of the iceberg. From 1991 to 1994, the FED handed out $3 million to over 200 professors to conduct research.

This is still going on. There has been growth. The Board of Governors now employs 220 Ph.D.-level economists. But the real growth has been in contracts.

A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That is a great deal of money. This amount of money, the author implies, is sufficient to buy silence. He adds that there are fewer than 500 Ph.D.-level members of the American Economic Association whose specialty is either money and interest rates or public finance. In the private sector, about 600 are part of the National Association of Business Economists’ Financial Roundtable.

If you count existing economists on the payroll, past economists on the payroll, economists receiving grants, and those who want in on the deal, “you’ve accounted for a very significant majority of the field.”

In addition, the FED has editors of the academic journals on its payroll or grants list.

“It’s very important, if you are tenure track and don’t have tenure, to show that you are valued by the Federal Reserve,” says Jane D’Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.


The Federal Reserve is untouchable inside academia. But it is beginning to have critics outside of academia. The bust and bailout in the fall of 2008 sent a message that finally penetrated the information barriers imposed by Old Boy Network: “The banking system is rigged to favor the biggest banks.” This has been true ever since 1914.

The FED still has a free ride inside academia. It does not have one on the Internet.

QE2 will backfire. There will be either price inflation or another attempted exit strategy. The exit strategy failed in 2010, as you can see here.

There is no permanent exit strategy, other than Great Depression 2. When it comes, either before or after hyperinflation, the FED’s Kings-X within the ranks of academia, with its depleted pension portfolios, will finally end.

March 30, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North