Are You a Gold-Hating, Fed-Loving Economist?

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Higher education in the United States was transformed by Rockefeller money, beginning in 1902: the General Education Board. The GEB made grants to colleges only if they hired Ph.D-holding graduates of a handful of universities, which alone granted the Ph.D. This way, the universities could indirectly take over the rest of the colleges, which were mostly church-related. The strategy worked.

Rockefeller’s academic empire included the University of Chicago, which he founded. From the turn of the 20th century, the University of Chicago’s department of economics repudiated the use of gold in monetary affairs.

Milton Friedman earned his Nobel Prize for a book researched mainly by his co-author, Anna J. Schwartz: A Monetary History of the United States (1963). Born in 1915, she still works full time. In the Wikipedia entry for her, we read:

Anna Jacobson Schwartz (born November 11, 1915) is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman “one of the world’s greatest monetary scholars”. She is best known for her collaboration with Milton Friedman on A Monetary History of the United States, 1867 – 1960 which laid a large portion of the blame for the Great Depression at the door of the Federal Reserve. She is a past president of the Western Economic Association (1988).

The book is known in academic circles and policy-making circles only for its thesis regarding the Federal Reserve System, 1930-33. It says that the FED had not inflated enough, 1930-33. The book is never quoted by the media on any other topic, although it is a fat book. That is the only academic thing that Friedman ever wrote that was adopted by his Keynesian peers. Why? Because he came out on their side.

The academic economics profession is united on only one topic: the superiority of central banking to the gold standard.

There has never been a college textbook in economics that called the FED a government-created cartel that exists for the sake of the largest banks. This outlook shapes the thinking of the students who get certified to teach. They are literally unable intellectually to apply the economic theory in the chapter on cartels to the Federal Reserve System, despite the fact that the theory in the cartel chapter fits seamlessly onto the facts of the FED. Support of central banking is basic to the entire curriculum in modern economics.

So, the graduates have a blind spot: central banking. This means they have another blind spot: a gold coin standard. It means that they have literally never examined the theory of a monetary standard that is based solely on the enforcement of voluntary exchange, including contracts. They are literally incapable of imagining a free market for money. The methodological tools which they apply with mathematical precision – a fake precision – to every other area of life, including marriage, they are intellectually incapable of applying to money.

For decades, the Federal Reserve’s Board of Governors (government) and its 12 regional banks (privately owned) have spent tens of millions of dollars (created out of nothing) handing research jobs to academic economists. The FED has literally bought off the profession. This story was concealed for years by the FED and its bought-off defenders, but it has recently surfaced.

This strategy was first adopted by the Rockefellers. John D. Rockefeller, Jr. hired Raymond Fosdick to run the Rockefeller Foundation. After he took over the running of the foundation, Fosdick continued to pay public relations pioneer Ivy Lee to help reduce criticism of the Rockefeller oil empire. Lee had been on the Rockefellers’ payroll ever since 1914. One of Lee’s suggestions was to pay academics a lot of money to write pro-Rockefeller books. This worked so well that Fosdick began spending millions to buy off academia. There is a book on this: Donald Fisher, Fundamental Development of the Social Sciences: Rockefeller Philanthropy and the United States Social Science Research Council. It was published by the University of Michigan Press in 1993.


With this as background, I examine a Yahoo article on ending the FED. The article appeared only because of Ron Paul’s campaign to end the FED. Paul has single-handedly made this a topic of public discussion. No one else has ever achieved this.

The “End the Fed” movement appears to have a lot going for it these days. Its adherents now include both conservatives and supporters of the Occupy movement. Perhaps its most prominent proponent, Rep. Ron Paul, has garnered respectable poll numbers in the 2012 Republican presidential race and blasts the Federal Reserve at every opportunity. Plus, the succinct slogan fits well on protest signs.

Paul has been so effective that the FED hired a public relations specialist in 2009. It had never done this before. The lady was famous in Washington as the lobbyist who ran Enron’s Washington office until the firm went bust in 2002. She was also an adviser to all three of Clinton’s Treasury Secretaries.

Removing the institution at the helm of U.S. monetary policy since 1913 seems unrealistic, though, and opponents consider it a crazy idea, even dangerous. However, proponents keep up the call, using an array of arguments from economic theory to promoting liberty.

Academic economists call no other academically defended idea “crazy.” They literally cannot imagine as sane the suggestion that the world could not run – and run better – without the government-licensed, privately owned monopoly of central banking.

Whatever view one takes, ending the Fed is a goal much more easily stated than accomplished. But if Fed bashers got their wish, here are a few snapshots of how the country might change. . . .

Notice the pejorative term, “Fed bashers.” It is true, of course. We are indeed Fed bashers. But the term is not used with respect to academically certified critics of any other government-created cartel.

A New Monetary Standard

Many advocates of ending the Fed argue for a return to the gold standard, which President Nixon ended in 1971, due in part to growing inflation, which was itself due to the costs of the Vietnam War. In addition, Nixon was concerned that Fort Knox contained only one third of the gold needed to back the dollars in foreign hands at that time. Under this system, the dollar’s value would once again be tied to the price of gold. Another option is to tie the U.S. dollar’s value to a basket of commodities.

The gold-exchange standard in 1971 was a hybrid created by governments at the 1922 Genoa conference. It was their way to avoid returning to the pre-World War I gold coin standard, which put tight limits on government deficits funded by bank credit. After World War II, this system subsidized the USA’s expansion of fiat money. It broke down in 1971 because the Federal Reserve had inflated ever since 1933, when the right of Americans to own gold was made illegal. The article mentions Ft. Knox, when the bulk of the country’s gold is held in the vault of the Federal Reserve Bank of New York, a privately owned firm. Again, the FED’s supporters refuse to discuss the facts.

End to Constant Inflation (for better or worse)

Tying the dollar’s value to a commodity could very well moderate inflation. If the country moved to a strict gold standard, for example, the money supply would be bound to the supply of gold, so printing more dollars would require acquiring more bullion to back them, a big disincentive. This notion, of course, pleases proponents of controlled government spending. Though there might be short-term bouts of inflation and deflation, in the long run, prices could easily remain stable.

This is correct. For 250 years, this has been the #1 defense of the gold standard. Also, for 250 years, the inflationists have rejected it, as we see here.

There are, of course, caveats. For example, massive borrowing could spark inflation.

This is nonsense. It ought to be obvious nonsense, but gold standard bashers cannot think straight. Massive borrowing cannot “spark inflation,” because borrowing cannot spark inflation without fractional reserve banking. When borrower A borrows money from lender B, no money is created. The use of an existing supply of money changes by voluntary agreement. Demand rises for the items borrower A buys. Demand falls for the items lender B would otherwise have bought. Simple. But it’s not simple for gold standard bashers to grasp.

And the country would also be forced to periodically deal with the relatively unfamiliar territory of deflation.

This is nonsense, for the same reason that the previous argument is nonsense. The supply of money does not change. If prices fall, it is because production rises. You know: “More goods chasing the same amount of money.” Isn’t the idea of slowly falling prices the whole idea of economic growth? If scarcity is a curse – and it is – then increased output reduces scarcity. If scarcity is defined as “greater demand than supply at zero price” – and it is – then falling prices point to reduced scarcity. Yet gold standard bashers regard this as a problem of the gold coin standard.

Returning to the gold standard in particular could make these problems worse. “The gold market can have very large movements within a day,” says Randall Kroszner, an economics professor at the Booth School of Business at the University of Chicago and a former governor of the Federal Reserve System. He adds that during recent times of economic uncertainty, this added volatility would likely not have been helpful.

Excuse me? The gold market today establishes the price of gold in terms of fiat money systems run by central banks. So, the price of gold as denominated in fiat money varies. Why? Mainly because the value of currencies fluctuates wildly because of investors’ doubts concerning the policies of central banks and commercial banks.

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December 5, 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