Table Of ContentDavid Howden · Joseph T. Salerno
Editors
The Fed
at One
Hundred
A Critical View
on the Federal Reserve System
The Fed at One Hundred
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David Howden (cid:129) Joseph T. Salerno
Editors
The Fed at One Hundred
A Critical View
on the Federal Reserve System
Editors
DavidHowden JosephT.Salerno
BusinessandEconomics PaceUniversity
St.LouisUniversityMadridCampus LubinSchoolofBusiness
Madrid NewYork,NewYork
Spain USA
ISBN978-3-319-06214-3 ISBN978-3-319-06215-0(eBook)
DOI10.1007/978-3-319-06215-0
SpringerChamHeidelbergNewYorkDordrechtLondon
LibraryofCongressControlNumber:2014943916
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Foreword
TheUSFederalReserverecentlycelebratedits100thanniversary.Itisthereforea
fittingmomenttoaskhowitisdoing.
This indispensable book, edited by Professors David Howden and Joseph
Salerno, and including contributions from a long list of distinguished scholars,
bothasksthequestionandanswersitsimplyandauthoritatively:theFedhasbeena
completefailure.
At first glance this question and answer might seem primarily of interest to
economists. But nothing could be further from the truth. What the Fed and other
centralbanksdodeeplyaffectsthelivesofeveryone.
IftheFedfails,ifmoreworryinglytheentirelineofthoughtthatledtotheFed
provestobewrong,itisthemiddleclassandthepoorwhopaytheultimateprice.
Overthecourseofthelastcentury,itisnoexaggerationtostatethatmillionshave
lost their jobs because of the Fed. In prior decades, many of these people faced
homelessness or even starvation. Even if homeless people rarely starve today in
America,theconsequencesofbadeconomicpoliciesareincalculable.
Fed failure is most obvious when it comes to economic crises and joblessness.
Butthereisagreatdealofwishfulthinkingandmisinformationaboutthissubject.
EconomicwriterJeffreyMadrickhasstated:“By1913,theUSfederalgovernment
createdastablefinancialsystemwiththecreationoftheFederalReserve.”
Economist Milton Friedman was more accurate when he wrote that: “The
severity of each of the major economic contractions… is directly attributable to
acts of … the Reserve authorities and would not have occurred under earlier
monetaryandbankingarrangements.”
Friedmanwrotethisin1962,yearsbeforetheFed-inducedgreatinflationofthe
1970sand theFed-induced bubblesthatled totheCrash of2008.Since 2008, the
Fedhasembarkedonwhatwouldseemtobethequixotictaskoftryingtoprovethat
moremoneyanddebtproducedbyitselfwillcureacrisiscreatedinthefirstplace
bytoomuchmoneyanddebt.
The Fed’s legislative mandate did not originally include employment levels.
ThatwasaddedbyCongressin1977.Theinitialfocuswasonpricestability.Itwas
v
vi Foreword
thought that stable prices and an elastic currency would eliminate the recessions
anddepressionsoftheprecedingyears.
The Fed did indeed bring us an elastic currency, which in practice just meant
creatingmoreandmorenewmoney,butitdidnotbringusstableprices.Sincethe
beginning of the Fed in 1914, the dollar has lost 97 % of its reported purchasing
power. And there are reasons to think that the dollar has actually lost even more,
especially since the Clinton administration, when the method of calculating con-
sumerpriceinflationwasquietlychanged.
PaulVolcker,generallyregardedasthemostsuccessfulofFedchairmen,stated
in1994:“Iftheoverridingobjectiveispricestability,wedidabetterjobwiththe
nineteenth century gold standard and passive central banks, …or even with ‘free
banking’.”
Uncontrollableconsumerpriceinflationissupposedtobeamystery,butthereis
nothing mysterious about it. Thibault de Saint Phalle observed in 1985 that: “No
oneinCongresseverpointsout…itistheFeditselfthatcreatesinflation.”Sowe
havetheironyofaninstitutionchargedwithcontrollinginflationwhichhasinstead
createdit.
TodaytheFedhasgonepublicwithapolicyofdeliberatelyfosteringconsumer
priceinflation,becausethisissupposedtohelptheeconomy.Nevermindthatthere
isneitherevidencenorlogictosupportthisidea,andnevermindthatrisingprices
mostdirectlypunishthemiddleclassandpoor.
Thelegislatorswho passedtheFederalReserve Actin1913thoughttheywere
creatinga“lenderoflastresort”runbybankers,notanationaleconomicplanning
agencyrunbyanarrowgroupofeconomists.Butthelatteriswhatwehavetoday.
Respected economic writer Jim Grant says about this: “Central planning may be
discreditedinthebroadersense,butpeoplestillbelieveincentralplanningasitis
practiced by…[the Fed]….To my mind the Fed is a cross between the late,
unlamentedInterstateCommerceCommissionandtheWizardofOz.”
EconomicwriterGeneCallahanaddsanimportantfurtherobservationwhenhe
saysthatthechairmanoftheFed“istheheadpricefixerofapricefixingagency.”
What he means is that the Fed’s main tool is control of the price of borrowed
money, one of the biggest prices in the economy. Other central banks directly
controlcurrencyprices,buttheUSFedchoosestoinfluenceratherthancontrolthe
priceofthedollaroninternationalexchanges.
Ironically,formerFedchairmanBenBernanketoldstudentsthat:“Pricesarethe
thermostat of an economy. They are the mechanisms by which an economy
functions.”Butpricescannotbeathermostatwhentheyarecontrolled.
TheFedisnotonlylooseinitseconomicthinking.Itisalsolooseininterpreting
itsownstatute.MuchofwhatitdidfollowingtheCrashof2008waslegal,butnot
allofit.ThepurchaseofFannieMaeandFreddieMacsecuritiesviolatedtheclear
languageofthelaw.UnfortunatelytheFedisneverheldtoaccount.Itoperatesin
almostcompletesecrecyandevenpaysforitselfbycreatingmoneyoutofthinair.
There is much, much more to be said, and it is all covered by this wonderful
book. Individual chapters range from the history of the Fed, including the unnec-
essarytragediesoftheGreatDepressionandCrashof2008,tohowtheFedoperates
Foreword vii
behinditscloseddoors,andwhatitmeansfortheeconomy.Importantly,ittellsus
what a better monetary system would look like, a monetary system that could
launchusonanewandhithertounknowneraofprosperity.
Thisisabookforanyone,notjustscholars.Itcouldalsobeusedasanexcellent
introduction to economics or as an adjunct to an economic textbook for students.
After seeing firsthand, in these pages, how critical right economic thinking and
policyareforourlives,anyonewouldwanttodelvemoredeeplyintothesubject.
Charlottesville,Virginia HunterLewis
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Contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DavidHowdenandJosephT.Salerno
APre-historyoftheFederalReserve. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DavidHowden
DoesU.S.HistoryVindicateCentralBanking?. . . . . . . . . . . . . . . . . . . 23
ThomasE.WoodsJr
BenBernanke,TheFDRofCentralBankers. . . . . . . . . . . . . . . . . . . . . 31
RobertP.Murphy
FedPolicyErrorsoftheGreatDepression. . . . . . . . . . . . . . . . . . . . . . . 43
JeffreyHerbener
TheFederalReserve:RealityTrumpsRhetoric. . . . . . . . . . . . . . . . . . . 55
ShawnRitenour
AFraudulentLegend:TheMythoftheIndependentFed. . . . . . . . . . . 65
ThomasDiLorenzo
WillGoldPlatingtheFedProvideaSoundDollar?. . . . . . . . . . . . . . . . 75
JosephT.Salerno
ArthurBurns:ThePh.D.StandardBeginsandtheEndof
Independence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
DouglasFrench
TheFederalReserve’sHousingBubbleandthe
SkyscraperCurse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
MarkThornton
ThereIsNoAccountingfortheFed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
WilliamBarnettII
ix
