The Fed at One Hundred

The Fed at One Hundred

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David Howden Joseph T. Salerno Editors The Fed at One Hundred A Critical View on the Federal Reserve System

Editors David Howden Business and Economics St. Louis University Madrid Campus Madrid Spain Joseph T. Salerno Pace University Lubin School of Business New York, New York USA ISBN 978-3-319-06214-3 ISBN 978-3-319-06215-0 (ebook) DOI 10.1007/978-3-319-06215-0 Springer Cham Heidelberg New York Dordrecht London Library of Congress Control Number: 2014943916 Springer International Publishing Switzerland 2014 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Foreword The US Federal Reserve recently celebrated its 100th anniversary. It is therefore a fitting moment to ask how it is doing. This indispensable book, edited by Professors David Howden and Joseph Salerno, and including contributions from a long list of distinguished scholars, both asks the question and answers it simply and authoritatively: the Fed has been a complete failure. 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 central banks do deeply affects the lives of everyone. If the Fed fails, if more worryingly the entire line of thought that led to the Fed proves to be wrong, it is the middle class and the poor who pay the ultimate price. Over the course of the last century, it is no exaggeration to state that millions have 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, the consequences of bad economic policies are incalculable. Fed failure is most obvious when it comes to economic crises and joblessness. But there is a great deal of wishful thinking and misinformation about this subject. Economic writer Jeffrey Madrick has stated: By 1913, the US federal government created a stable financial system with the creation of the Federal Reserve. 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 monetary and banking arrangements. Friedman wrote this in 1962, years before the Fed-induced great inflation of the 1970s and the Fed-induced bubbles that led to the Crash of 2008. Since 2008, the Fed has embarked on what would seem to be the quixotic task of trying to prove that more money and debt produced by itself will cure a crisis created in the first place by too much money and debt. The Fed s legislative mandate did not originally include employment levels. That was added by Congress in 1977. The initial focus was on price stability. It was v

vi Foreword thought that stable prices and an elastic currency would eliminate the recessions and depressions of the preceding years. The Fed did indeed bring us an elastic currency, which in practice just meant creating more and more new money, but it did not bring us stable prices. Since the 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 consumer price inflation was quietly changed. Paul Volcker, generally regarded as the most successful of Fed chairmen, stated in 1994: If the overriding objective is price stability, we did a better job with the nineteenth century gold standard and passive central banks, or even with free banking. Uncontrollable consumer price inflation is supposed to be a mystery, but there is nothing mysterious about it. Thibault de Saint Phalle observed in 1985 that: No one in Congress ever points out it is the Fed itself that creates inflation. So we have the irony of an institution charged with controlling inflation which has instead created it. Today the Fed has gone public with a policy of deliberately fostering consumer price inflation, because this is supposed to help the economy. Never mind that there is neither evidence nor logic to support this idea, and never mind that rising prices most directly punish the middle class and poor. The legislators who passed the Federal Reserve Act in 1913 thought they were creating a lender of last resort run by bankers, not a national economic planning agency run by a narrow group of economists. But the latter is what we have today. Respected economic writer Jim Grant says about this: Central planning may be discredited in the broader sense, but people still believe in central planning as it is practiced by [the Fed].To my mind the Fed is a cross between the late, unlamented Interstate Commerce Commission and the Wizard of Oz. Economic writer Gene Callahan adds an important further observation when he says that the chairman of the Fed is the head price fixer of a price fixing agency. 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 control currency prices, but the US Fed chooses to influence rather than control the price of the dollar on international exchanges. Ironically, former Fed chairman Ben Bernanke told students that: Prices are the thermostat of an economy. They are the mechanisms by which an economy functions. But prices cannot be a thermostat when they are controlled. The Fed is not only loose in its economic thinking. It is also loose in interpreting its own statute. Much of what it did following the Crash of 2008 was legal, but not all of it. The purchase of Fannie Mae and Freddie Mac securities violated the clear language of the law. Unfortunately the Fed is never held to account. It operates in almost complete secrecy and even pays for itself by creating money out of thin air. 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 unnecessary tragedies of the Great Depression and Crash of 2008, to how the Fed operates

Foreword vii behind its closed doors, and what it means for the economy. Importantly, it tells us what a better monetary system would look like, a monetary system that could launch us on a new and hitherto unknown era of prosperity. This is a book for anyone, not just scholars. It could also be used as an excellent 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 policy are for our lives, anyone would want to delve more deeply into the subject. Charlottesville, Virginia Hunter Lewis

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Contents Introduction... 1 David Howden and Joseph T. Salerno A Pre-history of the Federal Reserve... 9 David Howden Does U.S. History Vindicate Central Banking?... 23 Thomas E. Woods Jr Ben Bernanke, The FDR of Central Bankers... 31 Robert P. Murphy Fed Policy Errors of the Great Depression... 43 Jeffrey Herbener The Federal Reserve: Reality Trumps Rhetoric... 55 Shawn Ritenour A Fraudulent Legend: The Myth of the Independent Fed... 65 Thomas DiLorenzo Will Gold Plating the Fed Provide a Sound Dollar?... 75 Joseph T. Salerno Arthur Burns: The Ph.D. Standard Begins and the End of Independence... 91 Douglas French The Federal Reserve s Housing Bubble and the Skyscraper Curse... 103 Mark Thornton There Is No Accounting for the Fed... 115 William Barnett II ix

x Contents Fiat Money and the Distribution of Incomes and Wealth... 127 Jörg Guido Hülsmann Unholy Matrimony: Monetary Expansion and Deficit Spending... 139 Lucas Engelhardt Information, Incentives, and Organization: The Microeconomics of Central Banking... 149 Peter G. Klein A Stocktaking and Plan for a Fed-less Future... 163 David Howden and Joseph T. Salerno

List of Contributors William Barnett II Joseph A. Butt, S.J. College of Business, Loyola University New Orleans, New Orleans, LA, USA Thomas DiLorenzo Sellinger School of Business, Loyola University Maryland, Baltimore, MD, USA Lucas Englehardt Kent State University, Kent, OH, USA Douglas French Casey Research, Auburn, AL, USA Jeffrey Herbener Grove City College, Grove City, PA, USA David Howden St. Louis University, Madrid, Spain Jörg Guido Hülsmann Faculté de Droit, d Economie et de Gestion, Université d Angers, Angers, France Peter G. Klein University of Missouri, Columbia, MO, USA Robert P. Murphy Consulting By RPM, Nashville, TN, USA Shawn Ritenour Grove City College, Grove City, PA, USA Joseph T. Salerno Lubin School of Business, Pace University, New York, NY, USA Mark Thornton Ludwig von Mises Institute, Auburn, AL, USA Thomas E. Woods Jr Ludwig von Mises Institute, Auburn, AL, USA xi