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Essay: End The Fed

March 31, 2009

End The Fed

In 1913 Congress passed the ‘Federal Reserve Act’, creating a quasi public-private institution were bankers, free of government scrutiny, regulate the money supply. The purpose of this institution is to smoothen out the boom and bust cycle of the economy. In the face of political pressure, the Federal Reserve promotes and creates the boom while trying to fight off the inevitable bust. This process is easy to do politically but ultimately destroys the economy by not letting the bad debt liquidate. At the end of the day, who wants to go through a recession? That question is easy to answer whilst the boom is in full steam. Legally speaking the Federal Reserve is unconstitutional; article one section eight of the Constitution explicitly says Congress has the authority to coin and regulate money. The moral hazard of The Federal Reserves role of being the lender of last resort, taking the risk out of economics, ultimately allows people to do to many risky things that end up causing a huge financial mess. All the Federal Reserve does is manipulate the market and it is time it should be abolished.

The Federal Reserve by law controls our monetary policy. Since the Federal Reserve is a government “bank” they “help” other banks by giving them loans. Since they play the role of government “bank” and also set their own loans’ interest rates. The Fed is not a real bank used by the public, they have no savings and have nothing to base a correct interest rate off of.

Typically private banks set their interest rates on the amount of savings that bank has. The more savings, the more capitol is there and more loans can be issued. This process would be fine and create economic growth. What the Fed does is artificially manipulates its interest rate. They have no savings and therefore have to create a formula to determine what the correct rate should be. This process is a lot like keeping the economy balanced. If you start going to fast you bring the interest rate up, to slow down and you lower the interest rate to speed up. The problem is you have no idea how much real capitol is out there. When the interest rate is low, the banks have an incentive in getting loans. The more loans the banks get the more they can therefore loan. If all of this loaning is going on without sufficient savings; there will not be enough savings or capitol to complete the projects started.  When you start the project it creates a temporary boom, but when you find out the project cannot be finished it falls through and the bust occurs. This is in essence a small-scale cycle of what the Fed does to the economy, a paradigm of false booms that creates the horrible busts.

Along with the role of being the government “bank” the Fed also is the “lender of last resort” This concept sounds really good, and sells well politically but you have to look at all the consequences of such a role. The Federal Deposit Insurance Corporation (FDIC) protects your deposits in case the bank goes under. This program is funded at the expense of the taxpayer and takes the risk of lending by the bank out of the equation. In this day and age more people spend more time shopping and researching for a T.V. than a bank. This is because everybody feels safe wherever he or she puts his or her money. The problem is that when you take the risk out, the banks do riskier things. It creates a market where banks care less about their balance sheets and deposits and just want to make as many loans as they can to make money. Risk is needed in a free economy, this ensures people act responsibly and those who do not, fail.

There are a large number of people out there who say the Fed is needed to play these roles in order to have stability. I have been studying economics for about a year now and the most important thing that I have learned is that the key to a prosperous economy is freedom, and the free allocation of capitol. Some fear the free market is too risky on it’s own and they often point to the great depression as the grand example of the failures of the free market. I fear that many people have a great misunderstanding of the great depression. Most have learned that Hoover was a very hands-off, Laissez-faire guy during a downturn in the late 1920’s. Due to his inaction the recession turned into a depression and Roosevelt came in and saved the day with all of his government programs. This story has actually been blurred throughout the years. Hoover actually imposed crippling tariffs, and increased government spending. According to “FDR’s Folloy: How Roosevelt And His New Deal Prolonged The Great Depression” by CATO senior fellow Jim Powell, Hoover actually setup a program called the Reconstruction Finance Corporation. This program would help rescue banks. These actions were the exact opposite of what the government did during the downturn before that followed WWI. Nobody has heard of the recession of 1920 because the government did nothing to help and the market fixed itself and returned to normal within a year or two. People do not have trust in the free market; they think it is some willy-nilly roller coaster ride. What they fail to see is that it is more like a complex ecosystem that always finds balance. There is a reaction for ever action.

Freedom and the Constitution go hand in hand. To uphold the free economy you need to strictly follow the Constitution. The constitutional argument, not surprisingly would have the least amount of potency considering most members of Congress do not even read the Constitution or uphold it correctly. The Constitution explicitly says that Congress shall regulate and coin money (Article 1; Section 8). People often think that since Congress voted to create the Fed that it is constitutional. That is like saying if the President told the Supreme Court “Hey guys, this war on terror is really tough, you are all commanders in chief now” it would be OK. When the Constitution is explicit about a power, that power should not be infringed upon. Congress does so much it is not supposed to do, at least do what the Constitution tells you.

You would think since Congress created it, Congress could regulate it. That is not the case either. The Fed is free from public scrutiny, cannot be audited, does not have to answer to Congress or the President, and is run by a small circle of Bankers. Some say the Fed is as “Federal” as “Federal Express”, yet as secret as the “CIA”. You would think that a group like this would at least be at the whim of the Congress.

As an alternative to this mess I simply ask the Congress to do what is constitutionally, and morally right. Congress should regulate and coin our money themselves, tie the dollar down to a commodity and stop this politically charged business cycle. Stop playing with the market, and start being responsible. The power to create and destroy wealth is the most powerful tool is the modern world; it ought to be given to the People as it was intended. It is time to ‘End The Fed’

– Jon Lauro

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3 Comments leave one →
  1. March 31, 2009 2:21 PM

    This blog’s great!! Thanks :).

  2. martin permalink
    April 1, 2009 4:06 PM

    Jon,
    congratulations on your site, keep up the good work.
    I emigrated from socialist western Europe many years ago. Watching the current spending mania train wreck is painful. Hope sane heads a’la Mises and Ron Paul will eventually (soon) prevail.

  3. Jeff permalink
    June 13, 2009 3:33 AM

    Beast ending

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