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Central Banking

Clyde Gerome U.S. Economic History

Abstract Page An opinion on the role of Central Banking in the United States, its fallacies, and role in the economic crisis’ that the U.S. has faced since its ultimate establishment in 1913. The purpose of this report is to convince the reader that the Federal Reserve has done more harm than good for the economy of the United States. The report talks about the origins and founders of the Federal Reserve; it compares the current economic crisis to stagflation of the 1970s; it also discusses many ways the economy could possibly be improved without a central bank.

Central Banking

Over the past year or so, different currencies and commodities have been praised such as Gold, Silver, Diamonds and even the new-fangled Bitcoin. Influential leaders and economists have said that these commodities will bring and end to the dollar. There is another entity looming visibly, but invisibly affecting the value of the dollar. This entity is rarely mentioned as the cause for the low value of the dollar and the leaders of this entity are always praised as influential leaders. This juggernaut of economic power is the Federal Reserve and it has been the source of the United States’ economic problems since it was founded in 1913. A private bank owned by the families of Rothschild, Warburg and Rockefeller (Henderson). The Fed turns 100 years old on December 23 in its century of existence the Fed has seen the Great Depression, the destruction of the Gold Standard, short-lived booms, and numerous busts. Created to protect the value of the dollar the fed was given the exclusive right to create money in the year 1913 (Bresiger). The Fed was designed to protect from economic recessions. So, if the Federal Reserve was designed to protect against any economic downturn…why did the Great Depression happen, or any of the recessions that have followed? It seems to me that the Federal Reserve System, the privately owned fortress for monetary alchemy has been more of a thorn in the economy as opposed to a bandage. The origin of the Federal Reserve, and central banking in the United States dates back to the continental congress, Robert Morris forced through the idea of the Bank of

North America and eventually obtained its right to existence with help form the Federalists. (DiLorenzo). According the Murray Rothbard, an economist of the Asutrian School, the ultimate goal of the Federalists:

To reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt. The strong government was to impose high tariffs to subsidize domestic manufacturers, develop a big navy to open up and subsidize foreign markets for American exports, and launch a massive system of internal public works. In short, the United States was to have a British system without Great Britain (Rothbard p. 192).

Strong government and high taxes ruled by a heavy public debt. The bank was designed to provide cheap credit and expanded money. Unfortunately for Robert Morris public skepticism lead to the privatization of the Bank of North America. The First Bank of the United States—The Bank of North America—quickly achieved its inflationary prospective "The result of the outpouring of credit and paper money by the new Bank of the United States was … an increase [in prices] of 72 percent"(Rothbard p. 69) from 1791– 1796 (DiLorenzo). Although the first Bank of the United States was privatized and the second was later abolished by President Andrew Jackson, Nationalists have persistently tried, and in 1913,

succeeded to establish a strong central bank. As I mentioned above, the very problems the central banking system was designed to prevent, have continued to be a frustration to the people of the United States. Robert P. Murphy, a member of the Ludwig von Mises Institute, mentions that the current economic crisis is similar to stagflation of the 1970s and that the Federal Reserve’s bag of tricks is filled with the same solutions, solutions that were not— and are not—effective. Most economists, both free market and Keynesian were—and have been—baffled by these economic crisis’ (Murphy). It would seem that the Fed is trying to print more and more money to “inflate it’s way out of the crisis”(Murphy), however that seems to be the logical fallacy that has continually gotten the Fed into the mess it is in now. Printing money, buying up debt, devaluation of the dollar, and inflation of prices within the financial sector has been the Fed’s fix for everything, and from my point of view, it hasn’t worked. The Federal Reserve has destroyed the beauty of a private baking system. Banks base their interest rates on the amount of money people save, if more people are saving money, the lower the interest rate—similarly if there is less money being save, the higher the interest rate. The Fed, with the idea that it is helping stimulate economic growth, artificially, fixes the interest rates to be low. This prompts banks to lend more and people to spend more in hopes that the flow of cash will eventually multiply and stimulate the economy. However, this has resulted in what F.A. Hayek called the Boom and Bust Cycle. In a 1995 article from The Freeman, author Robert Batemarco reiterates the problems with the Federal Reserve, but also provides an alternative to inflationary fiat currency controlled by a central bank, Mr. Batemarco states:

The average person looks to central banks to maintain full employment and the value of the dollar. The historical record makes clear that a sound dollar was never the Fed’s intention. Nor has the goal of full employment done more than provide them with a plausible excuse to inflate the currency. The Fed has [c]ertainly not covered itself with glory in achieving either goal. Should this leave us in despair? Only if there is no alternative to central banking with fiat money and fractional reserves. History, however, does provide us with an alternative which has worked in the past and can work in the future. That alternative is gold (Batemarco).

Gold, although subject to corrections in value, is a far more solid currency than fiat currency as it is limited in supply and inflation is near impossible create with gold under a 100 percent gold banking standard as Murray Rothbard argued for. In Rothbard’s view monetary policy would be changed so that bank note and deposit holders would be “owners-in-law of the gold in the bank vaults.” Banks would therefore be treated as “money warehouses.”(Rothbard) The Rothbardian solution to banking, with the 100 percent gold dollar, seems to me to be the best solution to fix the economic issues that the United States has faced throughout its existence. To have a currency that protects against hyperinflation, monetary devaluation would help to prevent drastic economic bubbles. The “Boom and Bust Cycle” would not be a constant worry; business growth would not be staggered. The entire central banking system, all history considered, has been a failure. It is near impossible for me to find one good thing that has been brought about from the

“Creature from Jekyll Island”. It would seem that it is time to avoid insanity and try something new…perhaps logic would be a good start.

Works Cited Bresiger, Gregory. "The Ludwig Von Mises Institute." The Fed Turns 100: A Survey of the Critics. LvM Institute, 5 Dec. 2013. Web. 10 Dec. 2013. <http://mises.org/daily/6602/The-Fed-Turns-100-ASurvey-of-the-Critics>. DiLorenzo, Thomas J. "The Ludwig Von Mises Institute." The Corrupt

Origins of Central Banking. LvM Institute, 5 Nov. 2008. Web. 10 Dec. 2013. <http://mises.org/daily/3167>. Henderson, Dean. "Global Research." Global Research. Global Research, 1 Jan. 2011. Web. 06 Dec. 2013. <http://www.globalresearch.ca/the-federal-reserve-cartel-the-eightfamilies>. Murphy, Robert P. "The Ludwig Von Mises Institute." The Problems of Central Bank Planning. LvM Institute, 4 Apr. 2008. Web. 10 Dec. 2013. <http://mises.org/daily/2930>. Rothbard, Murray Newton. The Case for a 100 Percent Gold Dollar. Auburn, Ala.: Praxeology of the Ludwig Von Mises Institute, Auburn University, 1991. Print. Rothbard, Murray Newton. A History of Money and Banking in the United States: The Colonial Era to World War II. Auburn, Ala.: Ludwig Von Mises Institute, 2002. Print. Rothbard, Murray Newton. The Mystery of Banking. New York, NY: Richardson & Snyder, 1983. Print.