I want to tell you, I'm so glad to be here. It's good to be around like-minded people.
I met many of you yesterday, last night when I got in, and I'm talking to many of you.
I'm around people that I can talk about the Fed, and people like nod and agree.
That doesn't happen to me very often. I mean, I work in a university,
and I'll tell you a lot of my colleagues operate on a different plane than I operate on.
We kind of look at the world differently.
For instance, they accept the Fed as a given, as basically as a force for good.
That's what all the Fed-funded monetary theories that they study tell them.
That's what that implies.
Now, as a result, my colleagues are very mystified today by a popular movement
that blames the Fed for the financial crisis of today.
I can assure you that academics on the left and on the right accept the idea that whatever economic growth
that's occurred in the US since 1913 has happened because of sound central banking institutions.
There's a general understanding that whatever it is, they consider to be important functions of government.
War and Military Empire, putting a man on Mars, subsidizing industries, harassing General Motors' competitors,
rebuilding Haiti for the nth time, fill in the blank.
All these things would be much more difficult in a world without central banking.
But, I'm with these people now, and I have tenure, ha, ha, ha.
And in these mailroom discussions about current events that mostly test my sports knowledge, which is lacking, I might add,
central banking has come up a lot in the last two years.
Now, the conservative position, the conservative academic position on central banking is that the Fed should simply increase the money supply at a rate of about 3% a year and keep the government-measured inflation rate,
well, not the actual prices we pay for goods and services, but the government-measured inflation rate increasing at a small, positive and predictable range.
The liberal position is that the Fed should inflate a little bit more, so it can also promote social goals,
like increased housing ownership for the poor or other politically preferred groups.
That's the spectrum of allowable discussion about the role of the Fed.
And it's pretty convenient spectrum because it sort of ignores that the primary role of the Fed
has always been to feed a large centralized Leviathan state.
In fact, I sometimes think we shouldn't call it the Fed.
We should call it the feed, because that's what it does.
Now, both the left and the right happen to accept the Bernankean position,
and Bob said the Milton Friedman and Schwartz position on the Depression,
which is basically that the Fed caused it by not inflating enough,
that it's due to the gold supply's fault that the depression went on.
And if you accept this, it means it had absolutely nothing to do with the unprecedented
and egregious interventions in the market system at the time,
in the goods market, the labor market, the capital markets.
To say nothing of the unprecedented rampant corporatism and protectionism
that characterized the 1930s.
None of this had anything, is it possible that any of this had something to do with causing the depression to last on for a decade?
No, it's just that the Fed was not on the ball.
And so I'm told that, I mean, oh, and the penitent Bernanke apologized for this in 2002, right?
He apologized for the Fed's role in causing the depression.
And so we're supposed to believe that, I mean, thank goodness that FDR was there to save capitalism.
and thank goodness we have a better understanding of monetary theory today
so that we'll never have to go through anything like that ever again.
Well, we'll see.
Now, mainstream academics are not bad people, but I think they're rather narrow in their outlook.
I mean, they often teach what's in the, most of them teach what's in the approved textbooks
and then they try to publish in academic journals and that's all they're really concerned about.
I remember reading recently about a tenured professor at a Big Ten University
who admitted after viewing that famous Keynes-Hayek rap video, who's seen that?
All right.
I felt rather hip when I saw it myself.
I understood it.
The four-letter word was gold. It's a dirty word.
Anyway, after viewing the now famous, he had never even heard of Hayek.
The guy's a PhD, he's a Big Ten school, he'd never even heard of Hayek.
I mean, the guy just happened to win the Nobel Prize in 1974.
So you can imagine the responses I get from fellow academics when I tell them that perhaps the Fed itself is the problem,
that it should be abolished, and that we should let the market determine the type and amount of money in circulation.
The responses are blank stares.
The idea just isn't on their radar screens. It's kind of like what Bob said about Scott Sumner, who's a smart guy.
Things like that cannot be inputted into their abstract models.
So it's not a part of their world.
But really, we didn't have central banking for the most part in the United States during the 19th century,
a time that, I mean, overlapped the incredible industrial revolution.
It's not like the absence of central banking isn't tremendous with incredible economic
growth and the alleviation of poverty. One of the cases here is that the absence of central
banking forced political power to be decentralized, which had the effect of making property rights
more secure and therefore more productive in terms of generating wealth. If forever
had similar rates of growth again in the present century, a prerequisite would be the abolishment
of the Fed, among several other things I won't go into right here, but again I receive blank
stares when making these arguments. In academia there's often a disconnect between the theoretical
world and the real world. Sometimes we'll hear the response, yes, but abolishing the
Fed, isn't that like throwing out the baby with the bath water? Ever hear that? Now I'm
I'm glad, because the correct answer to that is yes.
But what if it's Rosemary's baby?
Now if you're below a certain age, that's a Roman Polanski movie
about a pregnant woman played by Mia Farrow
who learns of a satanic coven in New York City
that has nefarious plans for her yet to be born baby.
They want it to be a living devil.
Could such a baby be killed?
Well, we're around that point right now
with the Fed, which is no longer a baby,
and I've long thought about that movie in recent years.
You might say that the Fed is the demon child
of the progressive era.
It was not killed then.
It's lived a long life since.
But there's a natural life cycle
I think. I hope. It's not like I'm an expert on demon children. I remember my daughter when she was two, and I remember some of my students last week.
But we are, after all, discussing the Fed's birth and death. No one's saying we should throw holy water on the Fed governors, although frankly the idea does produce an amusing visual picture.
Simply talking about its demise, planning the idea into the public mind, is having the same effect.
Let me tell you, and especially if you've seen following the news this past week,
the idea is terrifying to those politically well-connected groups in society that benefit from the Fed and its inflation.
That this child would grow up to become a vast inflation machine would have surprised no one at its birth.
That's why many opposed the creation of a national bank, which they wanted to be an American version of the Bank of England following the Revolutionary War.
Let's look at the period leading up to the Fed's birth.
Now, the secret of meetings at Jekyll Island and the passage of the Federal Reserve Act in 1913 didn't occur in a vacuum.
In fact, I'd argue that the Fed was not born in Jekyll Island at all, but rather was born of an act of Congress in 1913 and that it was previously conceived here and then midwifed through Congress.
I'd add that conceptions can be messy experiences. They're often preceded by a long period of courtship and wooing.
It says a lot about the American people's deep-seated revulsion toward the idea of state-managed monetary systems that it took the political and economic forces that stood to benefit from a central bank several generations before they'd succeed in foisting one on the country.
But that one would be wanted, that a central bank would be wanted, should have been no surprise.
Prize. What government since the beginning of time, and you can go back to ancient Lydia
in the year 600 BC, where the first coins were invented, has not wanted and then used
some monopoly power over the production of money to engage in wealth redistribution.
In that sense, central banking could be the second oldest profession. Although in the
It was well known at the time of the American Revolution that it took generations of unlearning these lessons that allowed the progressives to get away with one of their two destructive acts in 1913.
The other being the passage of the 16th Amendment to the Constitution, which created the income tax.
Let me tell you, I'm looking forward to our conference on the birth and death of that.
The Caesars did it in Rome to finance the lifestyles of the ruling classes, their wars, and stadiums throughout the known world.
In medieval times, scholastic thinkers, both Catholic and Protestant, railed against the kings who harmed their people by inflating their currencies, thus imposing the regressive tax of higher prices.
One of my favorites was the Spanish Jesuit Juan de Mariana, who invoked the papal bull Coeni Domini, which excommunicated any ruler for raising taxes, to justify excommunicating rulers who debased the currency.
Mariana considered taxes and inflation as equal forms of theft and as an evil that could endanger one's soul.
The King didn't like Mariana's writings and threw the 73-year-old priest in prison for making this argument public.
It's little wonder that Murray Rothbard considered Mariana a Proto-Austrian.
By the way, if you look at the state of the Spanish economy today, the results of its
long attachment to its fiat currency and the results of its long attachment to the fiat
currency, you can see the cost of Spain's neglect of its great scholastic tradition,
which is currently being rejuvenated by its Austrian economists.
Let's fast forward now to the 1780s when the courtship of the present system really began.
Even during the time of the Articles of Confederation, there were efforts to birth an early version
of our demon child, known as the Bank of North America, by the very classes that benefited
from the fiat currency, the continental, during the Revolutionary War. These are classes that
benefit from government spending and in fact only exist because of government spending,
and not due to any special demand for their output in the market. One of the precursors
One of the precursors of classes, or these are the precursors of these classes that benefit from inflation today.
One historian of the period called the Articles of Theor, the Articles of Confederation,
the beginning of the Federal Trough, one of America's most imperishable institutions.
The leader of this class was Robert Morris, a Philadelphia merchant who assumed great power in the Continental Congress
and who was the first leader of the Bank of North America.
When revolutionary war debt rightly depreciated,
Morris agitated for debt holders to be paid at par,
something that immediately enriched those who purchased debt at depreciating values.
Sweet deal, right?
It's not that different from more recent efforts to bail out AIG with TART money
so that Goldman Sachs and others could be reimbursed on par for investments that they made that otherwise would have depreciated with falling housing values.
Government efforts to create a system of privatized profits while socializing losses, what a concept!
And it didn't just begin with the Bush-Obama era, although one is glad to see so many Americans finally are catching on to these schemes.
It's a system that occurs only to the extent that the government can thwart market forces.
After the Constitution was ratified, Morris's protege, Alexander Hamilton, succeeded in
creating the Bank of the United States, which would pick up where the Bank of North America
left off.
This bank was considered controversial from the very beginning.
It was created in 1791, and it was controversial because nowhere in the Constitution allowed
It immediately began inflating to the extent that producer prices rose at a rate of about 12% a year for its first 6 years of existence. Rothbard notes that this inflation financed spending on military programs and interest on existing debt and had the effect of enlarging the number of classes that come to depend on government inflation.
The bond between monetary and foreign policies has roots going back to the very beginning of the nation's founding.
Now, at the time, the federal government was rightly ignored by the rank and file.
It was just not pertinent to their lives.
But the die was cast, the justification for government inflation as being necessary,
John Quincy Adams would later say, to go abroad and slay dragons we do not understand in the name of spreading democracy was set.
This was going to happen whether or not citizens were willing to pony up the taxes in order to make it happen.
The result would be, as always, fortunes to be made by those who exist primarily on government spending.
Now I pause here to note the obvious in case it might not be obvious to everyone. Governments
then as well as governments today have to fund themselves through coercion or trickery.
Now coercion can take the form of plunder, but the more sophisticated manner is taxation.
That's why it's a joke on us when the IRS claims to be funded by contributions, which
which is how some of its literature puts it.
Debt is another sophisticated form of coercion, but that's simply a form of future taxation.
Note well that this is an essential characteristic of states.
If they weren't financed through force or through the threat of force,
meaning if they were financed solely through voluntary contributions and exchanges,
Trickery is a form of fraud in which governments are indirectly financed by the masses, who
may not notice they are being looted.
When the king clips his coins, thus allowing him to spend more money than he could before,
Or when Bernanke ratchets up bond purchases, thus allowing the government to spend more
than it could before, and increasing bank reserves as well.
The result isn't an increase in wealth, but transfers of wealth, and an eventual increase
in prices, or an upward pressure on prices at least.
So inflation is a form of trickery, and it's preferred by governments for various reasons.
First, when the new money reaches the politically preferred groups, they get to spend it first.
The prices have not yet risen.
They will eventually rise in response to the increase for demands in goods and services
that result simply because the new money is in circulation.
This way, government can grow without risking an immediate political cost.
Second, the rise in prices is equivalent to an increase in taxes.
This form of finance is preferred because people often do not make the connection between the increase in prices and the previous monetary inflations.
In fact, they often blame greedy businesses for raising prices when those businesses are simply raising prices in response to changes in supply and demand conditions.
There's a lag between the increase in prices and the government's inflation that makes their relationship less obvious.
But it was obvious enough at the end of the first Bank of the United States Charter that
it was not renewed.
It took financing the War of 1812 to get a second Bank of the United States Charter,
and it picked up where the previous one left off.
It set in place a boom and bust cycle that ended in what is called the Panic of 1819.
This raised the ire of one of my favorite politicians in American history, a politician
and Farmer, named John Taylor of Caroline. Now, Taylor represented those people who argued
for a United States in the plural, opposed the Constitution, and demanded provisions within
it that would both restrict the Federal Government and nurture, hopefully nurture, a republic.
Okay, so he would have won the CPAC straw poll of 1820.
Needless to say, Taylor opposed the federal government's courtship with central banking
and laid the blame for the 1819 panic directly on the steps of the Bank of the United States.
Now think about how pertinent Taylor's arguments apply to today's debates.
There's really nothing new. This has been a long-running theme in American history if we studied it.
Quote, in also ascribing our distresses to a diminution of bank currency, he's referring
to the post panic credit crunch, and urging it as an evidence of bad policy, we ought
to have foreseen that the history of this fact was understood by the nation. We know
that the increase in the money supply was caused by the expenses of the last war and
and by the influence of the banking bubble to awaken fraudulent speculations and not
by manufacturers. Public expenditures and naivish designs united to produce the banking
bubble, which was urged by the government as a proof of national prosperity. It was
in fact one cause of national and individual distress. It tempted governments to launch
It plunged into an ocean of extravagance and individuals into an ocean of speculation.
It produced a great number of bubbles under the denomination of internal improvements,
having the effect of enriching projectors and undertakers and impoverishing the people.
The bursting of the banking tumor left behind the sores of public extravagance, foolish
English public contracts, excessive taxation and great private debt, all of which it had
generated and these are proposed to be cured by letting them run on and promoting a new
gangrene by a new bubble of granting an enormous new bounty to another set of undertakers.
So what's he describing? He's describing this hair-of-the-dog strategy, which I believe
Hayek accused Keynes of, which is to create a new round of credit expansion, which is
exactly what the powers-that-be are trying to do right now, right?
Taylor later argues that these results could have been predicted given the experience of
revolutionary war finance. He wrote, quote, the local redundancy of money, meaning inflation,
defined to a few persons and factories, meaning these politically well-connected groups that
benefit from the new money, was originally produced and then subsequently increased by
increasing more to transfer than to exchange property. The sudden appreciation of revolutionary
certificates above twenty-fold beyond the value at which they were bought was a transfer
In this acquisition, the majority in no state participated. It was bestowed on the initiated few, skilled in the secrets of legislation, and able to manage its stratagems for their own emolument or benefit.
What Taylor is pointing out is that early on, those who benefit from government spending through inflation will plow a certain amount of their wealth back to Washington to perpetrate political support for the system.
Why have I never seen that circular flow diagram in my macro texts?
These things hardly started with people like Crook Dodd and Barney Frank.
It's ironic that the party of Dodd and Frank began in opposition to these early forays into central banking.
The Democratic Party gained prominence first as being the party that opposed the Bank of the United States.
In the process, it tapped into an anti-state sentiment that was so strong that we wouldn't see another one again until the next century.
Their adversaries were Whig politicians who defended the bank and its ability to grow the government and their personal fortunes at the same time.
at the same time. They were, in fact, quite open about these arrangements.
It was considered standard operating procedure for Whig representatives, for instance,
to receive money or monetary compensation for supporting the bank
when they left Congress. And one Whig congressman, Daniel Webster,
even expected annual payments while in Congress.
Once he complained to the Bank
of the United States President, Nicholas Biddle, that the payments
were being delayed, causing him to complain, quote,
I believe my retainer has not been renewed or refreshed as usual.
It may be wished, or if it be wished, that my relation to the bank should be continued.
It may be well to send me my usual retainer.
No wonder these people are pummeled with canes on the House floor.
It's little wonder that early Democrats garnered such popular support and would demand that
by Andrew Jackson and America's experiment with central banking, Jackson called it, quote,
dangerous to the liberty of the American people because it represented a fantastic centralization
of economic and political power under private control. Hard to believe the guy who said
that is now on the 20. Jackson also said the Bank of the United States was, quote, a vast
electioneering machine and could control the government and change its character. These
These sentiments were echoed by Roger Taney, Jackson's Treasury Secretary, who talked to
the banks, quote, corrupting influence and ability to influence elections.
And the Whigs would get their revenge on Taney later when he was Chief Justice, when Lincoln
had him issued an arrest warrant for him for writing an opinion that he disagreed with.
I think it had to do with habeas corpus.
But the courtship would go on.
These politically well-connected groups that benefited from early central banking would
The Federal Reserve would control the Whig and then the Republican parties, and then they would gain support of the Democratic Party over time, and they would continue to gain off of government finance, especially off of these internal improvements, which is, by the way, the 19th century word for pork. National banking would appear during the Uncivil War, setting in place a banking system in which individual banks would be chartered by the federal government. The government itself would use regulations to encourage bank's inflation and protect them from monetary
The boom and bust cycle, as explained by the Austrian School, became worse and worse leading up to 1913.
Now this is how that happens. Banks issued currency based on an actual supply of goods, usually gold and silver.
Now if they issued currency in direct proportion to their supply of gold and silver, they'd be engaging in what we would call 100% reserve banking
In direct proportion to their supply of gold and silver, they'd be engaging in what we
would call 100% reserve banking and the accounts will then clear. But if they gave into the
temptation to engage in fraud by printing more money in greater proportion than their
supply of gold and silver, then they're engaged in what we call fractional reserve banking.
Now when they did this, there'd be price inflation resulting from an increase of money
on the Market. There is also a redistribution of income and wealth because people are purchasing
goods not in exchange for an existing supply of gold and silver but in exchange now for
nothing. There were increases in economic activity but they are not sustainable because
they are not financed through real saving. When people in the market caught on to such
practices they would demand gold and silver in exchange for their existing supply of the
Inflating Banks Currencies, fraudulent banks can run out of gold and silver completely,
which provides a strong market incentive not to engage in fractional reserve banking.
The fear of bank runs, think of the end of the great money and banking movie, Mary Poppins,
or the great scene in the movie, It's a Wonderful Life.
These were healthy fears.
But with the progressive era spending on war and welfare and with the pressure on banks
Banks to inflate all this activity. The boom and bust cycles grew worse and worse.
One great thing about this period, in my opinion, was that the banks were forced to internalize
their losses. When banks faced runs on their currencies, private financiers would bail
them out, internalizing losses instead of socializing them. Who would have ever thought
Of course, when these losses grew, those financiers would secretly organize to reintroduce central
banking in America, thus engineering an urgent need for a new, quote, lender of last resort.
The meetings here at Jekyll Island marked the time when the courtship led to the Fed's
conception and to what I would consider its actual birth in 1913. This was the implicit
Socialization of the Banking Industry in the United States. People call the Federal Reserve
Act the currency bill because it was to create a bureaucracy that would assume the currency
creating duties of member banks. It was like the Pay Trade Act in that both were centralizing
bills that were written years in advance by people waiting for the appropriate political
environment to introduce them. It was like our current health care bills in which cartelized
Most firms in private industry wrote chunks of the legislation behind closed doors before
they were introduced into Congress.
It is incredible to me that the private banks would be willing to transfer billions of dollars
worth of gold and silver to the newly created Federal Reserve system and then relinquish
their currency-making abilities.
This was justified on the belief not that the government wouldn't inflate, but that
that it would do it better than the banks could and without market penalties.
And of course, Mises would argue that this is just a matter of holding of you would just
hold the banks to the same requirements you hold any other firm operating in the market
that you wouldn't have these problems that they were ostensibly trying to address here
or when they passed the Federal Reserve Act.
Mises would write later this, what's needed to prevent further credit expansion is to
To place the banking business under the general rules of commercial and civil laws, compelling
each individual and firm to fulfill all obligations in full compliance with the terms of contract.
Why not?
The bill passed fairly easily in part because the Democrats had a larger majority in both
houses than they do today.
There were significant differences that were resolved in conference, including the idea
The idea that it only required 40% of the gold supply was necessary to print money.
What that meant was instead of a one-to-one relationship between gold and silver, you had a relationship that was one to 2.5.
Juan de Mariana's days had long passed. No one was excommunicated, much less exercised.
The bill that was drawn up at Jekyll Island was signed by Wilson in the Oval Office shortly
after the Senate approved it. Actually, it was signed hours after the Senate approved
it. This was the real birthing of the Fed, and you can picture the solemn scene as reported
by the New York Times. Quote, In addition to the three gold pens purchased by the President
with which to sign his signature, apparently presidents at this age used to purchase the
Senator Chilton of West Virginia had presented another gold pen, which he asked the president
to use. With Senator Chilton's pen, President Wilson wrote the words, approved, 23 December
1913, remarking as he did so, I'll do the deed first and then I'll have something to
Then he took up one of the plain gold pens and wrote his first name, Woodrow, on it.
With the second of the plain gold pens, he wrote his first syllable of the last name
and finished his signature with the other pen.
I'm using a series of pens, explained the president to the gathering.
I'm sure their jaws all dropped.
In response came the deep voice of Senator James Hamilton Lewis of Illinois.
The bill came forth in installments.
Everybody laughed at this, and there was another laugh when the president, as he reached for
the fourth pen, remarked, I'm drawing on the gold reserve.
Truer words were never spoken.
Again, I come back to what people think will happen in theory, to what actually happens
in the real world.
Federal banks always result in feeding those forces that would centralize and expand the
nation state. The Fed's policies in the 1920s, so well documented by Rothbard, would provoke
the crisis that, in the end, wrenched political power from the cities and state governments
to the swamp land in Washington. People today take seriously the claim that there can be
a viable federal solution to virtually any problem thanks to the money printed up by
by the Fed, while each decade has seen a larger proportion of the population become dependent on its inflation.
The progressives had their demon child who would fuel so many of their plans.
It would remove major financial obstacles to entering the senseless slaughter in Europe a mere three years later.
I'm so glad we are here discussing its death, or at a point in history where we can actually do this.
I don't think the Fed will die of an act of Congress similar to the one that created it.
Yes, I'd like to see it ended amidst a popular Jacksonian or Ron Paulian-like uprising.
But it's more likely that it will die the death of the Interstate Commerce Commission,
slowly, long after being made irrelevant by market forces.
There are life cycles even for demon children.
When this one dies, there will be one less robbing, conniving, secretive institution in the world.
When this happens, believe me, I'll be crying, but they'll be Glenn Beck tears.