WEBVTT NOTE Why the Fed Got Birthed 1 00:00:00.000 --> 00:00:04.000 I want to tell you, I'm so glad to be here. It's good to be around like-minded people. 2 00:00:04.000 --> 00:00:10.000 I met many of you yesterday, last night when I got in, and I'm talking to many of you. 3 00:00:10.000 --> 00:00:16.000 I'm around people that I can talk about the Fed, and people like nod and agree. 4 00:00:16.000 --> 00:00:22.000 That doesn't happen to me very often. I mean, I work in a university, 5 00:00:22.000 --> 00:00:29.000 and I'll tell you a lot of my colleagues operate on a different plane than I operate on. 6 00:00:29.000 --> 00:00:31.800 We kind of look at the world differently. 7 00:00:31.800 --> 00:00:37.600 For instance, they accept the Fed as a given, as basically as a force for good. 8 00:00:37.600 --> 00:00:45.600 That's what all the Fed-funded monetary theories that they study tell them. 9 00:00:45.600 --> 00:00:48.000 That's what that implies. 10 00:00:48.000 --> 00:00:55.000 Now, as a result, my colleagues are very mystified today by a popular movement 11 00:00:55.000 --> 00:01:00.200 that blames the Fed for the financial crisis of today. 12 00:01:00.200 --> 00:01:06.000 I can assure you that academics on the left and on the right accept the idea that whatever economic growth 13 00:01:06.000 --> 00:01:13.300 that's occurred in the US since 1913 has happened because of sound central banking institutions. 14 00:01:13.300 --> 00:01:19.100 There's a general understanding that whatever it is, they consider to be important functions of government. 15 00:01:19.100 --> 00:01:33.060 War and Military Empire, putting a man on Mars, subsidizing industries, harassing General Motors' competitors, 16 00:01:33.060 --> 00:01:38.420 rebuilding Haiti for the nth time, fill in the blank. 17 00:01:38.420 --> 00:01:44.540 All these things would be much more difficult in a world without central banking. 18 00:01:44.540 --> 00:01:57.940 But, I'm with these people now, and I have tenure, ha, ha, ha. 19 00:01:57.940 --> 00:02:06.340 And in these mailroom discussions about current events that mostly test my sports knowledge, which is lacking, I might add, 20 00:02:06.340 --> 00:02:10.340 central banking has come up a lot in the last two years. 21 00:02:10.340 --> 00:02:23.940 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, 22 00:02:23.940 --> 00:02:34.340 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. 23 00:02:34.340 --> 00:02:40.440 The liberal position is that the Fed should inflate a little bit more, so it can also promote social goals, 24 00:02:40.440 --> 00:02:48.040 like increased housing ownership for the poor or other politically preferred groups. 25 00:02:48.040 --> 00:02:53.740 That's the spectrum of allowable discussion about the role of the Fed. 26 00:02:53.740 --> 00:03:03.740 And it's pretty convenient spectrum because it sort of ignores that the primary role of the Fed 27 00:03:03.740 --> 00:03:09.260 has always been to feed a large centralized Leviathan state. 28 00:03:09.260 --> 00:03:11.660 In fact, I sometimes think we shouldn't call it the Fed. 29 00:03:11.660 --> 00:03:19.740 We should call it the feed, because that's what it does. 30 00:03:19.740 --> 00:03:23.860 Now, both the left and the right happen to accept the Bernankean position, 31 00:03:23.860 --> 00:03:28.940 and Bob said the Milton Friedman and Schwartz position on the Depression, 32 00:03:28.940 --> 00:03:32.900 which is basically that the Fed caused it by not inflating enough, 33 00:03:32.900 --> 00:03:39.100 that it's due to the gold supply's fault that the depression went on. 34 00:03:39.100 --> 00:03:44.100 And if you accept this, it means it had absolutely nothing to do with the unprecedented 35 00:03:44.100 --> 00:03:47.600 and egregious interventions in the market system at the time, 36 00:03:47.600 --> 00:03:51.000 in the goods market, the labor market, the capital markets. 37 00:03:51.000 --> 00:03:57.300 To say nothing of the unprecedented rampant corporatism and protectionism 38 00:03:57.300 --> 00:03:59.800 that characterized the 1930s. 39 00:03:59.800 --> 00:04:09.800 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? 40 00:04:09.800 --> 00:04:13.200 No, it's just that the Fed was not on the ball. 41 00:04:13.200 --> 00:04:18.900 And so I'm told that, I mean, oh, and the penitent Bernanke apologized for this in 2002, right? 42 00:04:18.900 --> 00:04:23.200 He apologized for the Fed's role in causing the depression. 43 00:04:23.200 --> 00:04:28.800 And so we're supposed to believe that, I mean, thank goodness that FDR was there to save capitalism. 44 00:04:28.800 --> 00:04:32.600 and thank goodness we have a better understanding of monetary theory today 45 00:04:32.600 --> 00:04:37.300 so that we'll never have to go through anything like that ever again. 46 00:04:37.300 --> 00:04:40.300 Well, we'll see. 47 00:04:40.300 --> 00:04:48.300 Now, mainstream academics are not bad people, but I think they're rather narrow in their outlook. 48 00:04:48.300 --> 00:04:54.100 I mean, they often teach what's in the, most of them teach what's in the approved textbooks 49 00:04:54.100 --> 00:04:59.460 and then they try to publish in academic journals and that's all they're really concerned about. 50 00:04:59.460 --> 00:05:04.140 I remember reading recently about a tenured professor at a Big Ten University 51 00:05:04.140 --> 00:05:09.660 who admitted after viewing that famous Keynes-Hayek rap video, who's seen that? 52 00:05:09.660 --> 00:05:12.260 All right. 53 00:05:12.260 --> 00:05:15.820 I felt rather hip when I saw it myself. 54 00:05:15.820 --> 00:05:20.380 I understood it. 55 00:05:20.380 --> 00:05:23.820 The four-letter word was gold. It's a dirty word. 56 00:05:23.820 --> 00:05:28.300 Anyway, after viewing the now famous, he had never even heard of Hayek. 57 00:05:28.300 --> 00:05:31.780 The guy's a PhD, he's a Big Ten school, he'd never even heard of Hayek. 58 00:05:31.780 --> 00:05:36.700 I mean, the guy just happened to win the Nobel Prize in 1974. 59 00:05:36.700 --> 00:05:43.100 So you can imagine the responses I get from fellow academics when I tell them that perhaps the Fed itself is the problem, 60 00:05:43.100 --> 00:05:50.180 that it should be abolished, and that we should let the market determine the type and amount of money in circulation. 61 00:05:50.180 --> 00:05:53.460 The responses are blank stares. 62 00:05:53.460 --> 00:05:59.460 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. 63 00:05:59.460 --> 00:06:04.460 Things like that cannot be inputted into their abstract models. 64 00:06:04.460 --> 00:06:08.460 So it's not a part of their world. 65 00:06:08.460 --> 00:06:15.460 But really, we didn't have central banking for the most part in the United States during the 19th century, 66 00:06:15.460 --> 00:06:21.460 a time that, I mean, overlapped the incredible industrial revolution. 67 00:06:21.460 --> 00:06:25.740 It's not like the absence of central banking isn't tremendous with incredible economic 68 00:06:25.740 --> 00:06:31.180 growth and the alleviation of poverty. One of the cases here is that the absence of central 69 00:06:31.180 --> 00:06:36.980 banking forced political power to be decentralized, which had the effect of making property rights 70 00:06:36.980 --> 00:06:42.820 more secure and therefore more productive in terms of generating wealth. If forever 71 00:06:42.820 --> 00:06:49.460 had similar rates of growth again in the present century, a prerequisite would be the abolishment 72 00:06:49.460 --> 00:06:57.120 of the Fed, among several other things I won't go into right here, but again I receive blank 73 00:06:57.120 --> 00:07:03.100 stares when making these arguments. In academia there's often a disconnect between the theoretical 74 00:07:03.100 --> 00:07:08.700 world and the real world. Sometimes we'll hear the response, yes, but abolishing the 75 00:07:08.700 --> 00:07:15.380 Fed, isn't that like throwing out the baby with the bath water? Ever hear that? Now I'm 76 00:07:15.380 --> 00:07:19.680 I'm glad, because the correct answer to that is yes. 77 00:07:19.680 --> 00:07:24.980 But what if it's Rosemary's baby? 78 00:07:24.980 --> 00:07:29.580 Now if you're below a certain age, that's a Roman Polanski movie 79 00:07:29.580 --> 00:07:32.780 about a pregnant woman played by Mia Farrow 80 00:07:32.780 --> 00:07:35.980 who learns of a satanic coven in New York City 81 00:07:35.980 --> 00:07:39.780 that has nefarious plans for her yet to be born baby. 82 00:07:39.780 --> 00:07:42.680 They want it to be a living devil. 83 00:07:42.680 --> 00:07:45.980 Could such a baby be killed? 84 00:07:45.980 --> 00:07:47.580 Well, we're around that point right now 85 00:07:47.580 --> 00:07:49.500 with the Fed, which is no longer a baby, 86 00:07:49.500 --> 00:07:53.140 and I've long thought about that movie in recent years. 87 00:07:53.140 --> 00:07:56.520 You might say that the Fed is the demon child 88 00:07:56.520 --> 00:07:59.820 of the progressive era. 89 00:07:59.820 --> 00:08:04.100 It was not killed then. 90 00:08:04.100 --> 00:08:07.300 It's lived a long life since. 91 00:08:07.300 --> 00:08:08.840 But there's a natural life cycle 92 00:08:08.840 --> 00:08:25.840 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. 93 00:08:25.840 --> 00:08:37.840 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. 94 00:08:37.840 --> 00:08:44.840 Simply talking about its demise, planning the idea into the public mind, is having the same effect. 95 00:08:44.840 --> 00:08:49.840 Let me tell you, and especially if you've seen following the news this past week, 96 00:08:49.840 --> 00:08:58.840 the idea is terrifying to those politically well-connected groups in society that benefit from the Fed and its inflation. 97 00:08:58.840 --> 00:09:04.840 That this child would grow up to become a vast inflation machine would have surprised no one at its birth. 98 00:09:04.840 --> 00:09:13.840 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. 99 00:09:13.840 --> 00:09:17.840 Let's look at the period leading up to the Fed's birth. 100 00:09:17.840 --> 00:09:25.840 Now, the secret of meetings at Jekyll Island and the passage of the Federal Reserve Act in 1913 didn't occur in a vacuum. 101 00:09:25.840 --> 00:09:39.840 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. 102 00:09:39.840 --> 00:09:49.840 I'd add that conceptions can be messy experiences. They're often preceded by a long period of courtship and wooing. 103 00:09:49.840 --> 00:10:07.840 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. 104 00:10:07.840 --> 00:10:13.840 But that one would be wanted, that a central bank would be wanted, should have been no surprise. 105 00:10:13.840 --> 00:10:18.600 Prize. What government since the beginning of time, and you can go back to ancient Lydia 106 00:10:18.600 --> 00:10:25.480 in the year 600 BC, where the first coins were invented, has not wanted and then used 107 00:10:25.480 --> 00:10:33.960 some monopoly power over the production of money to engage in wealth redistribution. 108 00:10:33.960 --> 00:10:40.960 In that sense, central banking could be the second oldest profession. Although in the 109 00:10:43.840 --> 00:11:07.840 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. 110 00:11:07.840 --> 00:11:13.840 The other being the passage of the 16th Amendment to the Constitution, which created the income tax. 111 00:11:13.840 --> 00:11:17.840 Let me tell you, I'm looking forward to our conference on the birth and death of that. 112 00:11:23.840 --> 00:11:31.840 The Caesars did it in Rome to finance the lifestyles of the ruling classes, their wars, and stadiums throughout the known world. 113 00:11:31.840 --> 00:11:43.840 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. 114 00:11:43.840 --> 00:12:00.840 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. 115 00:12:00.840 --> 00:12:10.840 Mariana considered taxes and inflation as equal forms of theft and as an evil that could endanger one's soul. 116 00:12:10.840 --> 00:12:17.840 The King didn't like Mariana's writings and threw the 73-year-old priest in prison for making this argument public. 117 00:12:17.840 --> 00:12:22.840 It's little wonder that Murray Rothbard considered Mariana a Proto-Austrian. 118 00:12:22.840 --> 00:12:29.000 By the way, if you look at the state of the Spanish economy today, the results of its 119 00:12:29.000 --> 00:12:34.440 long attachment to its fiat currency and the results of its long attachment to the fiat 120 00:12:34.440 --> 00:12:40.080 currency, you can see the cost of Spain's neglect of its great scholastic tradition, 121 00:12:40.080 --> 00:12:45.360 which is currently being rejuvenated by its Austrian economists. 122 00:12:45.360 --> 00:12:51.080 Let's fast forward now to the 1780s when the courtship of the present system really began. 123 00:12:51.080 --> 00:12:55.600 Even during the time of the Articles of Confederation, there were efforts to birth an early version 124 00:12:55.600 --> 00:13:01.320 of our demon child, known as the Bank of North America, by the very classes that benefited 125 00:13:01.320 --> 00:13:07.240 from the fiat currency, the continental, during the Revolutionary War. These are classes that 126 00:13:07.240 --> 00:13:12.240 benefit from government spending and in fact only exist because of government spending, 127 00:13:12.240 --> 00:13:18.280 and not due to any special demand for their output in the market. One of the precursors 128 00:13:18.280 --> 00:13:25.280 One of the precursors of classes, or these are the precursors of these classes that benefit from inflation today. 129 00:13:25.280 --> 00:13:31.280 One historian of the period called the Articles of Theor, the Articles of Confederation, 130 00:13:31.280 --> 00:13:38.280 the beginning of the Federal Trough, one of America's most imperishable institutions. 131 00:13:38.280 --> 00:13:45.280 The leader of this class was Robert Morris, a Philadelphia merchant who assumed great power in the Continental Congress 132 00:13:45.280 --> 00:13:50.280 and who was the first leader of the Bank of North America. 133 00:13:50.280 --> 00:13:53.280 When revolutionary war debt rightly depreciated, 134 00:13:53.280 --> 00:13:58.280 Morris agitated for debt holders to be paid at par, 135 00:13:58.280 --> 00:14:03.280 something that immediately enriched those who purchased debt at depreciating values. 136 00:14:03.280 --> 00:14:06.280 Sweet deal, right? 137 00:14:06.280 --> 00:14:10.280 It's not that different from more recent efforts to bail out AIG with TART money 138 00:14:10.280 --> 00:14:20.280 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. 139 00:14:20.280 --> 00:14:28.280 Government efforts to create a system of privatized profits while socializing losses, what a concept! 140 00:14:28.280 --> 00:14:38.280 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. 141 00:14:38.280 --> 00:14:46.080 It's a system that occurs only to the extent that the government can thwart market forces. 142 00:14:46.080 --> 00:14:51.160 After the Constitution was ratified, Morris's protege, Alexander Hamilton, succeeded in 143 00:14:51.160 --> 00:14:55.080 creating the Bank of the United States, which would pick up where the Bank of North America 144 00:14:55.080 --> 00:14:56.200 left off. 145 00:14:56.200 --> 00:14:58.800 This bank was considered controversial from the very beginning. 146 00:14:58.800 --> 00:15:06.000 It was created in 1791, and it was controversial because nowhere in the Constitution allowed 147 00:15:06.000 --> 00:15:36.000 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. 148 00:15:36.000 --> 00:15:44.000 The bond between monetary and foreign policies has roots going back to the very beginning of the nation's founding. 149 00:15:44.000 --> 00:15:50.000 Now, at the time, the federal government was rightly ignored by the rank and file. 150 00:15:50.000 --> 00:15:54.000 It was just not pertinent to their lives. 151 00:15:54.000 --> 00:16:00.000 But the die was cast, the justification for government inflation as being necessary, 152 00:16:00.000 --> 00:16:12.000 John Quincy Adams would later say, to go abroad and slay dragons we do not understand in the name of spreading democracy was set. 153 00:16:12.000 --> 00:16:19.000 This was going to happen whether or not citizens were willing to pony up the taxes in order to make it happen. 154 00:16:19.000 --> 00:16:26.000 The result would be, as always, fortunes to be made by those who exist primarily on government spending. 155 00:16:26.000 --> 00:16:33.940 Now I pause here to note the obvious in case it might not be obvious to everyone. Governments 156 00:16:33.940 --> 00:16:41.560 then as well as governments today have to fund themselves through coercion or trickery. 157 00:16:41.560 --> 00:16:48.040 Now coercion can take the form of plunder, but the more sophisticated manner is taxation. 158 00:16:48.040 --> 00:16:53.520 That's why it's a joke on us when the IRS claims to be funded by contributions, which 159 00:16:53.520 --> 00:16:57.320 which is how some of its literature puts it. 160 00:16:57.320 --> 00:17:05.120 Debt is another sophisticated form of coercion, but that's simply a form of future taxation. 161 00:17:05.120 --> 00:17:08.920 Note well that this is an essential characteristic of states. 162 00:17:08.920 --> 00:17:12.480 If they weren't financed through force or through the threat of force, 163 00:17:12.480 --> 00:17:19.200 meaning if they were financed solely through voluntary contributions and exchanges, 164 00:17:19.200 --> 00:17:37.800 Trickery is a form of fraud in which governments are indirectly financed by the masses, who 165 00:17:37.800 --> 00:17:41.000 may not notice they are being looted. 166 00:17:41.000 --> 00:17:46.120 When the king clips his coins, thus allowing him to spend more money than he could before, 167 00:17:46.120 --> 00:17:50.780 Or when Bernanke ratchets up bond purchases, thus allowing the government to spend more 168 00:17:50.780 --> 00:17:55.520 than it could before, and increasing bank reserves as well. 169 00:17:55.520 --> 00:18:01.160 The result isn't an increase in wealth, but transfers of wealth, and an eventual increase 170 00:18:01.160 --> 00:18:04.760 in prices, or an upward pressure on prices at least. 171 00:18:04.760 --> 00:18:12.040 So inflation is a form of trickery, and it's preferred by governments for various reasons. 172 00:18:12.040 --> 00:18:18.360 First, when the new money reaches the politically preferred groups, they get to spend it first. 173 00:18:18.360 --> 00:18:21.520 The prices have not yet risen. 174 00:18:21.520 --> 00:18:25.520 They will eventually rise in response to the increase for demands in goods and services 175 00:18:25.520 --> 00:18:29.240 that result simply because the new money is in circulation. 176 00:18:29.240 --> 00:18:34.880 This way, government can grow without risking an immediate political cost. 177 00:18:34.880 --> 00:18:39.920 Second, the rise in prices is equivalent to an increase in taxes. 178 00:18:39.920 --> 00:18:49.920 This form of finance is preferred because people often do not make the connection between the increase in prices and the previous monetary inflations. 179 00:18:49.920 --> 00:18:59.920 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. 180 00:18:59.920 --> 00:19:08.920 There's a lag between the increase in prices and the government's inflation that makes their relationship less obvious. 181 00:19:08.920 --> 00:19:12.600 But it was obvious enough at the end of the first Bank of the United States Charter that 182 00:19:12.600 --> 00:19:13.920 it was not renewed. 183 00:19:13.920 --> 00:19:19.400 It took financing the War of 1812 to get a second Bank of the United States Charter, 184 00:19:19.400 --> 00:19:23.080 and it picked up where the previous one left off. 185 00:19:23.080 --> 00:19:30.280 It set in place a boom and bust cycle that ended in what is called the Panic of 1819. 186 00:19:30.280 --> 00:19:36.600 This raised the ire of one of my favorite politicians in American history, a politician 187 00:19:36.600 --> 00:19:43.600 and Farmer, named John Taylor of Caroline. Now, Taylor represented those people who argued 188 00:19:43.600 --> 00:19:50.600 for a United States in the plural, opposed the Constitution, and demanded provisions within 189 00:19:50.600 --> 00:19:56.600 it that would both restrict the Federal Government and nurture, hopefully nurture, a republic. 190 00:19:56.600 --> 00:20:02.600 Okay, so he would have won the CPAC straw poll of 1820. 191 00:20:02.600 --> 00:20:09.600 Needless to say, Taylor opposed the federal government's courtship with central banking 192 00:20:09.600 --> 00:20:14.600 and laid the blame for the 1819 panic directly on the steps of the Bank of the United States. 193 00:20:14.600 --> 00:20:18.600 Now think about how pertinent Taylor's arguments apply to today's debates. 194 00:20:18.600 --> 00:20:25.600 There's really nothing new. This has been a long-running theme in American history if we studied it. 195 00:20:25.600 --> 00:20:33.920 Quote, in also ascribing our distresses to a diminution of bank currency, he's referring 196 00:20:33.920 --> 00:20:40.920 to the post panic credit crunch, and urging it as an evidence of bad policy, we ought 197 00:20:40.920 --> 00:20:46.640 to have foreseen that the history of this fact was understood by the nation. We know 198 00:20:46.640 --> 00:20:51.840 that the increase in the money supply was caused by the expenses of the last war and 199 00:20:51.840 --> 00:20:57.720 and by the influence of the banking bubble to awaken fraudulent speculations and not 200 00:20:57.720 --> 00:21:04.720 by manufacturers. Public expenditures and naivish designs united to produce the banking 201 00:21:04.720 --> 00:21:12.720 bubble, which was urged by the government as a proof of national prosperity. It was 202 00:21:12.720 --> 00:21:18.280 in fact one cause of national and individual distress. It tempted governments to launch 203 00:21:18.280 --> 00:21:23.760 It plunged into an ocean of extravagance and individuals into an ocean of speculation. 204 00:21:23.760 --> 00:21:29.160 It produced a great number of bubbles under the denomination of internal improvements, 205 00:21:29.160 --> 00:21:35.640 having the effect of enriching projectors and undertakers and impoverishing the people. 206 00:21:35.640 --> 00:21:41.060 The bursting of the banking tumor left behind the sores of public extravagance, foolish 207 00:21:41.060 --> 00:21:50.140 English public contracts, excessive taxation and great private debt, all of which it had 208 00:21:50.140 --> 00:21:56.220 generated and these are proposed to be cured by letting them run on and promoting a new 209 00:21:56.220 --> 00:22:05.380 gangrene by a new bubble of granting an enormous new bounty to another set of undertakers. 210 00:22:05.380 --> 00:22:11.700 So what's he describing? He's describing this hair-of-the-dog strategy, which I believe 211 00:22:11.700 --> 00:22:17.980 Hayek accused Keynes of, which is to create a new round of credit expansion, which is 212 00:22:17.980 --> 00:22:23.460 exactly what the powers-that-be are trying to do right now, right? 213 00:22:23.460 --> 00:22:27.340 Taylor later argues that these results could have been predicted given the experience of 214 00:22:27.340 --> 00:22:33.700 revolutionary war finance. He wrote, quote, the local redundancy of money, meaning inflation, 215 00:22:33.700 --> 00:22:38.540 defined to a few persons and factories, meaning these politically well-connected groups that 216 00:22:38.540 --> 00:22:45.380 benefit from the new money, was originally produced and then subsequently increased by 217 00:22:45.380 --> 00:22:52.780 increasing more to transfer than to exchange property. The sudden appreciation of revolutionary 218 00:22:52.780 --> 00:22:58.460 certificates above twenty-fold beyond the value at which they were bought was a transfer 219 00:22:58.460 --> 00:23:22.460 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. 220 00:23:22.460 --> 00:23:36.460 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. 221 00:23:36.460 --> 00:23:43.460 Why have I never seen that circular flow diagram in my macro texts? 222 00:23:43.460 --> 00:23:49.460 These things hardly started with people like Crook Dodd and Barney Frank. 223 00:23:49.460 --> 00:23:56.460 It's ironic that the party of Dodd and Frank began in opposition to these early forays into central banking. 224 00:23:56.460 --> 00:24:02.460 The Democratic Party gained prominence first as being the party that opposed the Bank of the United States. 225 00:24:02.460 --> 00:24:10.460 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. 226 00:24:10.460 --> 00:24:18.460 Their adversaries were Whig politicians who defended the bank and its ability to grow the government and their personal fortunes at the same time. 227 00:24:18.460 --> 00:24:22.460 at the same time. They were, in fact, quite open about these arrangements. 228 00:24:22.460 --> 00:24:26.460 It was considered standard operating procedure for Whig representatives, for instance, 229 00:24:26.460 --> 00:24:30.460 to receive money or monetary compensation for supporting the bank 230 00:24:30.460 --> 00:24:34.460 when they left Congress. And one Whig congressman, Daniel Webster, 231 00:24:34.460 --> 00:24:38.460 even expected annual payments while in Congress. 232 00:24:38.460 --> 00:24:42.460 Once he complained to the Bank 233 00:24:42.460 --> 00:24:46.460 of the United States President, Nicholas Biddle, that the payments 234 00:24:46.460 --> 00:24:49.900 were being delayed, causing him to complain, quote, 235 00:24:49.900 --> 00:24:54.500 I believe my retainer has not been renewed or refreshed as usual. 236 00:24:54.500 --> 00:25:00.420 It may be wished, or if it be wished, that my relation to the bank should be continued. 237 00:25:00.420 --> 00:25:06.180 It may be well to send me my usual retainer. 238 00:25:06.180 --> 00:25:11.500 No wonder these people are pummeled with canes on the House floor. 239 00:25:11.500 --> 00:25:15.940 It's little wonder that early Democrats garnered such popular support and would demand that 240 00:25:15.940 --> 00:25:21.340 by Andrew Jackson and America's experiment with central banking, Jackson called it, quote, 241 00:25:21.340 --> 00:25:26.820 dangerous to the liberty of the American people because it represented a fantastic centralization 242 00:25:26.820 --> 00:25:32.980 of economic and political power under private control. Hard to believe the guy who said 243 00:25:32.980 --> 00:25:39.620 that is now on the 20. Jackson also said the Bank of the United States was, quote, a vast 244 00:25:39.620 --> 00:25:44.860 electioneering machine and could control the government and change its character. These 245 00:25:44.860 --> 00:25:49.140 These sentiments were echoed by Roger Taney, Jackson's Treasury Secretary, who talked to 246 00:25:49.140 --> 00:25:54.140 the banks, quote, corrupting influence and ability to influence elections. 247 00:25:54.140 --> 00:26:00.420 And the Whigs would get their revenge on Taney later when he was Chief Justice, when Lincoln 248 00:26:00.420 --> 00:26:04.860 had him issued an arrest warrant for him for writing an opinion that he disagreed with. 249 00:26:04.860 --> 00:26:09.260 I think it had to do with habeas corpus. 250 00:26:09.260 --> 00:26:10.940 But the courtship would go on. 251 00:26:10.940 --> 00:26:14.220 These politically well-connected groups that benefited from early central banking would 252 00:26:14.220 --> 00:26:44.220 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 253 00:26:44.220 --> 00:26:50.220 The boom and bust cycle, as explained by the Austrian School, became worse and worse leading up to 1913. 254 00:26:50.220 --> 00:26:58.220 Now this is how that happens. Banks issued currency based on an actual supply of goods, usually gold and silver. 255 00:26:58.220 --> 00:27:06.220 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 256 00:27:06.220 --> 00:27:09.620 In direct proportion to their supply of gold and silver, they'd be engaging in what we 257 00:27:09.620 --> 00:27:16.060 would call 100% reserve banking and the accounts will then clear. But if they gave into the 258 00:27:16.060 --> 00:27:21.160 temptation to engage in fraud by printing more money in greater proportion than their 259 00:27:21.160 --> 00:27:27.740 supply of gold and silver, then they're engaged in what we call fractional reserve banking. 260 00:27:27.740 --> 00:27:31.840 Now when they did this, there'd be price inflation resulting from an increase of money 261 00:27:31.840 --> 00:27:36.920 on the Market. There is also a redistribution of income and wealth because people are purchasing 262 00:27:36.920 --> 00:27:41.880 goods not in exchange for an existing supply of gold and silver but in exchange now for 263 00:27:41.880 --> 00:27:48.880 nothing. There were increases in economic activity but they are not sustainable because 264 00:27:48.880 --> 00:27:53.160 they are not financed through real saving. When people in the market caught on to such 265 00:27:53.160 --> 00:27:57.560 practices they would demand gold and silver in exchange for their existing supply of the 266 00:27:57.560 --> 00:28:03.560 Inflating Banks Currencies, fraudulent banks can run out of gold and silver completely, 267 00:28:03.560 --> 00:28:08.200 which provides a strong market incentive not to engage in fractional reserve banking. 268 00:28:08.200 --> 00:28:14.360 The fear of bank runs, think of the end of the great money and banking movie, Mary Poppins, 269 00:28:14.360 --> 00:28:17.760 or the great scene in the movie, It's a Wonderful Life. 270 00:28:17.760 --> 00:28:20.740 These were healthy fears. 271 00:28:20.740 --> 00:28:25.320 But with the progressive era spending on war and welfare and with the pressure on banks 272 00:28:25.320 --> 00:28:32.800 Banks to inflate all this activity. The boom and bust cycles grew worse and worse. 273 00:28:32.800 --> 00:28:38.720 One great thing about this period, in my opinion, was that the banks were forced to internalize 274 00:28:38.720 --> 00:28:44.480 their losses. When banks faced runs on their currencies, private financiers would bail 275 00:28:44.480 --> 00:28:48.920 them out, internalizing losses instead of socializing them. Who would have ever thought 276 00:28:48.920 --> 00:28:56.360 Of course, when these losses grew, those financiers would secretly organize to reintroduce central 277 00:28:56.360 --> 00:29:03.360 banking in America, thus engineering an urgent need for a new, quote, lender of last resort. 278 00:29:03.360 --> 00:29:08.600 The meetings here at Jekyll Island marked the time when the courtship led to the Fed's 279 00:29:08.600 --> 00:29:15.320 conception and to what I would consider its actual birth in 1913. This was the implicit 280 00:29:15.320 --> 00:29:20.400 Socialization of the Banking Industry in the United States. People call the Federal Reserve 281 00:29:20.400 --> 00:29:25.240 Act the currency bill because it was to create a bureaucracy that would assume the currency 282 00:29:25.240 --> 00:29:31.840 creating duties of member banks. It was like the Pay Trade Act in that both were centralizing 283 00:29:31.840 --> 00:29:37.040 bills that were written years in advance by people waiting for the appropriate political 284 00:29:37.040 --> 00:29:43.080 environment to introduce them. It was like our current health care bills in which cartelized 285 00:29:43.080 --> 00:29:49.160 Most firms in private industry wrote chunks of the legislation behind closed doors before 286 00:29:49.160 --> 00:29:54.800 they were introduced into Congress. 287 00:29:54.800 --> 00:29:58.880 It is incredible to me that the private banks would be willing to transfer billions of dollars 288 00:29:58.880 --> 00:30:03.280 worth of gold and silver to the newly created Federal Reserve system and then relinquish 289 00:30:03.280 --> 00:30:06.140 their currency-making abilities. 290 00:30:06.140 --> 00:30:09.840 This was justified on the belief not that the government wouldn't inflate, but that 291 00:30:09.840 --> 00:30:16.520 that it would do it better than the banks could and without market penalties. 292 00:30:16.520 --> 00:30:20.520 And of course, Mises would argue that this is just a matter of holding of you would just 293 00:30:20.520 --> 00:30:25.520 hold the banks to the same requirements you hold any other firm operating in the market 294 00:30:25.520 --> 00:30:32.560 that you wouldn't have these problems that they were ostensibly trying to address here 295 00:30:32.560 --> 00:30:34.840 or when they passed the Federal Reserve Act. 296 00:30:34.840 --> 00:30:39.440 Mises would write later this, what's needed to prevent further credit expansion is to 297 00:30:39.440 --> 00:30:45.240 To place the banking business under the general rules of commercial and civil laws, compelling 298 00:30:45.240 --> 00:30:54.240 each individual and firm to fulfill all obligations in full compliance with the terms of contract. 299 00:30:54.240 --> 00:30:56.840 Why not? 300 00:30:56.840 --> 00:31:01.200 The bill passed fairly easily in part because the Democrats had a larger majority in both 301 00:31:01.200 --> 00:31:03.480 houses than they do today. 302 00:31:03.480 --> 00:31:08.760 There were significant differences that were resolved in conference, including the idea 303 00:31:08.760 --> 00:31:18.760 The idea that it only required 40% of the gold supply was necessary to print money. 304 00:31:18.760 --> 00:31:27.760 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. 305 00:31:27.760 --> 00:31:36.760 Juan de Mariana's days had long passed. No one was excommunicated, much less exercised. 306 00:31:36.760 --> 00:31:41.120 The bill that was drawn up at Jekyll Island was signed by Wilson in the Oval Office shortly 307 00:31:41.120 --> 00:31:45.360 after the Senate approved it. Actually, it was signed hours after the Senate approved 308 00:31:45.360 --> 00:31:52.360 it. This was the real birthing of the Fed, and you can picture the solemn scene as reported 309 00:31:52.360 --> 00:31:59.760 by the New York Times. Quote, In addition to the three gold pens purchased by the President 310 00:31:59.760 --> 00:32:05.240 with which to sign his signature, apparently presidents at this age used to purchase the 311 00:32:05.240 --> 00:32:16.720 Senator Chilton of West Virginia had presented another gold pen, which he asked the president 312 00:32:16.720 --> 00:32:23.520 to use. With Senator Chilton's pen, President Wilson wrote the words, approved, 23 December 313 00:32:23.520 --> 00:32:29.960 1913, remarking as he did so, I'll do the deed first and then I'll have something to 314 00:32:29.960 --> 00:32:38.920 Then he took up one of the plain gold pens and wrote his first name, Woodrow, on it. 315 00:32:38.920 --> 00:32:43.720 With the second of the plain gold pens, he wrote his first syllable of the last name 316 00:32:43.720 --> 00:32:47.000 and finished his signature with the other pen. 317 00:32:47.000 --> 00:32:52.000 I'm using a series of pens, explained the president to the gathering. 318 00:32:52.000 --> 00:32:55.460 I'm sure their jaws all dropped. 319 00:32:55.460 --> 00:33:00.020 In response came the deep voice of Senator James Hamilton Lewis of Illinois. 320 00:33:00.020 --> 00:33:02.700 The bill came forth in installments. 321 00:33:02.700 --> 00:33:07.860 Everybody laughed at this, and there was another laugh when the president, as he reached for 322 00:33:07.860 --> 00:33:13.940 the fourth pen, remarked, I'm drawing on the gold reserve. 323 00:33:13.940 --> 00:33:16.260 Truer words were never spoken. 324 00:33:16.260 --> 00:33:22.440 Again, I come back to what people think will happen in theory, to what actually happens 325 00:33:22.440 --> 00:33:24.340 in the real world. 326 00:33:24.340 --> 00:33:29.300 Federal banks always result in feeding those forces that would centralize and expand the 327 00:33:29.300 --> 00:33:36.020 nation state. The Fed's policies in the 1920s, so well documented by Rothbard, would provoke 328 00:33:36.020 --> 00:33:41.100 the crisis that, in the end, wrenched political power from the cities and state governments 329 00:33:41.100 --> 00:33:48.460 to the swamp land in Washington. People today take seriously the claim that there can be 330 00:33:48.460 --> 00:33:53.540 a viable federal solution to virtually any problem thanks to the money printed up by 331 00:33:53.540 --> 00:34:01.540 by the Fed, while each decade has seen a larger proportion of the population become dependent on its inflation. 332 00:34:01.540 --> 00:34:06.140 The progressives had their demon child who would fuel so many of their plans. 333 00:34:06.140 --> 00:34:13.340 It would remove major financial obstacles to entering the senseless slaughter in Europe a mere three years later. 334 00:34:13.340 --> 00:34:19.740 I'm so glad we are here discussing its death, or at a point in history where we can actually do this. 335 00:34:19.740 --> 00:34:23.740 I don't think the Fed will die of an act of Congress similar to the one that created it. 336 00:34:23.740 --> 00:34:30.740 Yes, I'd like to see it ended amidst a popular Jacksonian or Ron Paulian-like uprising. 337 00:34:30.740 --> 00:34:35.740 But it's more likely that it will die the death of the Interstate Commerce Commission, 338 00:34:35.740 --> 00:34:41.740 slowly, long after being made irrelevant by market forces. 339 00:34:41.740 --> 00:34:46.740 There are life cycles even for demon children. 340 00:34:46.740 --> 00:34:52.940 When this one dies, there will be one less robbing, conniving, secretive institution in the world. 341 00:34:52.940 --> 00:35:00.940 When this happens, believe me, I'll be crying, but they'll be Glenn Beck tears.