Tuesday, December 7, 2010

Federal Reserve: The Heart of Tyranny, #1

From the byzantine assortment of evil federal government agencies, if you were to ask me to single out the most appalling, the most menacing, the most sinister of them all - the one political cornerstone of the welfare state against which all defenders of freedom and individual rights should press their activist energy - I would answer that it is the one upon which all the others depend, i.e., its financier.  I would say it is the one that is not a federal government agency at all, but instead designed to exist in perpetual legal limbo in order to offer its leaders the full power of the leviathan federal apparatus while simultaneously shielding it from public scrutiny.  I would say that It is the one that serves its master, not through a conspicuous, petty kind of thievery, but by levying a mysterious and almost unknowable tax - inflation - a tax so insidious that some brilliant minds regard it not as a parasitic malady to be razed as an economic matter of life and death but as a benefit - an elixir able to "stimulate" the economy while conjuring the confiscation of wealth out of thin air.  Of course, I would single out the Federal Reserve.   


"Give me control of a nation's money, and I care not who makes its laws" was said to be a maxim of the House of Rothschild.  This statement captures a fundamental truth, that a nation's money is woven into the fabric of society, touching every facet of an individual's life.  In a sense, its history is the history of virtually everything.  The soundness of money in a society is in a sense a barometer - a barometer not only of the nation's economic health, but necessarily, its political and philosophical health. 

The history and theory of central banking has been chronicled in excruciating detail.  Yet, fully appreciating the nature and role of central banking in your life and in the life of the nation's economic system does not necessarily require a technical treatise or even expert knowledge.  It takes integration - the integration of knowledge from many different specialized fields along with an ability to distill essential principles in such a way that a lay audience can fully appreciate the scope and importance of this institution on their daily lives and what it means for the future of civilization itself. 

To fully appreciate the destructive potential of the Federal Reserve, one needs to understand something about the history and nature of money and banking.  What is money?  What role does a bank play in a free market economy?  Historically, how and why has government policy resulted in the monetary framework we have today?  How are the actions of the Federal Reserve today going to affect the future?  And, what can be done about it?  

I hope to take on some of these questions in forthcoming posts to go along with previous posts on the subject.  I'm even considering setting up a separate blog only about this topic, but not sure.  Stay tuned.  In the meantime, here is an index to a three part series I did on the boom-bust cycle.  I never completed part 4, but instead decided to open this up as a continuing series. 

Part 1 - Today's crisis as an instance of the classic inflation-depression or boom-bust cycle

Part 2 - Positivism, empiricism and the self-induced myopia of the economics profession

Part 3 - Brief review and analysis of 19th century monetary history; gold the hero, government the villain


LL said...

I'm not disputing what you said - it's jut that the Federal Reserve is not an agency of the Federal Government, not is it under the control of Congress.

On one hand, Congress botches nearly everything it touches. In order for the Feds to do anything, they must spending an overwhelming sum of money and send an overwhelming number of people to do it. And they they work by brail.

On the other, Private control of our nations monetary system seems to have completely failed.

So we're screwed.

Doug Reich said...


Why do you think private control failed? When/how was it privately controlled?

madmax said...


There is alot of criticism of the Fed along the lines that it is a private institution with conflicting interests. For example, Goldman Sachs, I believe, is the firm that the fed contracts with to sell its bond. Goldman frontruns the Fed and makes a fortune. Now anti-capitalists, mostly Leftists but not exclusively, see this and say this is the problem with a "free market".

Even among the Austrians, I am noticing an emphasis on the private nature of the Federal Reserve banks. I don't know how the Fed operates in detail, but I think it would be a good post or set of posts if you focused on how the Fed functions and on why it is irrelevant that the Fed is nominally private. It is government mandate which determines how the Fed operates as well as legal tender LAWS which ensure that only gov't money is used.

I for one am tired of hearing that the Fed is bad because it is private. This is exactly the wrong set of reasons to dislike Central banking.

madmax said...

I should add, that even in this video that you linked to earlier:


a main part of their criticism has to do wit Goldman Sachs. This just fuels anti-capitalism sentiments in my opinion.

Perplexio said...

Moreso than the Federal Reserve I think many of our economic issues today stem from removing the gold standard. When the US dollar ceased to be back by gold and started to be backed by "the confidence of the American people" (or whatever the term was) that was the beginning of this mess.

I have little problem with the federal reserve but I feel removal of the Gold standard from our currency removed a valuable check against the Federal Reserve.

As long as the dollar was backed by Gold there were some limits to how creative the federal reserve could get with printing more money. Once that was taken away it's given the Federal Reserve considerable more liberty to authorize the over-inflationary printing of money.

Doug Reich said...


Yes, a major theme of my past posts and future posts will be that the Federal Reserve is NOT part of a capitalist system. The Fed represents, in essence, a quasi nationalization of the monetary system and represents the complete antithesis of a free, private banking system. Therefore, the disasters and injustices that the Fed causes should be regarded as yet another failed instance of government intervention in the free market.
A free banking system is the ideal from a moral and practical perspective.


Although there was gold backing to the original Federal Reserve notes, that provision was legally removed in 1933 by FDR and since 1971, there has not been even partial backing of gold. We have a completely irredeemable fiat currency.

To a large extent, the Federal Reserve system was a self-fulfilling prophecy. Once the governmet, in essence, took over the banking system, it was a matter of time before they removed the tie to gold completely. This enables them to print as much currency as they want in order to fund government largesse - since it debases the currency, everyone "pays" for this process by losing purchasing power of the fiat currency.

Of course, this whole process is the substance of future posts, but I have written fairly extensively already. You can search my blog, or see the first 3 posts to which I linked here.

Please continue to post comments and questions as it helps to gauge interest level and fertile areas for posts.

HaynesBE said...

Interested--just no time to comment.

garret seinen said...

Doug, good post as usual.

Personally, I think a clear and agreed upon definition of money is needed before agreement can be reached on the role of money. Too often things get bogged down by equating what we are doing today as a respectable way of defining money. The fact that some 95% of the dollar's value has evaporated and the financial system is on the ropes should serve to make us aware that something is grievously wrong with what we are doing.

I await your enlightening post on that subject. Thanks, gs