Easy Money II
Scholarship suggests that the Framers intended to prohibit paper money. Any judge who thought today he would go back to the original intent really ought to be accompanied by a guardian rather than be sitting on a bench.
- Conservative jurist extraordinaire Robert Bork
The second argument advanced by those, like Ron Paul, opposed to the Federal Reserve System and our current FRN paper currency, is that the system engenders inflation. Since 1913, when Congress created the Fed, the US dollar has lost 97% of its “buying power” the argument goes. A devastating indictment on the surface… until you realize that the FRB were not open for business until late November of 1914, and that even at that, the rate of inflation works out to around 3% per year. Nor is the Federal Reserve responsible for much of that amount either. In fact, it wasn’t until the late 1990s that the Fed was free of the liberal Keynesian Congressional mandates that forced Fed policy makers not to attack inflation directly.
From Wikipedia:
The Employment Act of 1946 was a definitive attempt by the federal government to develop macroeconomic policy. Future economic policy was allowed to grow beyond the constitutionally defined realm of monetary and trade control and into the national economy at-large… (T)he Act encourages the federal government to “promote maximum employment, production, and purchasing power.
Mindful of the 20% unemployment of the pre-WWII Great Depression and concerned with all the GIs returning to the workforce, Congress tasked the Fed with the goal of “full employment.”
In 1978, in the midst of the Carter economic debacle and fearful of the voters, Keynesian liberals in Congress passed the Humphrey-Hawkins Full Employment and Balanced Growth Act,
A bill to establish and translate into practical reality the right of all adult Americans able, willing, and seeking to work to full opportunity for useful paid employment at fair rates of compensation; to combine full employment, production, and purchasing power goals with proper attention to balanced growth and national priorities; to mandate such national economic policies and programs as are necessary to achieve full employment, production, and purchasing power; to restrain inflation; and to provide explicit machinery for the development and implementation of such economic policies and programs.
The head nod to restraining inflation was of little consequence. Amendments offered that called for a balanced federal budget, tax cuts for businesses to stir growth and employment, and one to reduce inflation to 3% within 5 years were all defeated. Liberals have never been very concerned with inflation anyway, and Keynesian economics has never offered much in the way of policies to contain it, as inflation allows them to repay their deficit spending with cheaper future dollars.
Fact is, the Fed was not really intended to deal with inflation at all… but with DEFLATION instead.
The Federal Reserve System was created in response to the Panic of 1907, which, with the 3 other such panics that preceded it since 1870 were the result of deflation which exacerbated the periodic “runs” on local banks, which had no cash on hand to satisfy anxious depositors… the very same combination (compliments of an ignorant NY FRB) which turned just such a run in New York into the Great Depression of the 1930s. Not enough money in circulation, and no mandated reserves available to quell the panic.
It was deflation that precipitated these panics, resulting in the “Free Silver” movement, the rise of the “Progressives” and William Jennings Bryant.
In fact the average annualized rate of “inflation” from 1865 to 1915 is a deflationary -0.98%! While America grew, and its economic output grew, haltingly, there simply was not enough currency available to fully accommodate the growth.
None of this is to say that a 3% rate of inflation ought to be the de facto norm. But since WWII successive Democrat administrations have fostered increased inflation and successive Republicans have had to contend with the consequences. And it is only since the expiration of Humphrey-Hawkins that the Fed has been allowed to focus on inflation, rather than trying to balance monetary policy with more political concerns such as a full employment mandate.
Thanks largely to the work of Milton Friedman, both the Fed and the public understand that inflation, and deflation, are both questions of monetary supply growth. As Chairman Bernanke noted sardonically on the occasion of Friedman’s 90th birthday,
Regarding the Great Depression. You were right… we did it. We’re very sorry.
To suggest that we dissolve the Federal Reserve System is simply silly. To do so with no in depth discussion of the consequences, international and domestic, and with no detailed alternative suggestion is simply irresponsible. Most of us would prefer a stable 2.5 to 3% inflation rate over the prior roller coaster of inflation and deflation.
