End the Fed
The Federal Reserve was created in 1913 with the primary purpose of avoiding a chain of bank runs, also known as a bank panic. On March 11th, 2008 Bear Stearns suffered a bank run. Exactly four months after that, IndyMac bank went through the same thing and on September 25th, 2008 Washington Mutual had to temporarily shut down in order to avoid a full out bank run. With several other banks now at risk of similar fates it is evident that the Federal Reserve system has failed to do what it was created for. So why should we uphold this failing institution? We shouldn’t. It is time to end the Fed.
The system currently plays an integral role in the markets through setting the interest rate and controlling the monetary supply. These powers were given to it in order to maintain a stable market. It obviously hasn’t worked. Not only has it failed to do its job, but it has actually harmed the markets by making the economic climate less stable in the long run. Here’s how:
Setting the interest rate
One of the jobs of the current Federal Reserve is to set the interest rate. The rate plays a huge role in loans because higher rates mean less loans and less credit created, whereas lower rates do the opposite. This has a titanic effect on the modern, credit-based economy. There is a problem with the current system though: the market is far too big for anyone to accurately gauge it and set the rate for it. This is because so many variables play a part into it and no one can measure all of them (especially emotions and confidence.) What ends up happening when the Fed sets the rate is that bubbles and economic stagnation are created when the rate is too low or too high respectively. This has played a big part in the recession-boom business cycles we have seen in the 1900s. Perhaps the most drastic example of the destruction caused by the Federal Reserve setting the rate is in the current economic crisis- which almost all experts, Keynesians and free market capitalists alike, agree was largely driven by Alan Greenspan’s low rates. Greenspan, the former chairman of the Fed, ushered in an era of historically low rates and as a consequence really drove the housing bubble to levels it would have never reached had the rate been higher.
The better alternative would have been to simply let the market set the interest rate through competition. The institutions and people that actually lend and borrow would compete for the best rates. The whole scenario would be driven by the omnipotent laws of supply and demand and lead to fair rates for both borrowers and lenders that are also sustainable in the market.
Controlling the monetary supply
Another major power that the Federal Reserve has is controlling the monetary supply. The Fed currently controls the creation of money in two ways: having its hand in how much money is printed and by being the driving force behind the fractional reserve banking system. In theory, the Federal Reserve would use its control over the monetary supply in order to keep prices stable, so that there is not excessive deflation or inflation. It is also supposed to use this power in order to maintain an elastic currency, so that there is always enough money to fuel the fractional reserve banking system, so that bank runs don’t happen (which obviously didn’t work out how it was supposed to.)
By again taking a look at the current crisis as well as history, it is clear that the Federal Reserve has not and cannot maintain a sustainable or healthy monetary supply. Currently, the Fed is printing tons of money in order to make up for the money that the government cannot raise through the sale of securities (i.e. bonds.) This is creating monetary inflation, which is essentially a tax on the people because the buying power of the dollar falls when it occurs during periods of slow economic growth. The system is not fair to the people, nor is it sustainable.
Fractional reserve banking is also very unsustainable, especially with our current reserve requirements, because it essentially demands unlimited exponential economic growth. If there is not exponential economic growth, then the monetary supply inflates because there is still exponential growth in the monetary supply. Trying to have unlimited exponential growth is obviously impossible and trying to create unlimited exponential growth actually ends up making bubbles that eventually pop, like the housing bubble that created this crisis.
Exponential growth forever is not possible and the other alternative in the current system, inflation, is not fair. So why do we put up with it? A better alternative would be to end the Fed, which would almost certainly bring down the fractional reserve banking requirements and hence, create a more stable system. It would also lead to less inflation as less money is created.
A disastrous institution
This current Federal Reserve system has hurt the market more than it has helped it and if it continues the way it is operating, we Americans face severe consequences. Aside from the unstable environment it is creating, we also face the risk of something even worse due to the Fed’s control over the monetary supply. That worst case scenario is hyperinflation.
The Federal Reserve, a group of men that isn’t even elected by the people, has the tools in its hands to inflate the currency as much as they want to. Central banks usually try not to inflate currency too much, but when the country in question is in massive debt and continues to spend massive amounts of money (like the United States is currently doing) they usually do end up inflating the currency a lot and the citizens of the country have to pay for it. It is the tax that the politicians never talk about. Inflation reduces the buying power of the dollar and with that we have to pay more dollars to buy the same things we used to pay less for. It works out to be just like a tax. Sometimes it gets out of hand to the point where the money is worthless and that is the day when the economy collapses. For those who think this won’t happen to us, it is important to look at history and the numerous cases of hyperinflation. It might just surprise you how many times entities that control a fiat money supply (such as the Fed) have destroyed the currency.
The examples can be seen throughout history and most of these cases were at the hands of national banks or similar entities: Angola and Argentina in the early 1990s, Austria in the early 1920s, Belarus in the mid 1980s, Brazil from the mid 1980s to 1994, Bulgaria in the early 1990s, Chile in the early 1970s, China in the late 1940s and early 1950s, the Free City of Danizig in the early 1920s, Georgia in the mid 1990s, Germany in the early 1920s (the Weimar Republic,) Greece in the early 1940s, Hungary in the mid 1940s, Israel in the 1970s and early 1980s, Japan in the early 1940s, Krajina in the early 1990s, Madagascar in the mid 2000s, Mozambique in the 1990s and early 2000s, Nicaragua in the late 1980s, Peru in the late 1980s, the Philippines in the early 1940s, Poland in the early 1920s and again in the early 1990s, the Republika Srpska in the early 1990s, Romania in the early 2000s, Russia in the early 1920s, Turkey throughout the 1990s, Ukraine in the mid 1990s, Yugoslavia in the late 1980s and early 1990s, Zaire in the early and mid 1990s, Zimbabwe currently, and the United States in the early to mid 1880s.
And these examples are only of hyperinflation- it does not include inflationary struggles not classified as hyperinflation. Is it really crazy to think it can’t happen to us?
End the Fed
The Federal Reserve literally has the power to destroy this nation’s economy. It can tax us at will with inflation. It can control the demand for loans. It can create as much money as it wants to. Despite all of these very potent powers, the Federal Reserve is a very opaque institution, in that there is very little transparency to it. They recently even refused to release information about the whereabouts of some of the bailout money to Congress. They refused to respond to Congress, so why would they bother to even report to the people? AIG ended up releasing some of the information that the Fed refused to give out.
It is a very secretive and unjust institution and it must be ended. The organization affects every single American and has the power to make us richer or poorer, yet it refuses to report to us. Is this acceptable?
The Federal Reserve has too much power and it has not even been able to do what it was created for. We need to abolish the system before it makes things even worse with even more market distortions. Congressman Ron Paul recently sponsored HR 1207, which would allow Congress to audit the Fed. It is a step in the right direction because it will really make the people aware of the misdoings by the central bank. Paul and other free market capitalists are for abolishing the Federal Reserve all together, but this is a means of really convincing others of the damage that the institution is causing. It is time to act on this together as citizens by contacting your Senator and Representative and letting them know that you want HR1207 passed (as well as maybe suggesting the abolishment of the Fed altogether.) It is time to audit the Fed, so that one day we can finally end the Fed.
Aside: You can buy End the Fed, Ron Paul’s upcoming book of the same title as this post right now (through preorder) by clicking the book image in the sidebar (to the right) or by clicking the link above.
6 Comments »
Mar 17 2009 at 2:14 pm
Excellent article!
We the People should also pursue an Article V Convention. If we enact Article V of the US Constitution, WE THE PEOPLE can abolish the Fed, the unconstitutional income tax, and end the masturbatory “war on drugs”.
Article V:
The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress; Provided that no Amendment which may be made prior to the Year One thousand eight hundred and eight shall in any Manner affect the first and fourth Clauses in the Ninth Section of the first Article; and that no State, without its Consent, shall be deprived of its equal Suffrage in the Senate.
(see also)
Friends of the Article V Convention:
http://www.foavc.org/
Keep Fighting the Good Fight!
Mar 19 2009 at 8:41 pm
Very well written as well as being very informative.
With the Federal Government in mind, isn’t income tax unconstitutional? I have heard about this many times. We as United States citizens are not required to pay an income tax. Where is it written in the Constitution or any of the amendments?
I know that the income tax was started during WW1 as a war tax to help support the war. The Government saw that it was profitable so I guess they decided to keep it going…
Sorry if I was a bit off topic on this…
Mar 20 2009 at 6:55 pm
This is a very interesting post. I am currently taking Intro to Finance course in college. Recently, I have just found out that the Federal Reserve has nothing to do with the government. The word “Federal” definitely fools the ignorant people like me. It’s funny how an institution has so much power, and government has nothing to do with it. The Fed definitely needs to be audited because there are so much going on inside the institution that nobody from outside really knows.
Mar 20 2009 at 10:29 pm
@Doctor DEA The Federal income tax was not originally supposed to be made permanent, but was made so in 1913 with the passing of the 16th amendment, which gave Congress the power to impose an income tax (it did place restrictions, but it also clearly gave the power.) Personally, I am against the income tax and I think it should be abolished because in the end I would much rather have it in the pockets of Americans who earned it than have the government use it. I am for a small Federal government, so naturally I am against most forms of Federal taxation as well.
@Kai Lo The Federal Reserve was still made by the government and it does work with the government a lot, so in a way it is part of government. It definitely has too much power though, considering that does not fall under a branch of government and has no elected officials. The Fed should be audited, but the best decision would be to end it altogether.
Apr 22 2009 at 6:13 am
the problem with income tax is that it does not take much to earn ( for govt)
and unfortunately govts are terrible at spending money, one famous rule of govt spending being, why have one for the price of one when you can have two for the price of two.
Sep 23 2009 at 7:00 pm
Miraj, your article is completely factual. I’d like to add that many cronies from Goldman Sachs now either work there or are in correspondence with the top brass. There is great market manipulation taking place and Goldman Sachs should be posted in every Post Office. The Fed will always turn a blind eye to the crimes of its mistress, GS, as will the Treasury. Bear Stearns and Lehman were allowed to fall only because they were GS’s direct competition. As a Democracy, we cannot have a select few multi-millionares in the Fed, Treasury, and manipulative banks controlling the economy. Down with the Fed, but not before a meticulous investigation of these unethical organizations.