Imagining a World Without the Federal Reserve

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An article headline in Saturday's Wall Street Journal read "Rate Talk Heats Up Within The Fed." As Journal reporters Jon Hilsenrath and Michael Derby explained, "A debate is intensifying among the Federal Reserve's regional bank presidents about whether to push interest rates up from near zero sooner than planned..."

Notable here is that in the late 20th century an informal and surely unplanned debate between central planning and free markets was staged, and the contest wasn't even close. Ignoring for the purposes of this piece the often bloody governance that revealed itself inside countries that practiced central planning, the unrelenting drudgery that defined economies designed by politicians and bureaucrats was surely one of the most cruelly animating features of the century before this one. Centrally planned countries imploded by century's end, while economically free countries soared.

That's what's so odd about our ongoing empowerment of the world's foremost central bank, the Federal Reserve. Even though we'd violently recoil at the idea of allowing government bureaucrats to plan "loose" or "tight" access to bananas, shoes, and televisions, we've come to accept central planning of credit access. It's possible the problem here is one of wording. We perhaps presume that the "enlightened" minds at the Fed are planning access to dollars issued by the Fed itself. They're doing no such thing.

In truth, when the Fed presumes to set interest rates, it is attempting to control which individuals, businesses, and yes, governments, get access to society's always limited resources. People don't borrow money to stare at it longingly, rather they borrow it because as a measure of exchangeable value, access to money means access to labor, machinery, trucks, airplanes, computers, and everything else.

So when the Fed "debates" the level of interest rates, it's obnoxiously debating how human, physical, and financial capital will be allocated. This unfortunate reality should concern readers. Indeed, the extreme poverty and persistent want that the old Soviet Union symbolized (lines for every consumer product, none of it desirable) revealed in vivid color the horrors of bureaucratically planned access to anything, and it would be folly to presume the astrologists who staff the Fed are any better than those once charged with carrying out the U.S.S.R.'s hubristic five-year plans.

The logical response to all this is that we need a central bank like the Fed to create the very credit that lubricates market-driven economic activity. This presumption fails very quickly for reasons that may already be apparent.

To be blunt, the Fed cannot create credit. The latter is created in the private sector. Credit is once again access to real economic production, and as governments have no resources other than what they tax or borrow from us, they can only create credit insofar as they take it from us first. In a broader sense, the federal government's profligate existence speaks to the economy-weakening extinction of always limited credit. Our government consumes a great deal, and because it does, we're able to consume a lot less.

What the government does do, and can do constitutionally, is issue money. Money is not wealth, rather it's a measure of wealth. We're always exchanging products for products, our work presupposes the latter, but since the vintner doesn't necessarily always want the baker's bread, money is the mutually agreed upon measure of value that allows the vintner to sell wine to the baker with an eye on getting meat from the butcher.

Credit is created in the private sector, it presumes access to the production of others, and then we use money created by the government to measure our own production, and that of those whom we want to exchange with or borrow from. Right or wrong, our Constitution granted the federal government the right ("to coin money and regulate the value thereof") to create the measure (money) that facilitates access to actual credit, but oh my, what a lousy job it has done in modern times.

Indeed, with the value of the dollar unstable, credit has logically declined. This is so basic as to probably not require explanation, but if the money that facilitates the exchange of real credit and access to real wealth isn't stable in value, logic dictates that less credit is going to be extended. Why offer up to others access to goods in return for a medium of exchange that may decline in value over time?

Just the same, readers of this column are well aware that investors are buying future dollar income streams when they invest, investment in production enhancements (think tractors over shovels, computers over typewriters, robotic forms of manufacture over assembly by hand) means the production of even more wealth (thus more credit to access), but if money's value is uncertain, the willingness of investors to commit capital to new ideas is reduced. In short, while government cannot create credit, its failures with money surely restrict the creation of it.

Bringing this back to the Fed, its comical attempts to set the price of short-term credit are doomed to fail in much the same way that the alleged "wise men" who populate the Department of Agriculture could never knowledgeably debate the allocation of lettuce meant for hamburgers. Lettuce creation and consumption of same can't be centrally planned, and neither can credit be. The Fed fails for the same reasons that the old Soviet Union ultimately failed. Government can't properly allocate resources.

Assuming a world without the Fed, there would still be credit; the only difference being that officials with the Fed's imprimatur wouldn't exist to waste time and oxygen debating the proper level of rates with straight, and yes, sometimes angry faces. There would still be interest rates, but rather than those rates being distorted by adolescent minds at the Fed who believe credit can be decreed cheap or costless, interest rates would reflect the cost of ultimately attaining access to the plentiful resources invariably generated by a mostly free-market economy.

As a result of the above, a world without the Fed would be one marked by plentiful credit. That's the case because prices would reflect natural market conditions, and as such, any shortages of real credit would be signaled by higher interest rates; the higher rates set by the markets a certain lure for those with credit to offer, much as the high price of anything else in a market economy attracts entrepreneurs eager to make that which is obscure and expensive, ubiquitous and cheap.

A world without the Fed would also, and this is contrary to what is commonly believed, be one marked by healthier banks and a healthier financial system overall. This is so simply because in a world without our Fed (we don't need the Fed to create dollars), only solvent banks would be able to attract lender-of-last-resort funds from profit focused businesses. And with only the solvent able to attain operating funds, poorly run banks would quickly be swallowed by their betters in the banking sector.

Ultimately a world without the Fed would be one defined by much greater economic growth mainly because it would constitute an economy marked by a great deal less in the way of central planning. Central planning in the 20th century was a life-exterminating, poverty-inducing failure. The Fed is one of the last vestiges of a century that is most useful for it telling us what not to do in the 21st. Let's end this economy-suffocating monument to scarcity.


John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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