A World Without the Fed Would Be the Same As the World With It
Going back many, many centuries to China’s Song dynasty (960-1279), the Confucians supported private money over what government-issued currency because "the market would compel private issuers of money to maintain its value." Think about this historical anecdote for a bit. It has modern relevance.
It’s first a reminder that the notion of market-based money is hardly a modern, libertarian concept. It’s long been understood that politicians have a tendency to clip the proverbial monetary coin, thus robbing the citizenry.
More broadly, it’s a reminder that the central banks that occupy so much space in the minds of so many didn’t invent currency devaluations. In truth, currency devaluations are as old currencies are.
This rates mention in consideration of the unceasing obsession among some with central banks, and the Federal Reserve most notably. We all know the central bank obsessed. In their telling of how the world works, nearly every economic ill can be tied to their existence. So while there will be no defense of wholly unnecessary and wholly superfluous central banks in this column, an argument will be made that little would change if entities like the Fed were abolished. Think about it.
Let’s start with currency devaluations. Those endlessly focused on the Fed repeat with great gusto the line about how the dollar has lost 93% (the number is somewhere in the nines) of its value since 1913. Maybe the number is correct, maybe it isn’t, but that’s really not the point.
The point is that the history is inaccurate. Though the Fed was created in 1913, the dollar’s official value was 1/20.67th of an ounce of gold until 1933. It was in 1933 that FDR and the Morgenthau Treasury devalued the dollar from 1/20.67 to 1/35th. Fed Chairman Eugene Meyer was adamantly opposed to FDR’s decision, he quickly resigned over FDR’s decision, but Meyer had no power to alter the president’s decision.
Same with 1971. It was then that President Nixon and the Connolly Treasury severed the dollar’s link to gold. Fed Chairman Arthur Burns begged Nixon, Treasury officials, and other economic advisers close to the president to not commit such an economy-sapping error. Burns, like Meyer nearly 40 years before, was ignored.
The Fed obsessed live in a world in which history is of no consequence. Even though the dollar’s exchange value has never been part of the Fed’s policy portfolio, even though the first two major dollar devaluations took place in the face of Fed protest, and even though the biggest U.S. currency devaluations (“that’s not worth a Continental) happened before the Fed opened its doors, those whose minds are occupied by the men and women inside the Marriner Eccles Building will tell you over and over again that the Fed controls the dollar’s value.
What about “low” interest rates? Ok, the very notion of “low” interest rates is a major falsehood on its own. Hard as it is for the central-bank obsessed to wrap their heads around, rates are what they are. No one borrows money. They borrow what money can be exchanged for: cars, houses, vacations, tractors, office space, etc. All of this is very expensive, which is a statement of the obvious. So to pretend, as the central-bank captivated do, that the Fed and other central banks can decree “easy credit” is as lamebrained a view as the Keynesian one that says government spending multiplies economic growth, or the 20th century view from the old Soviet Union that said Five Year Plans would result in enormous abundance.
Back to reality, interest rates are a cost of accessing market goods. If central banks could set those rates, or make them artificially cheap, there would be no reason for anyone to borrow money simple because there would be nothing worth buying. For those still scratching their heads, just look up the “U.S.S.R.” and “collapsed” to see why the intense agonizing about Fed “easy money” comes from some kind of parallel, unreal, universe.
But the main question for those pre-occupied by central bank conspiracies to contemplate is what government would be doing minus the Fed. More specifically, does anyone think government officials wouldn’t be trying to manipulate the cost of credit with an eye on pleasing various constituencies? After all, what are the World Bank, the IMF, Fannie, Freddie, the SBA, the PPP, and all manner of other hideous political creations but an attempt by those in power to make cheap or costless what logically isn’t?
Sure, but the Fed bails out banks? Yes, it does. Or it thinks it does. Word inside the central bank is that Citi alone has been saved at least five times over the last thirty or so years. Ok, so what’s your point? Does anyone remember 2008? Does anyone remember how President George W. Bush decided that the markets that quite simply are (much like interest rates) needed to be bended so that they would reflect an unreality embraced by Republicans and Democrats alike? That’s a long, or a short way of saying that the Fed vanishing tomorrow would in no way result in a cessation of bank bailouts.
Which brings us to government spending. The central bank bewitched tell us all that “money printing” results in expanded government borrowing and debt. They should go back to school, or much better, get outside more. If the mere creation of “money” could summon market goods, then it would certainly be true that Argentina’s annual federal budget would rival the U.S.’s in terms of size. It doesn’t, and it doesn’t because few investors are willing to buy debt denominated in Argentine pesos. A purchase of debt is a purchase of future currency income streams, but it’s really a purchase of goods and services in the future. To pretend, as the central bank fixated do, that the creation of money amounts to the summoning of market goods truly staggers the imagination.
To be clear about what’s been written, none of it is a defense of the Fed or any other central bank. As my 2016 book, Who Needs the Fed? made plain, the Fed should be abolished. It’s a monument to wildly obtuse thinking, and a reminder of how dangerous economists are. But to pretend, as the Fed-obsessed do, that Nirvana is what follows “End the Fed” is just silly. And naïve.