End the Fed?

Disney and Dollars

     Scrooge McDuck, Walt Disney's leading character in the show “Duck Tales,” was born in Scotland into a poor family of many generations. The first salary he ever acquired was made from a humble job as a shoe shiner. Scrooge eventually moved from Scotland to America and became a self-made millionaire because he was a smart risk-taker. In one episode of “Duck Tales,” Gyro—a genius inventor who also happens to be Scrooge's personal friend—creates a ray-gun which is able to duplicate any item he fires it at. Without Scrooge's knowledge, his mischievous nephews, Huey, Dewey, and Louie, discover the machine and begin turning their insignificant piggy banks into endless supplies of money.

     Naturally, almost every character in the cartoon believes this is a groundbreaking invention that will make them incredibly wealthy, and change the world. Disney's animator's could have illustrated the excitement of these cartoon characters by drawing dollar signs in place of pupils in their eyes. To everyone's great surprise, however, Scrooge McDuck demands the machine must be destroyed immediately. Scrooge carefully explains that the more money they create, the less valuable the money already in existence will become. In other words, if money actually did grow on trees, it would become just as invaluable as the leaves that grow on its branches. Scrooge also warns that if this machine falls into the wrong hands it could potentially bring chaos to the world. This children's cartoon story, as silly as it might sound, provides for us a superb illustration of the dangers the Federal Reserve system poses to the economic welfare of the United States.

A Brief History of The Federal Reserve System

     The Federal Reserve began in 1913 during what has commonly been referred to as the “Progressive Era.” In a time in which the gold standard maintained a system of balance, banks could only risk so much money on what they loaned out. Gold, in a sense, acted as the key regulator even over the largest banks. However, over a long period of time various events occurred which pushed the creation of one central banking system that could perform actions commercial banks could not. Men like Jacob Schiff, head of Kuhn, Loeb, & Co., spoke in favor of American's adopting a European style central bank, claiming that the “country needed money to prevent... crisis.”¹ While speeches like Schiff's sparked curiosity, it would seem that the banking panic of 1907 was the strong thrust of force that moved government officials to flirt with the idea of adopting this type of monetary system.

     Two years later in 1909, President William Howard Taft personally endorsed the American adoption of a central bank, and influenced others through his endorsement. Even the Wall Street Journal ran a fourteen-part series on the benefits and need for a central bank in the United States.² In November 1910, the first drafting of the bill that would eventually become the “Federal Reserve Act” was written. The men who attended this meeting certainly were an interesting combination: Nelson Aldrich, Henry Davison, Paul Warburg, Frank Vanderlip, and A. Piatt Andrew.

     Aldrich was from the senate. Davison was a senior partner of J.P. Morgan, the banker. Warburg was a German advocate of central banking. Vanderlip was the VP of a large bank known as National City Bank. Andrew was Assistant Secretary of the Treasury to the President of the United Sates, William Howard Taft. Ron Paul notes “In this group, we find the essence of the Fed: powerful bankers with powerful government officials working together to have the nation's money system serve the interests, justified by economists there to provide the scientific gloss.”³ After some slight modifications were made to satisfy some protestors, the bill would eventually be passed and the Federal Reserve system we know today was born. Since that time, the FED—as it is often called—has played a major role throughout history in the economic status of our nation.

What is The Purpose of The Fed, Exactly?

     According to a publication of the board of governors over the Federal Reserve, the Fed was originally created, “to provide the nation with a safer, more flexible, and more stable monetary and financial system.⁴” What is its main means of doing so? How could we sum up the Fed's unique duties and abilities in one sentence? In the words of Ron Paul, “The Fed has one power that is unique to it alone: it enables the creation of money out of thin air.”⁵ Occasionally money will be created in incredibly vast amounts. Other times, it won't seem like much at all. Yet, just as Gyro's ray-gun duplicator, the Fed has the unique power to instantly make something out of nothing and to do it instantly. This concept is sometimes referred to as “Fiat money.” In other words, something that essentially comes from nothing as if God were creating all over again—if that helps to illustrate the point at all.

     The main avenue used by the Fed to create money has been through the loans given out to citizens by commercial banks. The process usually goes something like this: a bank customer applies for a loan of any amount, in this case we'll say 1,000 dollars. After approving the loan, the bank will credit that amount of money to that person's account by “creating it,” according to the Economic Way of Thinking.⁶ Contrary to what the populace believes, banks do not take the money out of someone else's account. Soon after when the customer who received the loan for 1,000 dollars spends the money, the first bank will credit the funds to the person who now owns the rights to that money. Finally, the Federal Reserve will then credit the 1,000 dollars loaned out by the first bank to that same bank, and new money has been introduced and cycled into the economy. The process sounds simple and efficient, but what sort of potential problems does the existence of the Fed pose?

Five Potential Problems The Fed Poses to our Economy

     First, regardless of our stance on whether or not America needs a central banking system, it should be noted that the freedom by which Federal Reserve operates is quite troubling. Did you know if the head of the Fed wanted to, he could print 999 trillion dollars tomorrow without any explanation whatsoever? This isn't an exaggeration, it's actually true!  The Fed's influence over the economy is most certainly unparalleled. Its power knows no other equal. It has no accountability.  Skeptics may not be one-hundred percent committed to abolishing the Federal Reserve, but all of us should certainly be troubled by the Fed's absolute freedom to exercise its will without hindrance. As Ron Paul notes, “The fact that the Fed can create trillions of dollars and distribute them... without congressional oversight should shock us all.”⁷ The Fed even has the power to control interest rates, and to carry out any desire it has without providing a single reason to congress. It certainly is troubling to realize the immense power that has been placed in the hands of the Fed.

     If those who run it were ever to be blinded by their own opinions—which all of us are at some point!—they could easily throw the American economy into complete and utter chaos. Not only that, but the Fed's unchecked decisions have bearing upon not just our economy, but the entire world's. When the American economy fails, countries that we trade with will greatly suffer as well. When those countries suffer, other countries are thrown into turmoil. A single decision of poor judgment from the Fed could easily result in a domino effect of epic proportions.  Milton Friedman, Nobel Prize winning Economist, said it best:

Any system which gives so much power and so much discretion to a few men, [so] that mistakes excusable or not—can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic—this is the key political argument against an independent central bank.”

     Just like Gyro's duplicator gun—or a real gun, for that matter—it would only take pulling of a trigger, and instantly economies all over the world would take a deadly bullet to the heart. There's no telling what sort of pandemonium it could cause. No one man should have that much power. As Ron Paul states, “No single institution in society should have power this immense.”⁸ In this writer's opinion, the people of the United States, though they are unaware, live each day atop a sleeping volcano; ever so silent, incredibly lethal, and ready to explode at any moment without their knowing.

     Second, the Federal Reserve system gives an unfair advantage to large commercial banks. Banks are able to take risks that couldn't have been taken over 100 years ago. In 2008, when many large commercial banks and huge businesses were failing, the Federal Reserve created money for the purpose of saving these companies. To have given certain businesses free money because they have been deemed “too big to fail,” does not fit within the principles of a free market. Not only should we be free to succeed, but free to fail as well. In the end, the people who end up getting hit the hardest, unfortunately, are the poor. It's also not unfair, considering that the competing companies who might have become the next big company had their competition properly fallen from the race. For them, it's like fighting a battle against “zombie corporations” who simply can not die. It all results as simply a classic example of the rich getting richer and the poor getting poorer.

     Third, the Fed, though it is neither good nor evil, has the potential to be used in incredibly immoral ways. Just as the Apostle Paul once wrote, “the love of money is a root of all sorts of evil.”⁹ Those who love money—and we can safely assume that's a lot of people—could easily use the Fed for their own crooked desires. Some allege theories regarding conspiracy and deceit consuming the Fed. Whether or not these theories are true can not and will not be proven by this writer. That being said, it does not seem foolish at all to speculate that the future may see someone take advantage of this monetary system for their own selfish gain—if someone has not already taken advantage of it already in the past. We would be wise to steer clear of the dangerous and destructive road which leads toward the love of money. The Fed can easily act as that road. Therefore, this writer would conclude it is more than likely that the Federal Reserve will be taken advantage of at some point in its history. Many systems are taken advantage of. None, perhaps, more dangerous to all of us than the Federal Reserve.

     Fourth, the Fed has the potential to cloud any voter's judgment during presidential elections. It has shrewdly been observed that before election years the president in office will seek to provide an economic stimulus to the nation. He does this, naturally, out of a desire to boost his popularity just before debates, interviews, and the eventual votes take place. What most people are unaware of, though, is that he uses the Federal Reserve system to accomplish this. The stimulus is simply artificial.  Without providing any “real” economic growth, the president can easily influence the people to vote in his favor by requesting the Fed approve of his stimulus plan.

     Sadly, this serves only his own personal interests. In the long run he only creates inflation, and he does so in a terribly irresponsible manner. It doesn't seem right for the president to artificially boost the economy before his re-election campaign just so he can get more votes. The Fed states one of their duties is to be, “maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.¹⁰” How does aiding the President by providing an artificial stimulation even come slightly close to fulfilling this duty? It doesn't.  And shouldn't the President be focusing on improving our nation rather than spending months working toward being re-elected as well as damaging our dollar's value in the process? We can be sure that even if the Fed did not exist he would most likely still dedicate his time toward being re-elected. At least we could eliminate the possibility of his causing inflation to boost his own public-image. That much in itself is important enough to be sought after.

     Lastly, the Fed, without a doubt, is the catalyst behind inflation. The irresponsible creation of money, just like in the “Duck Tales” episode, only makes money less valuable. It raises prices and makes the bare necessities harder to acquire for the middle class and poor people. If we define inflation as “an artificial increase in the supply of money and credit,¹¹” as Ron Paul does, then we must conclude that the Fed drives behind the wheel of inflation rates. In fact, the entire existence of the Fed's purpose is to generate more money.

     Toward the end of the “Duck Tales” episode, the created money begins to duplicate on its own without the use of the duplicator gun invented by Gyro. The city begins to crumble, and prices begin to soar through the roof.  Lollipops cost five-thousand dollars, and one scene shows a mother demanding her children stop dragging coins into the house stuck on the bottom of their shoes.  Luckily, the copies of the money begin to explode and cease to exist any longer. The city is saved and the duplicator machine is destroyed. Unfortunately, while this solution helped Disney writers provide a conclusion to the 20 minute children's cartoon episode, money will not just explode on its own in reality.

Solution And Conclusion

     So what should be done?  Paul says, “The Federal Reserve should be abolished because it is immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty. Its destructive nature makes it a tool of tyrannical government.¹²” While this writer appreciated Ron Paul's data and his knowledge of economics, his views seem a bit extreme, especially in the area of wars and money.  Paul advocates what could only be described as economic pacifism. Nevertheless, our conclusion doesn't deal with Ron Paul, but with the Fed. This writer agrees with Dr. Albert Mohler, who says he prefers “a simple monetary system.¹³” For now, it doesn't seem like the Fed is going away any time soon.  So what kind of solutions could make the Fed better than it is now?  This writer, who overall is not a big fan of the Fed, could only think of one: accountability
     If some form of checks and balances was put into place the Federal Reserve would instantly gain credibility.  It might even be a system worth keeping. No other leader in the U.S. government has been granted as much power as the Fed's chairman. Isn't this country supposed to operate on a separation of powers?  It is this writer's conviction that, regardless of one's background, we must all recognize the unchecked power of the Fed must be removed. The absence of any accountability leaves open the door to an economic pandora's box. Almost all of the Fed's problems stem from its unchecked authority over money and interest rates.  Unconstitutional power is the root of its bad fruit.  It isn't entirely necessary that we "End The Fed," as many will say, but a sovereign central banking system will never be safe for any economy full of mere men.

1Ron Paul, End the Fed, (2009, Grand Central Publishing) p. 19.

2Ibid. p. 20.

3Ibid. p. 21.

4http://www.federalreserve.gov/pf/pf.htm

5Ron Paul, End the Fed, (2009, Grand Central Publishing) p. 6.

6Paul Heyne, Peter Boettke, David Prychitko, The Economic Way of Thinking, (2010, Prentice Hall) p. 346.

7Ron Paul, End the Fed, (2009, Grand Central Publishing) p. 12.

8Ibid. p. 13.

9The Holy Bible, (1995, New American Standard Bible) 1 Tim 6:10.

10http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4

11Ron Paul, End the Fed, (2009, Grand Central Publishing) p. 15.

12Ron Paul, End the Fed, (2009, Grand Central Publishing) p. 104.

13Interview with Dr. Albert Mohler