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Money Part VII - End the Fed



April 12, 2009 – Comments (6)

I've had to break this post up into two parts. The first part is here. The second part will be the first comment. I hope you enjoy it, particularly the ending video :)


I haven't been a very busy blogger lately. Lots of forces are arrayed against me right now. Work has been busy. My family has needed my support. It's tax time. Most importantly, however, it's baseball season and I don't miss a Cubs game if I can help it. This year, I've got the MLB.TV package and a VPN set up so I can watch 2,430 MLB games online out here in the middle-of-nowhere-Qatar. Thank Gore for the Internet!  That means a lot more emails to friends lamenting the Cubs lack of a lefty handed setup guy (aka the LOOGY) and fewer posts about economic freedom. 

It's an appropriate segway to our current discussion. (You can find the previous six articles on Money here.)  In our efforts to End the Fed and return America to a monetary system of sound money there are several forces aligned against us. Without an understanding of who they are it will be impossible to win this battle.  We may defeat one enemy in the intellectual debate, only to lose to 4 or 5 others.  In the previous 6 posts on money we've covered a large number of misconceptions about our current monetary system. This is going to be a speed of light summation of the arguments for the abolishment of the Federal Reserve and legal tender laws and their replacement with nothing. 

Money use arose in society naturally, as market participants needed a fungible asset to be used in indirect exchange, normally gold and silver. The government never decreed money use. Instead it abrogated competition in currency creation after starting its own mints. The government mints were often the source of corruption by debasement.  Without abrogation, governments could never have monopolized the money supply. It would be as likely as the Post Office driving UPS out of competition.  It couldn't happen without outlawing UPS.  

You Burned My Towns and Raped My Women But I Enslaved Your King - The Birth of Central Banking

If you ask a Scot what he thinks about the English you are likely to hear a list of expletive filled greivances that span a thousand years.  Scotsman William Paterson turned the tables on the English in 1694, offering to loan the king 1.2 million pounds in exchange for the creation and priviliged status of a new bank, charmingly called The Bank of England. Thus, the English crown and his people were enslaved.  William III had ascended to the throne during a time of rebellion and endless conflict.  The Crown was broke.  Rather than curtailing Britain's vast empire and ending hostilities with France, the King applied for a loan.  Besides, I'm sure anyone who mentioned such peaceful alternatives was considered a threat to national security who emboldened the francoterrorists. 

The Forces Aligned Against Us

Before we move along, here is my personal message to all liberty lovers. When debating these topics, we tend to fall into a trap. We focus on bankers or Socialists, exclusively, thus making us easy targets for skeptics. "Oh you believe in evil banker conspiracies," they mock us.  Its much more important to focus on the policies, with an ultimate understanding of who benefits from these policies.  All who benefit from the Fed will be looking to crush any resistance, as Democratic Congressmen Barney Frank and Henry Gonzalez found out 1993 when they took on the Fed.  Imagine their surprise when they were smashed by fellow Progressive Bill Clinton? 

Back in 1993 Gonzalez sponsored a bill (Frank co-sponsored) that called for "fullfledged Congressional control of the Fed's budget ..... full independent audits of the Fed's operations; videotaping the meetings of the Fed's policymaking committee; and releasing detailed minutes of the policy meetings within a week ..... the presidents of the twelve regional Federal Reserve Banks would be chosen by the president of the United States rather than, as they are now, by the commercial banks of the respective regions." (The Case Against the Fed, Rothbard, p. 4)

This isn't about Left and Right, Conservative and Liberal.  This is about liberty vs. power, individual power vs. collective power. We see that, in this game, money production makes strange bedfellows.

The Bankers

Support for our current banking system runs deep in the Fool community, unsurprisingly. Most seasoned investors have intimate knowledge of commercial banks and investement banks, and have followed the actions of the Fed for years, if not decades. Imagining a world without them seems impractical and foolish.   We've already tackled the typical inflation / deflation arguments put forth by Fed proponents as well as other less sophisticated arguments for the Fed's monopoly on money.  

The purpose of the Federal Reserve, from the banker's perspective, is to create money for banks. It is really that simple.  Fractional Reserve banking is inherently flawed and always collapses.  It must because embezzlement is a destructive process.  That is why in any scenario besides banking, embezzlement is outlawed.  It destroys wealth.  A backstop is needed - a lender of last resort - to protect the banking system from its predetermined downfall.  

What is embezzlement and how does it apply to today's banks?  Banks started as money warehouses where deposits were backed 100% just as they are in any storage facility.  Imagine giving a warehouseman your grandmother's wedding ring to hold for a year and when you return he shrugs, "sorry but I lent it out to John and he never paid it back. Here's the cash value for it instead from the FDIC."  You would be outraged and he would be put in jail.  But what if the item was fungible?  In other words, what if the item had millions of close matches that could be subsitituted with no harm done?  Wouldn't that eliminate the problem of fractional reserve?  Not at all. Consider the grain warehouses of the 19th century.  Often they operated on a fractional reserve, selling futures contracts to Chicago BOE traders for grain assets they did not have in reserve.  Eventually, just like the banks, all their schemes fell apart. They were charged with embezzlement and jailed. 

So why not allow 100% reserve banks to compete with fractional reserves? If you did that, savers would set the interest rate rather than the Fed. In fact, over time it would make the Fed's interest rate manipulation fairly meaningless.  Scrupulous savers would invariably be drawn to the 100% reserve banks once they understood their advantages in stability and service.  Once 100% banks are firmly established, the idea that taxpayers invested in 100% banks would be willing to bail out taxpayers invested in fractional reserve banks seems ludicrous.  The FDIC scam would unravel and only the least risk-adverse citizens would continue to put money into the Fed's cartel.  On the flip side, fractional reserve banks would be forced to clean up their balance sheets, engage in less speculative lending, and resist the tempation to overextend themselves.  Fear of bankruptcy is the best way to keep a fractional reserve bank honest. In fact, it's the only way.  

The Fed's arguments get even weaker when we consider the idea of competing currencies produced on the market by independent entrepreneurs.  Why shouldn't money arrive at the marketplace is the same manner as clothing and computers?  The Fed's argument is two-fold: first that it will weaken confidence in the dollar and our current monetary system and second, that it will be unstable and chaotic. The first argument is true. In fact, it is the very reason that we desire free market money production.  We want to weaken the power of the dollar, as it is from this very system that forces have taken power away from the individual, confiscated our wealth, encroached upon our liberties, expanded the American empire into 130+ countries, and turned our political system into a charade and laughingstock.  The second argument is purely perjorative and speculative nonsense.  If the market for clothing and microchips is stable, based upon service, value, and reputation, why would the market in money production be any different?  The Austrian Theory of the Business Cycle can actually help you understand that the Federal Reserve itself, along with Fractional Reserve Banking, is the source of instability in our economy.

The Progressives

Imagine the surprise of Congressmen Gonzalez and Frank when President Bill Clinton opposed their plan to open up the Federal Reserve to oversight, as I described above.  Some Democrats have co-sponsored Congressman Ron Paul's bill to audit the Fed.  They too will be surprised when President Barack Obama, the self-proclaimed champion of transparency, comes out against the plan, which he is certain to do.  Powerful Progressives understand the value of having a monopoly on the supply of money.  We already observed the obvious hypocrisy of decrying monopoly as a free market evil but supporting a government granted monopoly  when its useful in this post.  

The relationship between the Progressives and central banking predates the Federal Reserve. European Socialists had already found themselves a willing supplier of the nation's wealth for their reform agendas in Europe, all but extinguishing Classical Liberalism from the continent by the late 19th century.  It was only a matter of time before they would find a way to make central banking a permanent institution in America.  

"The origin of the Federal Reserve has been deliberately shrouded in myth spread by pro-Fed apologists. The official legend holds that the idea of a Central Bank in America originated after the Panic of 1907, when the banks, stung by the financial panic, concluded that drastic reform, highlighted by the establishment of a lender of last resort, was desperately necessary. All this is rubbish. The Panic of 1907 provided a convenient handle to stir up the public and spread pro-Central Bank propaganda. In actuality, the banker agitation for a Central Bank began as soon as the 1896 McKinley victory over Bryan as secured." (The Case Against the Fed, Rothbard, p. 82-83)

As the Bankers tried to grapple with an American psyche that favored sound money they had some things working in their favor. The hard money Democrats had lost a great deal of power to the inflationary Republicans after the Civil War.  (Yes, the Democratic party used to support hard money and slavery. At least they had one out of two right.)  During that same period the Progressives had made massive inroads into American politics by working with Big Businesses, pushing forward regulatory reforms that would monopolize and cartelize certain industries while telling the public that these reforms would prevent monopolies.  The naive American public was buying it up.  The railroad and meat packing industries had already consolidated their power, and now it was the bankers turn to ally with the Progressives to crush competition.  

But why would Progressives, those noble reformers want to stamp out competition and be so willing to engage in dubious, hypocritical, and deceitful tactics?  In reality, the Progressives have only wanted one thing: power.  They'll pretend to populism if it will help win elections. They'll tell you to Rock the Vote since you'll surely vote for their guy.  They'll promise anything under the heavens so as long as you'll vote for them.  They may refer to themselves as Liberals or Socialists or something else, but their political ideology is always a secondary consideration, useful only for motivating the apparatchik at the DNC and shaping the political discussion.  Progress is moving forward.  Moving forward towards what exactly is a matter of little consequence. Being the people who do the moving is what matters to them. Might makes right.   

Continued in the comments section....

6 Comments – Post Your Own

#1) On April 12, 2009 at 9:26 PM, whereaminow (< 20) wrote:

The Military

Speaking of mighty, beware the Military Industrial Complex. 

If what the Austrian School says is true regarding the Inflation Tax, then the military and its tentacles of contractors have no wish to disrupt the supply of monetary heroin.   Here Ron Paul talks about the Inflation Tax and Wall Street, but Defense Contractors derive a similar benefit from using the money first.

I don't think I need to add any more to this.

The Intellectuals

For generations of Americans shaped by the views of intellectuals it is difficult to conceive of them as bungling, power hungry, grubbers.  Yet, for those who get to see the American intellectual unmasked, the stark contrast between the hallowed chambers of higher learning and the weasels that often inhabit them is disturbing. Take for instance Randolph Bourne's critic of the intellectuals on the eve of World War I:

"And the intellectuals are not content with confirming our belligerent gesture. They are now complacently asserting that it was they who effectively willed it, against the hesitation and dim perceptions of the American democratic masses. A war made deliberately by the intellectuals! A calm moral verdict, arrived at after a penetrating study of inexorable facts! Sluggish masses, too remote from the world-conflict to be stirred, too lacking in intellect to perceive their danger! An alert intellectual class, saving the people in spite of themselves, biding their time with Fabian strategy until the nation could be moved into war without serious resistance! An intellectual class, gently guiding a nation through sheer force of ideas into what the other nations entered only through predatory craft or popular hysteria or militarist madness! A war free from any taint of self-seeking, a war that will secure the triumph of democracy and internationalize the world!" (Read the entire essay here.)

Rothbard and Mises have also noted intellectual propensity to favor planning, since it is assumed that the noble elite will certainly call upon them to assist in such great causes.  What better men and women to plan our society than them?!  Yet, as Rothbard proved, the market needs no planning. It only needs for wiser men and women to stay out of the way and keep the intellectuals and politicians from intervening.  

Yet, the worst light shed on the Intellectuals comes from their peers who portray the backroom politiking and arm-twisting of the university world in such disgusting detail that it's hard to imagine how these animals have to time to do any real research.  Perhaps, some of them don't.

We won't even scratch the surface of where the funding for America's universities derives from, except to note that even the private institutions recieve federal assistance that approaches or exceeds fifty percent! No wonder college professors are enamored with State solutions.

The Special Interest Groups

This group really doesn't need any thorough explanation. If a special interest group derives a benefit from the government it certainly will not want to see the printing presses replaced with something so quaint as honest money.  How would they get paid?

The Political Entrepreneurs

There is no bigger myth in American economic history than that of the Robber Barons. Progressives like Sinclair, it is said, saved America by exposing the evils of unregulated capitalism and ushering in the Progressive Era filled with market reforms.  These reforms included the American Meatpackers Association, which pushed forward massive regulations that crippled smaller competitors who couldn't afford them.  Perhaps you prefer Antitrust and Monopoly legislation that has been used ever since inception to protect big businesses that were losing out to smaller, more dynamic competitors in the free market.  

Just as the morally bankrupt CEO's of our day turn to the government for assistance when times are bad, so did the political entrepreneurs of the 19th century.  With the assistance of Progressives and Republicans they were able to break their competitors with the strong arm of the law.  The story is always the same and people always fall for it.   

The Masses

Speaking of which....


It's certainly a formidable task to abolish the Federal Reserve and return America to honest money.  However, now that you know how power works in America, you have only three realistic choices.  First, you can go back to ignorance, and hope and pray that the people in charge will not ruin your life.  Second, you can join them.  I suggest running for office as a Democrat, working with the Progressives, say in Chicago, and hoping they'll carry you to great heights.  Or finally, you can join the fight against them.   Join the Campaign for Liberty, The Libertarian Party, The Constitution Party, or become a Ron Paul Republican or Ron Paul Democrat, as they say.  Either you make the choice or someone else is going to make the choice for you.


David in Qatar

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#2) On April 13, 2009 at 1:58 AM, DaretothREdux (46.24) wrote:


My second favorite chant right after RON PAUL! RON PAUL! RON PAUL!

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#3) On April 13, 2009 at 8:38 AM, whereaminow (< 20) wrote:

Thanks Dare. At least now the poser Huckabee supporters will know what they're saying at the next CPAC.

After he finished his tremendous book (and exhausting) A Monetary History of the United States, Friedman wondered whether the Fed should be replaced by a computer. Monetary policy, he felt, was too important to leave to humans.  Since the Fed always seemed to get it wrong, maybe a computer would work better.

I guess its too much to hope that he was joking. Monetarists like Friedman are always asking "what is the optimum supply of money in an economy and how can we manage it?"  Have they considered whether that question is even worthwile? Does anyone wonder what the optimum supply of toasters is in an economy?  What about push brooms or microchips?  Do we need to have a Toaster Reserve to manage the supply of toasters?

And to think, the guy was so smart otherwise.

David in Qatar

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#4) On April 13, 2009 at 11:49 PM, FleaBagger (27.55) wrote:

Who was that in the first video?

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#5) On April 14, 2009 at 1:49 AM, redneckdemon (< 20) wrote:


      Having read all of this series of blog posts, I can only hope that book deal goes through soon.  I found them all to be highly informative and entertaining (though your editor needs to be fired), and the comments served both to expand your posts and provide a nice contrast to view them with.

Thank you, and keep up the great work.  When the revolution comes, I'll share my SPAM hoard with you ;)


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#6) On April 14, 2009 at 11:06 AM, whereaminow (< 20) wrote:


The first video is Part 4 in a 5 part series called Conquering the Spirit of Debt by Pastor Rod Parsley.  All 5 vidoes are up on You Tube.


No matter how many times I proofread, I can't catch my own mistakes. It's bizarre!  Well, at least I'm happy that you've enjoyed the series.  Best wishes to a fellow Patriot.

David in Qatar

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