How To End the Fed, and How Not To
by Gary North: Social
Security Checks Raided To Pay for Student Loans
would be very easy to end the Federal Reserve System. Congress would
write the following bill. The President would sign it.
- The Federal
Reserve Act of 1913 and all subsequent amendments to that Act
are hereby revoked.
- The gold
that belongs to the United States government, and which is kept
on deposit with the Federal Reserve System, is hereby transferred
to account of the United States Treasury.
If the Federal
Reserve System has made any secret agreements with other central
banks regarding the ownership of that gold, those arrangements would
become legally null and void. The FED would own no gold of its own
to deliver. Ownership would revert to the United States government.
If other central
banks wanted to sue the Federal Reserve System, an exclusively private
entity acting on its own authority alone, to recover any gold the
FED had promised to deliver, they would have the right to do so.
If they really thought the FED could deliver on those agreements
merely because a court ordered it to, they could hire lawyers and
JACKSON VS. CENTRAL BANKING
There is a
legal precedent for all this. In 1832, Henry Clay and his allies
in Congress decided to make a political issue of the Second Bank
of the United States, the Federal Reserve System of that era. It
was a Presidential election year. Clay proposed the re-chartering
of the Bank four years early. The bill passed Congress. The Wikipedia
account of what happened next is accurate. A confrontation took
place between Nicholas Biddle, the most arrogant central banker
in history, and President Jackson. How arrogant? He believed he
could crush Andrew Jackson, and said so in private letters.
mobilized his political base by vetoing the re-charter bill and
the veto sustained easily won reelection on his anti-Bank
platform. Jackson proceeded to destroy the Bank as a financial and
political force by removing its federal deposits, and in 1833, federal
revenue was diverted into selected private banks by executive order,
ending the regulatory role of the Second Bank of the United States.
In hopes of extorting a rescue of the Bank, Biddle induced a short-lived
financial crisis that was initially blamed on Jackson's executive
action. By 1834, a general backlash against Biddle's tactics developed,
ending the panic and all recharter efforts were abandoned.
In February 1836, the Bank became a private corporation under Pennsylvania
commonwealth law. It suspended payment in 1839 and was liquidated
not have to do anything else besides pull its accounts. The Bank
could not compete. It was a legal appendage of the U.S. government,
although privately owned. It went belly-up.
So would the
Federal Reserve System. Its profits would henceforth be taxed by
federal and state governments. Its authority to regulate commercial
banks would end. It would no longer establish reserve requirements.
Excess reserves owned by the commercial banks that are held on deposit
at the Federal Reserve would no longer be backed by the U. S. government
in any way. They would probably be pulled out overnight all
$1.5 trillion worth. This would be a bank run like no other in banking
Reserve and its allies virtually the entire intellectual
class use this fear to maintain its position as the quasi-public
bureaucracy in charge of America's money. It lured the nation into
the lobster trap of debt debt undergirded by Federal Reserve
fiat money and Congressional deficits and the country cannot
see a way to get out on a pain-free basis. There is no pain-free
escape, as we will find over the next two decades: hyperinflation
or the Great Deflationary Default or both.
debt and the monetary inflation cannot go on indefinitely. Either
the dollar dies or else the debt is repudiated. Maybe both.
replace the Federal Reserve System? Nothing. Without any federal
government connection, there would be no central bank.
be the new currency of the United States? Not Federal Reserve Notes,
I suspect. Something else. But what? Whatever the free market creates.
bail out Congress when it runs huge deficits? Not the Federal Reserve
System. Then who? Maybe nobody. Preferably nobody. What would be
there with QE3? Not the Federal Reserve System. Then what? Preferably
There is an
old political slogan: "You can't beat something with nothing." But
the free market's system of supply and demand, profit and loss,
is not nothing. Replacing crony banking and the legal authority
to print counterfeit money is positive. It is like replacing cancerous
cells with normal cells. It is a vast improvement.
cancerous cells surgically with no anesthetic is painful. People
put off the operation as long as they can. The cancer spreads.
REFORMS BY ECONOMISTS
error of every scheme to reform the FED, or regulate the FED, or
even replace the FED, is this: it establishes a professionally designed
system of money management that relies on a committee of government-paid
economists. These schemes have this in common: they never rely exclusively
on the free market to determine what money is. They always place
a committee in charge. The committee is supposed to be staffed by
economists. In short, the reformers all invoke central planning
of some kind.
point of any economically plausible system to end the FED should
be a commitment to avoid all forms of central economic planning,
for all of the reasons that Ludwig von Mises set forth in his classic
1920 essay, Economic
Calculation in the Socialist Commonwealth.
Here is the
problem in both theory and practice: academic central bank reformers
believe in central economic planning. They do not trust the free
market in the area of money. They all think that a committee of
government-salaried experts has greater wisdom than the free market.
benefit of my proposed reform is that it does not rely on any committee.
It does not rely on coercion by the government. It relies exclusively
on the free market. This is why Keynesians will reject it, Friedmanite
monetarists will reject it, supply-siders will reject it, Greenbackers
will reject it. None of them believes Mises' 1920 essay.
If I had the
motivation, the time, and the curiosity, I would write a book on
various proposed reforms of the Federal Reserve System. But why
bother? None of the proposed reforms will ever gain wide acceptance.
Academic economists do not agree on much of anything, other than
the wisdom of central banking. They agree with Marx, who defended
the idea of a central bank in his famous ten steps to Communism.
will not enact any carefully designed reform. If it enacts anything,
it will be some last-minute scheme proposed by a joint Congressional
committee that is advised by the Secretary of the Treasury (Goldman
Sachs) and the Chairman of the FED's Board of Governors in the middle
of a financial catastrophe. In other words, it will be a replay
of October 2008.
THE FEDERAL GOVERNMENT!"
In order to
illustrate my point the economists' credulous faith in committee-managed
money I am going to dissect a plan of monetary reform offered
by an obscure academic economist. Why bother? Because his plan goes
back to a plan proposed by Henry Simons, who taught Milton Friedman.
It also goes back to Irving Fisher, the inventor of the statistical
As we shall
see, the author calls for pure fiat money, issued by the government.
His proposal features 100% reserve banking, but it explicitly denies
any need for a gold standard. The money supply would be controlled
by the government. In short, we can trust the government to manage
the money supply. Here is what Henry Simons proposed in 1934.
per cent reserves, simply could not fail, so far as depositors were
concerned, and could not create or destroy effective money. These
institutions would accept deposits just as warehouses accept goods.
Their income would be derived exclusively from service charges
perhaps merely from moderate charges for the transfer of funds by
check or draft. . . . These banking proposals define means for eliminating
the perverse elasticity of credit which obtains under a system of
private, commercial banking and for restoring to the central government
complete control over the quantity of effective money and its value.
This is cited
in a refutation of Simons written by Prof. Huerta de Soto, an Austrian
School economist and legal theorist. It appears on page 732 of his
detailed book, Money,
Bank Credit, and Economic Cycles ( 2012). The key
phrase is this: ". . . restoring to the central government complete
control over the quantity of effective money and its value." There
is nothing free market about this proposal. It is statist to the
disciple is Prof. Herman Daly. He is retired. He has for a generation
been a major promoter of zero-growth economics (ZGE). He has challenged
the central confession of faith of virtually all economic policy-making.
A list of his books tells the story: Toward
a Steady-State Economy (1973); Steady-State
Economics (1977; 1991); Valuing
the Earth (1993); Beyond
Growth (1996); Ecological
Economics and the Ecology of Economics (1999); and Ecological
Economics and Sustainable Development (2007). The title
of the last book is intriguing. How you can have sustainable development
in a zero-growth economy is surely a puzzle. But, honestly, it is
a puzzle that I do not choose to solve. I think sustainable development
implies economic growth. If it doesn't, I'll pass. He
is a self-proclaimed green economist green as in ecology,
not as in "cash on the barrelhead." (Most economists are green in
the latter sense.)
essay on banking reform, he proposes the other kind of green
economy: cash on the barrelhead. He asks:
our present banking system, in addition to fraudulent and corrupt,
also seems "screwy" to you, it should. Why should money, a public
utility (serving the public as medium of exchange, store of value,
and unit of account), be largely the by-product of private lending
and borrowing? Is that really an improvement over being a by-product
of private gold mining, as it was under the gold standard?
You can see
where this is headed: (1) money as a "public utility" (government);
(2) gold as bad, because it is private. He is a Chicago School economist
of the old school: a fiat money man. He wants green, not gold. He
wants paper, not metal. He wants government, not private ownership.
He wants badges and guns, not contracts. He sounds like a Greenbacker.
"Why should the public pay interest to the private banking sector
to provide a medium of exchange that the government can provide
at little or no cost?"
there not a better away? Yes, there is. We need not go back to the
gold standard. Keep fiat money, but move from fractional reserve
banking to a system of 100% reserve requirements. The change need
not be abrupt; we could gradually raise the reserve requirement
to 100%. Already the Fed has the authority to change reserve requirements
but seldom uses it. This would put control of the money supply and
seigniorage entirely with the government rather than largely with
private banks. Banks would no longer be able to live the alchemist's
dream by creating money out of nothing and lending it at interest.
All quasi-bank financial institutions should be brought under this
rule, regulated as commercial banks subject to 100% reserve requirements.
I am also
for 100% reserves, as a matter of the law against fraud. Prof. De
Soto explains this in 800 pages. But I am not in favor of the United
States Congress's being in charge of the money supply. Yet he wants
a committee of expert economists and statisticians to determine
the money supply.
make up for the decline and eventual elimination of bank- created,
interest-bearing money, the government can pay some of its expenses
by issuing more non interest-bearing fiat money. However, it can
only do this up to a strict limit imposed by inflation. If the government
issues more money than the public voluntarily wants to hold, the
public will trade it for goods, driving the price level up. As soon
as the price index begins to rise the government must print less.
Thus a policy of maintaining a constant price index would govern
the internal value of the dollar. The external value of the dollar
could be left to freely fluctuating exchange rates.
He is a committee
man. They are all committee men. They all exercise faith in committees
will make sure that the U.S. Congress will not inflate? Who will
enforce the rule tht the money supply undefined will
raise prices back to zero-price increases?
He never mentions
this. FED reformers never do. "Trust Congress," they imply. Old-time-religion
Greenbackers actually do say this. The Ph.D-holding reformers never
Then he invokes
John Maynard Keynes.
if we instituted John M. Keynes' international clearing union, the
external value of the dollar, along with that of all other currencies,
could be set relative to the bancor, a common denominator accounting
unit used by the payments union. The bancor would serve as an international
reserve currency for settling trade imbalances a kind of gold substitute.
So, he went
from the gold standard (bad) to a committee appointed by Congress
(good). Now he moves to a New World Order committee that is totally
separated from Congress (best). He is not a 100% pure Greenbacker
after all. He is a Keynesian-Chicagoan-internationalist, zero-growth,
ecological Greenbacker. He is unique. Fortunately.
Then he comes
clean. He admits where this idea came from.
the 1920s the leading academic economists, Frank Knight of Chicago
and Irving Fisher of Yale, along with others including underground
economist and Nobel Laureate in Chemistry, Frederick Soddy, strongly
advocated a policy of 100% reserves for commercial banks.
There it is:
an appeal to Frederick Soddy, one of the patron saints of Greenbackism
and its cousin, Technocracy. Soddy was a monetary crank. He is still
cited by Greenbackers. I have never before seen a Ph.D-holding economist
have the courage or the honesty to cite him.
is Irving Fisher, who invented the index number the tool
that Daly's committee would use to plan the economy through planning
the monetary system. He is the man Milton Friedman called America's
greatest economist. He was challenged by Ludwig von Mises in Mises'
of Money and Credit (1912). He believed in the same fiat
money system that Daly proposes. He lost his fortune and his sister-in-law's
fortune in the Great Depression. He was the author of this insight,
published on October 17, 1929. "Stock prices have reached what looks
like a permanently high plateau. I do not feel there will be soon
if ever a 50 or 60 point break from present levels, such as [bears]
have predicted. I expect to see the stock market a good deal higher
within a few months." A week later, the crash began.
If he was
the greatest economist in American history, why was he also the
most bonehead forecaster in American financial history? I offer
this suggestion: his statistical methodology misled him.
dismiss such sound policies as extreme in the face of the repeatedly
demonstrated failure and fraud of our current financial system is
quite absurd. The idea is not to nationalize banks, but to nationalize
money, which is a natural public utility in the first place. The
fact that this idea is hardly discussed today, in spite of its distinguished
intellectual ancestry and common sense, is testimony to the power
of vested interests over good ideas. It is also testimony to the
veto power that our growth fetish exercises over the thinking of
dismiss all of this as fiat money crackpottery. It is central planning
by monetary committee. Some version of this doctrine is held by
virtually all mainstream economists. Prof. Daly is simply the most
open about the doctrine of money by bureaucratic government committee.
guild today is burdened by a century of erroneous monetary theory.
Central planning is the universal doctrine still: central planning
of money. The quest for power through politics has been the dream
of all would-be philosopher kings from the days of Plato. It is
the dream that politicians will listen to experts at all times,
especially times of crisis.
is inherently crackpot. Why would anyone with any understanding
of politics take it seriously? But economists do take it seriously
all except the Austrians.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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