C.S. Hayden's Blog

Mike Rozeff on the Fed's Wrecking of the Economy and Bernanke's Collectivism

It is entirely reasonable to conclude that discretionary central banking with open market operations and without gold playing an essential constraining role is the cause of greater price instability and price inflation. Central banking with discretionary open market operations and without the constraint of gold is what helps defines central banking; that and the fact that its notes are legal tender by law. If open market operations were taken away and if the central bank had to redeem its currency in gold, we would no longer have central banking as we know it now and as we have known it since 1913. For this reason, it is reasonable simply to say that central banking is the cause of greater price instability. To achieve price stability, we need only get rid of central banking. If we do that by stripping it of various powers like open market operations and by making it redeem in gold, all the while retaining the shell institution, we are essentially getting rid of central banking.

We can reach these conclusions if we look at the record. They are not conclusions that depend on being a libertarian, a socialist, a democrat, a republican, a collectivist, or anything else. And if we go into the matter more deeply and examine the theory of how the monetary systems operate before and after 1913, we will affirm these conclusions again. I will do this only briefly, but enough to convey the basic idea. Banks before 1913 could not inflate in any serious way because if they did, there would be a run on the bank. The depositors would demand redemption in gold, and that would cut short the bank’s inflation. So banks had to be careful about making too many loans. After 1913, the FED essentially had the power to inflate without having to worry about gold redemption. At first it did this for special reasons like wars and depression; and gold actually flowed into the U.S. because of problems overseas. But eventually, the government simply stopped redeeming in gold altogether, so that the FED could inflate without gold as a constraint. And so, no matter what our political beliefs are, we have to conclude that sensible theory also tells us that central banking causes price instability.

posted by C.S. Hayden @ 12:20 PM