The past week marks the 103rd anniversary of President Woodrow Wilson signing the Federal Reserve Act. The bill permanently established a central bank with enormous powers and influence. At the time, Americans were highly skeptical of such sweeping encroachments, so like thieves in the night, sponsors and designers of the new law met just days before Christmas for the finishing touches. While the public at large celebrated the birth of Christ, bankers and politicians in one fell swoop seized control of the nation’s entire monetary system. Thus began 100 years of hell.
Libertarians are quite familiar with the numerous problems the Federal Reserve causes. This article serves to educate the others. The mission of the central bank morphed to—like most government programs—include many other duties. One of the main objectives is to constantly Increase the money supply, injecting more and more dollars into the economy. Generally speaking, the bank tries to keep inflation around 2% to 3% each year. Sounds harmless enough, right? Wrong. Even if we believe the government statistics on inflation, 2% to 3% each year over a span of 100 years adds up. Unsurprisingly, since the beginning of the Federal Reserve the cumulative rate of inflation is over 2000%! The dollar cannot buy today what it could 10 years ago, let alone 100 years ago.
This continuous decrease in value robs consumers of purchasing power. Year after year, consumers must dedicate more of their hard earned money to buy the same quantity of goods and services. The law of supply and demand holds true, even with currency. An increased supply of dollars leads to a lower “price” of them. Who does this harm the most? The poor and savers of course. People on fixed incomes, or anyone with stagnant wage growth, gain nothing. As we know, inflation causes all prices to rise. Food. Gas. Healthcare. Literally every economic activity becomes more costly. With limited resources, the poor have almost no recourse.
One of the primary functions of a stable currency is to serve as a store of value. Central banking virtualy guarantees that savers cannot store their dollars in good confidence. The Federal Reserve enacts policies that essentially punish saving and reward spending in the here and now. If a dollar today will be worth 95¢ next year, then clearly saving that dollar is a bad idea. This incentivizes over consumption in the present at the expense of future investment. The hidden tax of inflation makes saving a chump’s game. So long as the Federal Reserve exists, the dollar cannot fulfill one the most rudimentary functions of a currency: a stable store of value.
Perhaps the absolute worst consequence of central banking is the state’s near limitless ability to wage war. War is extremely expensive, not only in human lives, but also monetarily. To fund expansive wars, the state has only two options: taxation or money printing. Regardless of the purpose, raising taxes is rarely popular. Expanding and diluting the money supply provides the state with a short term and effective method of funding. In the short run, the state indulges in all the immediate benefits of “free money” from inflationary monetary policy. Without having to bear the political costs of unpopular tax increases, the state can readily stoke war fever. Without the support of the Federal Reserve, funding the US federal government’s endless international crusading simply would not be possible. Any serious critic of the military industrial complex and the warfare state must oppose centralized banking.
Lastly, artificial increases and decreases in the money supply create catastrophic economic distortions. From its inception, the bankers at the Federal Reserve meddled with legitimate economic growth. A well-known side effect of changes in the money supply is indirect control of national interest rates. Interest rates signal invaluable information to entrepreneurs about time preferences. They let entrepreneurs and investors know whether a particular business venture will generate real profits. When the Federal Reserve artificially increases the money supply, and thus lowers interest rates, it falsely signals the potential profitability of hiring, building, and expanding. Businesses make these mistakes and add air to a ballooning economic bubble. The resulting market crash and correction leads to recessions and in extreme cases depressions. The Great Depression and more recently the Great Recession could not have happened without poor monetary policy.
The Federal Reserve, along with central banking in general, is an enemy to those who desire freedom. With their unchecked monopoly over currency, central banks have proven themselves entirely irresponsible. They’ve destroyed the purchasing power of our dollars, engaged in endless international conflict, and caused predictable boom and bust cycles in the economy. Like the populists of Andrew Jackson’s era, we must oppose central banking and disseminate the truth to as many people as possible. The true political power lies with the institution controlling the money. All other forms of governance are essentially subject to the whims of the central bank. Spread the truth and end the Fed!
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