A Federal Reserve advocate warned of financial fires and “trouble” from bankers if the central bank is disbanded. Dean Baker, an economist and World Bank consultant, recycled these and other central banking scare tactics from the past 250 years at an evening debate in Washington, DC. Jeffrey Tucker, an economist and executive editor of Laissez Faire Books, argued for a free market in banking.
Baker repeatedly compared Federal Reserve* to a fire department, that “may not be the best, but you wouldn’t disband it.” The truth is a bit different. Far from dousing financial fires, Federal Reserve starts them by creating piles of new money that ignite into low-interest loans for many unprofitable projects. Banks earn interest and fees on the new loans, and if the borrower goes bust, they force taxpayers to cover losses. Even worse, if Federal Reserve does arrive, its fire hoses spout more new money that ensure continued low interest rates and a veritable bonfires of false booms, bankruptcies, and unemployment.
Baker continued his ominous theme by reciting the many booms and busts during the 19th and early 20th centuries–about one crash every 20 years in his view–to prove central bankers must manage the economy. Tucker, his opponent, countered that the government caused those booms and busts, through subsidies for railroads and other industries and banking regulations. I would also add that since Federal Reserve’s beginning in 1913, financial problems have been more severe, including the 1929 crash and ensuing depression, the late 1930s’ recession, the Savings & Loan debacle, the dot-com crash, and the most recent housing bubble and recession.
Evoking a mobster who extorts protection money, Baker reminded everyone about the 1907 crash where JP Morgan stepped in to supposedly save the financial system. Baker said, “If you don’t have the Federal Reserve, you’ll be controlled by JP Morgan and Goldman. However, the Federal Reserve Act of 1913 institutionalized bankers’ control of the financial system, giving them the power to appoint their own regulators—the Federal Reserve managers—and the power to create money. They recently used this power to bail themselves out of housing loans at taxpayer expense. At least in 1907, JP Morgan had to shell out his money to help other banks.
By adjusting the interest rate, Federal Reserve has the power to start and stop business booms. It is entirely possible for people with insider Federal Reserve knowledge to profit by buying stocks or homes before the boom and selling just before the bust. Whether these people use this information or not, this power to start and stop booms should not be in the hands of any one group.
How do you make the Federal Reserve dollar look good? Baker compared it to currencies that are worse. He said the dollar rose about 40 percent compared with other currencies in the ’90s, then lost ground during the past decade. He claimed that was “pretty good,” but he’s just comparing sinking ships â€“ all currencies are being devalued. Only real items, with a primary use in society, are the best point of comparison. Measured against commodities and real products, the Federal Reserve dollar has lost about 95 percent of its value since Federal Reserve’s inception in 1913. For example, one dollar bought six boxes of cereal in 1950, and now buys only one-third of a box, whereas gold and probably any other item can be exchanged for about the same as they could in the 1950s.
Baker smeared the gold standard as “utopian.” He overlooks the 3,000 years in which gold, silver, tobacco, and other products were used as mediums of exchange throughout the world and much of U.S. history. Every person used to have the right to choose what to use as money, just as today a person can choose retirement investments.
“You can’t eat gold,” quipped Baker when someone said the high price of gold proved rampant inflation. He didn’t mention that you can’t eat dollars either. Those who chose gold as a means to protect their earnings during the past 10 years can certainly buy more food today than those who tried to build savings with dollars.
When pressed about low interest rates harming savers, Baker said he’s worried about the “millions of unemployed.” He overlooks the elderly who aren’t working either and who live off their savings and the interest. And should a Federal Reserve czar, I mean governor, have the power to choose who suffers during this recession? Moreover, Federal Reserve caused the housing bubble, luring many into the housing industry and subsequent unemployment.
The Federal Reserve’s government-enforced monopoly of the money system is a virtue, according to Baker. He compared it to a municipal water system monopoly that prevents redundant pipes down every street and thwarts merchants from over-charging for water. Yet, food is as important as water, but no one wants to give one company or municipality a monopoly on food.
An audience member pointed out that people also defended the U.S. phone company monopoly â€“ whose chief innovation during the 50 years before de-monopolization was an upgrade from rotary dial to push-button, all for the low price of $2 per long-distance minute. After de-regulation, “redundant” phone lines and now cellular towers introduced nearly free calls with phones so advanced that they’re no longer even phones. The freedom of people to choose with whom they do business forces merchants to continually improve products and reduce costs. Expect nothing less if money was de-monopolized.
“Someone” must manage the system, said Baker. Who should that be? An audience member said the better question is who could that be? The “knowledge problem” handicaps any single person or group of people from knowing the best or correct price to sell or rent cars, homes, or anything else. No one knows the correct interest rate, which is really the price to rent money. Millions of private transactions reveal a price, and it changes continually.
The most important point about Federal Reserve was barely covered. Baker said five percent inflation may be needed to spur the economy, all engineered by Federal Reserve creating new money and lending it to the government. This is NOT a solution, as the new money will devalue existing money in circulation, like a tax on everyone’s money. Five percent inflation is a five percent loss to everyone’s bank accounts and salaries. Prices then rise five percent since money is worth less.
Jackson battling bankers
Similar banking debates likely occurred before shutting down the other three central banks in U.S. history: the Bank of the United States in 1785, the First National Bank in 1811, the Second National Bank in 1836. Andrew Jackson called central bankers a “den of vipers.” Thomas Jefferson said “banking institutions are more dangerous to our liberties than standing armies.”
Dismantling the fourth iteration of a U.S. banking cartel and monopoly will reduce financial fires, and those that do occur will be less damaging and shorter in duration. Mistakes will be suffered by the people who made them, not forced upon taxpayers and savers for the benefit of financial mobsters and their crony firemen.
*Note to reader: I don’t place the in front of Federal Reserve because it’s a private company like Federal Express, though with a monopoly in its field.
James Henry hosted and moderated the debate as part of his new Empire Unplugged salon series. This debate was held at Montserrat House, a party venue.
- Jeffrey Tucker’s debate summary
- Video of Dean Baker’s opening statement
- Tangled as Political Allegory