In business, what doesn’t work is changed. Every day companies announce they are reorganizing, divesting, and eliminating unprofitable or insufficiently profitable operations. People are fired, factories closed, towns abandoned—painful but necessary economic root canals. If a company doesn’t do so, investors mark down its securities, profitability declines, executive bonuses shrink, worker pay erodes, market share declines, and the company falls behind its competitors, until it’s bankrupt. That is the ceaseless, pitiless logic of markets and capitalism; it’s built into the system.
Governments do not operate in the same way, not a dazzling insight. They have their own internal incentives and logic, which defy logic. SLL has said that for government, nothing succeeds like failure. That’s not facetious; it’s true and there are reasons for it. In response to some sort of public demand, a government program is created. The day the legislation is signed marks the height of the public’s concern with whatever problem the program was meant to address. It also marks the beginning of the Washington scrum among affected individuals and businesses, their lobbyists, bureaucrats, and politicians. While the public moves on the next issue, the scrum know that outcomes will be dictated by the government and big bucks ride on influencing those outcomes. Before long new shoots of Washington’s indigenous flora and fauna sprout: lobbying, campaign contributions, bribes, revolving doors, cronyism, and regulatory and bureaucratic capture, in short, corruption that dares not speak its name.
It’s tempting to say that the question of failure or success of the programs original mission becomes irrelevant, but that’s seeing it through rose-colored glasses. Failure is preferred by all concerned. Failure can always be attributed to lack of adequate funding and inadequate powers for the government agency responsible for the program. This leads to bigger budgets, more power, and more of the attendant influence peddling and corruption. And that’s why government continuously gets bigger, more powerful, more failure-prone, and more corrupt. To outside observers, Washington is an out of control cancer. For those on the inside, the malignancy is a huge success, precisely because it is malignant: destroying healthy tissues, proliferating unchecked, but ensuring its own survival at the expense of its host.
The history of the Federal Reserve presents no anomalies; it has gone from failure to failure. Its loose money during the 1920s led to the stock market crash of 1929 and a recession that FDR turned into a Great Depression. Fed printing press financing of Johnson and Nixon’s guns and butter paved the way for inflation in the 1970s, the worst since the Civil War. Greenspan’s serial lowering of the monetary floodgates in response to the 1987 stock market crash, the savings and loan fiasco, the Asian market meltdown, Y2K (a crisis that never happened!), and the tech wreck gave rise to his infamous equity market “put.” The Fed sponsored a cheap-money housing bubble and bust; the bust met by Bernanke’s “put.” Bernanke and Yellen’s zero interest rate policy and massive debt monetization have not produced economic recovery, but have destroyed price discovery in financial markets, promoted the political propensity to run up debt, and underwritten trillions of dollars of malinvestment. Because the Fed’s program has served as a template for other central banks’, there are trillions of new yen, euro, and renminbi debt and malinvestment as well.
Not despite but because of these failures the Fed’s budgets, powers, and influence over the economy has grown since its 1913 inception. So too has the attendant corruption. The central bank has been captured by the banking industry and is emblematic of the what’s-a-back-scratching-among-friends culture of Washington. Beneficiaries of cheap money recycle some of their loot into six-figure speaking fees for the men responsible for that largess, dutifully sitting through Greenspan’s and Bernanke’s unmemorable speeches. The door between the Fed and Wall Street never stops revolving. A stint at the central bank is a worthwhile apprenticeship before a lucrative career in hedge funding or investment banking or an influential semi-retirement and cushy sinecure afterwards.
If the Fed were a business it would have been shuttered decades ago. As a de facto arm of the federal government it has thrived. If SLL were a conventional, mainstream financial website this article would conclude dutifully with a call for reform, joining hundreds of other long-forgotten articles on the Fed. Reform is a badge of honor for government entities. Every agency, bureau, and department worth it’s salt has been reformed; most more than once. Experienced bureaucrats roll with the punches: publicly accepting the need for reform; working with lawmakers on its specifics; implementing it; then distorting it beyond all recognition to further serve the needs of the bureaucracy and constituents. Like regulation for private businesses, reform is not embraced but is tolerated, an inevitable part of governance.
The only “reform” that would have a lasting effect on the Fed (or any other government entity or program) is abolition. Nobody has ever presented a coherent case why governments and their central banks must be involved with money, and there are plenty of reasons why they shouldn’t. Invariably debtors, usually their country’s largest, governments have a clear incentive to devalue their debt through monetary depreciation. They accrue issuers’ advantages of seigniorage, the difference between the cost of production and the value of their currencies. Central banks purchase their debt with money they conjure from thin air, providing a market and suppressing interest rates, thus facilitating governments’ indebtedness and expansion. The economic value governments realize from currency depreciation comes from their citizens, who hold their depreciating currencies. It’s another tax, much preferred by governments because it’s hidden.
What would private money look like? Undoubtedly any transition from government money to market-determined money would be complicated. Multiple forms of money would probably evolve in a private-money world. Specie-backed bank notes are almost certain, which might not be the end of fractional reserve banking but would certainly curtail it. Some of the newer cyber-monies might meet the market test. Money, whatever its forms, serves economically useful functions. Taking money away from central banks and governments and leaving it for market determination takes it away from the two institutions most responsible for impairing or destroying its economic value. Markets will determine the most efficient and trustworthy forms of money, some of which are unforeseeable at the present time (almost by definition, innovation is unforeseeable until it happens).
What can be foreseen is that private money, whatever its form, will embody some sort of identifiable value. Specie-backed money will be convertible into a precious metal, obviously tangible value. Cyber-money will promise anonymity, transactional ease, and an untouchable promise of a controlled quantity in existence. In a private money system, both those who originate the money and those who use it will have an interest in maintaining its value. Beyond that, we would have to see how people and markets use private money and how it evolves.
That statement shouldn’t doom it. All sorts of government programs are birthed with extravagant promises, when it can confidently be asserted beforehand that the program will fail, expand, grow in power, become increasingly corrupt, and never die. Markets and private, for-profit entities continuously change and improve…or die. Private money would be a process of trial and error. So is manufacturing, medicine, transportation, entertainment, communications, and every other private market activity. That’s how change and improvement happen.
However, there is no way that the transition to private money can happen in the present system. The government and its beneficiaries would lose power, prominence, the ability to manipulate economic variables—including asset markets’ prices—for political advantage, and hidden tax revenues. It is no coincidence that bloated welfare-warfare-regulatory states blossomed in conjunction with central banks.
Central banking’s greatest failures lie ahead of it. As the Fed’s powers have grown, the variables it is charged with controlling have grown as well. Inevitably it will run into the Command and Control Futility Principle: Governments and central banks can control one, but not all variables in a multi-variable system (see “Crisis Progress Report,”). When control is lost and the economy and financial markets crash into a deflationary depression, it is to be hoped, perhaps in vain, that the Fed will be unable to escape its rightful share of the blame. Consequently, there may be an intellectual shift, a willingness to question and reject the fundamental premises of central banking. The ultimate conclusion: for freedom and economic sanity to be restored, money must be privatized and the creature from Jekyll Island slain.
CHAPTER 28, FOOLS’ GOLD: WHY THE FED WAS A BAD IDEA
A NOVEL OF THE INDUSTRIAL REVOLUTION