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The Federal Reserve Bank Must Be Destroyed!

The Federal Reserve Bank Must Be Destroyed!
Profile photo of Patrick Barron

“Delanda est in Susidium Foederatum Bank”

(The Federal Reserve Bank Must be Destroyed)

During the years of the Roman Republic, Cato the Elder ended every speech with the phrase “Delanda est Carthago” (Carthage must be destroyed). Rome had fought two wars with Carthage, yet the threat to the Republic remained. Cato saw Carthage as an existential threat and concluded that Rome would not be secure as long as Carthage existed. So fervently did he hold this view that he ended every speech, even about completely different subjects, with the famous phrase. I believe that we Austrians need to adopt a similar phrase to remind the American people that the US faces an existential threat from the machinations of the Federal Reserve Bank. “Delanda est in Susidium Foederatum Bank”…The Federal Reserve Bank must be destroyed. Like Carthage, the Federal Reserve Bank cannot be controlled or restrained. Either it or our republic will survive, but not both. For the sake of our nation, the Fed must be destroyed.

 

Founding the Fed Instead of Ending Fractional Reserve Banking

 

The Fed was founded under false economic premises–to prevent bank runs by providing temporary liquidity to banks which found themselves unable to redeem their certificates and demand deposits for cash and/or specie. The real cause of illiquid banks–fractional reserve banking–was never seriously addressed. It was assumed that banks had the legal right to invest their customers’ demand funds in loans and that runs were caused by over indulging in this practice. But as Murray N. Rothbard explain in What Has Government Done to Our Money?, loaning demand funds instantly places  the bank in an insolvent position, for it cannot redeem all of its demand accounts for cash or specie. Through the process of lending demand funds, the banks have created fiduciary media out of thin air, reducing their reserve ratio below one hundred percent. If the banks do this on a very modest basis, the public may not be aware of the fraud. However, once the rumor starts that the bank is illiquid, there is a literal “run” to the bank to withdraw demand funds. In such a case, even a bank that only modestly lent its demand funds might find itself unable to honor all withdrawal claims and would be forced to close its doors.

 

(NOTE: Central Banking was established to legitimize counterfeiting fraud, aka – Fractional Reserve Banking)

 

The Federal Reserve Bank, as the lender of last resort, was supposed to prevent such occurrences by providing temporary, penalty rate loans to struggling banks. Note that there is nothing that a central bank could provide that could not be provided by another private bank. In fact the banking panic of 1907 was stemmed by private bank interventions led by J. P. Morgan. However, Morgan realized that such private bailouts were very risky and presented a case of moral hazard; i.e., that bankers, confident of a bailout by the Morgan banking empire, might  book riskier, higher yielding loans. So rather than face the real cause of banking crises and lobby to outlaw fractional reserve banking, the Morgans, Rockefellers, etc.–who did not want to forego the financial benefits of lending demand deposits–lobbied instead for government to create a lender of last resort, a central bank, which we named the Federal Reserve Bank.

 

Fed Policy Causes Depressions and Then Prevents Recovery

 

Over time this entity, new to Americans, would expand its role in fruitless attempts to cure crises caused by ITSELF. The Fed caused and exacerbated crises by allowing, facilitating, and expanding the practice of fractional reserve banking. In the 1920’s the Fed began to expand the money supply to prevent prices from falling, justifying its new role as one of maintaining a stable price level. But printing money to prevent falling prices caused malinvestment in the structure of production and led to a depression by the end of the decade.

 

Rather than do nothing and allow the purging of bad investments and liquidation of malinvestment, which would re-establish a sustainable structure of production, as it had done at the beginning of the decade in the depression that no one remembers, the Fed intervened monetarily to pump up reserves while the Hoover administration intervened fiscally to prevent price deflation and maintain high spending levels. All this is well documented in Murray N. Rothbard’s America’s Great Depression.

 

Yet even an interventionist Fed could not prevent the massive bank failures of the 1930’s, due to many factors which included restrictive bank branching laws. But the primary cause of the bank failures was *again* the banks’ adherence to fractional reserve banking practices which resulted in  their inability to honor all demand deposit redemption requests for specie and/or cash.

 

In the Roaring Twenties fractional reserve banking had expanded the money supply well beyond the ability of banks to stem all the runs. Again the banks and the politicians refused to dig deeper into the real cause of the problem. Rather than separate banking into deposit and loan functions–the former would require one hundred percent reserves and the latter would require strict asset-liability management to ensure that loans matured on the same schedule as time deposits, what is commonly known as funding loans out of savings–the government suspended specie redemption and eventually formed the FDIC to “ensure” bank deposits.

 

However, the FDIC’s “insurance” program was nothing more than an explicit promise that the Fed would print enough money to redeem all ensured deposits, thus insuring the continuation of fractional reserved banking, the very problem that was used as the excuse to establish the Fed; the very problem–bank instability–the Fed was sold to the public to solve. So, once again, a solution to cure a problem caused by the Fed itself resulted in even more power for the increasingly government run banking system.

 

The Monetary Genie Was Out of the Bottle

 

Once the politicians realized that the Fed could print money at will, the genie was out of the bottle. Money growth did expanded at a modest rate for a few decades, due mainly to the efforts of prudent men such as Fed Chairman William McChesney Martin (1951 to 1970) and fiscally conservative politicians such as President Dwight Eisenhower (1953 to 1961). However, it was inevitable that less prudent men, such as President Lyndon Johnson and all Fed chairman with the exception of Paul Volcker, would rise to power on their promises to fund all manner of government programs with what was now seen to be unlimited money.

 

This was the key revelation!

 

Money printed in unlimited quantities could cure all ills, or so it was claimed, and to its everlasting shame the economics profession provided sufficient “academic” cover to support these spurious assertions. Now everyone understood that the Fed could monetize–i.e., purchase government debt itself–any amount of government spending. The economics profession refused to consider the inevitable consequences of these irresponsible monetary policies. Instead it cherry picks historic price data to prove them to be non-inflationary and endorses changes to unemployment calculations to prove them to be fiscally sound, too. These whores, these house economists have their eyes glued to the rear view mirror of spurious government statistics as the race car of state hurtles toward an economic cliff of depression and perhaps even hyperinflation.

 

Money Production and Banking Subject to Commercial and Criminal Law

 

It matters not who is in charge of the Fed or what rules Congress may insist that it adopts. Once money printing, via fiat or fractional reserve credit creation, is seen to be both feasible, justified, and legal nothing and no one can stop it. The political pressure to fund government programs will be irresistible. Everyone knows that the Fed seemingly has the ability to solve their problem by monetizing the federal debt. Should it refuse to do so, we would see riots in the streets similar to what is happening in Europe as protesters target the European Central Bank.

 

The only solution is to destroy the monster that makes it all possible, the Fed. Without the ability to sell its debt to its own central bank, government would be forced to live within the means set by the will of the people through their elected representatives. The scales would eventually fall from the eyes of both politicians and public as its becomes clear that what government spends comes at the expense of the private economy. The public would no longer be fooled by government propaganda that its spending spurs the private economy, when it is clear that the only way government can spend is to tax the people or suffer the crowding out effect of private investment by government borrowing. Money production must be moved to private hands that are subject to normal commercial and criminal law, where money printing is nothing more than counterfeiting. Banks, too, must be subject to normal commercial and criminal law, which requires them to treat a demand deposit as a bailment for which they must keep one hundred percent reserves. Loan banking would be subject to the normal principles and well understood practices of sound asset-liability management, whereby loans are funded by real savings and the maturities of both loans and deposits must be coordinated in order for lending banks to honor their liquidity commitments. The path to the destruction of our nation through endless wars and welfare would end with the destruction of the Fed.

 

Delanda est in Susidium Foederatum Bank!

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Patrick Barron is a consultant to the banking industry. He teaches Austrian school economics at the University of Iowa and Bank Managemant Simulation for the Graduate School of Banking, University of Wisconsin. Visit his blog. Send him mail.

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