The Fed

I think a lot of us here at Decline to State and a good number of people coming in to read anything I have to say all tend to agree on what should be done with the Federal Reserve System. It should be removed. It hasn't proven itself any use to society, given that even through micromanagement of monetary supply in various forms (M1, M2, etc), we still have huge booms and huge busts. One of the things Monetarists and Keyensians tend to believe is that a specific level of intervention in the market can iron that all out. In my lifetime there have been two giant rollercoasters (the stock bubble and the housing bubble) and I wouldn't be surprised if there were going to be more now that we have QE3 coming down from above.

In fact there's arguments to The Fed having been destructive. If you compare the purchasing power of the dollar now to that of pre-Fed times, it's sad to say that we need many times more dollars to buy the stuff we did one hundred years ago. These non-elected technocrats sit in secret meetings to determine what should be done about the things we use every day in America. This is not to say that we are entirely beholden to the Fed when it comes to money. Legal tender laws in America, while favoring the dollar, are only the required currency of debt repayment. Businesses and people are still very welcome to do active transactions in anything else they like, apparently so long as you report what you barter with to the IRS and send in fair-market-value level of tax money to them. However that works.

And it's not like it's a giant conspiracy that Ron Paul is only known for talking about. I believe the recent Audit the Fed bill was started by someone else, and it had many people across party lines voting in favor of it. The bill didn't pass through Congress, but hey, at least those guys up there have some good ideas.

But it's not as if the Fed should exist either. A strict Constitutionalist would note that Article I, Section 8 says that only Congress shall regulate coinage and the like. The Fed, with only vague ties to government (chairmen nominated by the President from members having sat for over 14 years, affirmed by the Senate), does this instead through laws of pure supply. By printing and destroying dollars, or more officially, by buying and selling government bonds / assets, the value of the dollar is shifted. If we didn't have legal tender laws favoring the Federal Reserve Note, this wouldn't be a big problem, it'd just be an awkward case of private money based on gambling on the activity of the government. Unfortunately, most all of us tend to pay taxes, and those are subject to legal tender laws, so we need to pay in dollars. As such, it makes rational sense that people carry around dollars entirely rather than combinations of market and government currency.

Being an anarcho-capitalist, I think government should leave the market alone entirely, but a libertarian would sit down and say "well, it's more bad than good, it's unconstitutional, and even politicans notice it's unusually wonky behavior, so why hasn't it been done away with?" After all, we have people running on "End The Fed" campaigns and slinging around "Audit The Fed" bills to garner political support.

The answer is probably obvious to a libertarian when I say it: You can't compete with government, especially if it gives handouts.

Initially, the Fed was started as a fractional reserve banking system backed by the eternal credit of the government, where each bank had a million or so dollar emergency fund to cover bank runs, and the entire system was to shift money to different banks to cover for any possible runs. I suppose that makes a good bit of sense, if you're going to run a fractional banking system, which is based on not protecting the entire wealth of your consumers. This is what The Fed calls it's powers of being a depository agent, being the backbone of the banks.

Today, The Fed is a giant clearinghouse. Back in the 20's, if you wrote a check, you were typically asked to stay in town a couple days because they'd have to mail your check to your bank to get the funds out, and that took a lot of time and was subject to a lot of forgery. The Fed does this now, through those numbers on the bottom of your checks. The Fed provides a centralized and simple system to run checks, and cards too. Those magnetic strips on the back of your debit and credit cards are processed through the clearinghouse system The Fed runs. It doesn't stop at providing a clearinghouse for us mortals, it does the job for the government. Your income taxes and social security taxes are run through the system too to insure everything goes to the right places. The reverse happens too. Refunds and entitlements are paid out through The Fed. The Fed calls this it's fiscal agent powers.

So in reality The Fed does more with our money than "regulate" it. They handle it. Everything about it. Don't think about this as scary. FICA taxes still come out of my paycheck, and I still pay only with my debit card. This is all very useful to us mortals. Imagine if we couldn't walk up to an ATM from a different bank to withdraw money. Imagine if we absolutely had to pay in cash even if we didn't want to carry gobs of bills around. Imagine if we had to hand calculate and hand mail our taxes to the treasury. What a nightmare. At least it'd get people to wake up and realize that maybe, just maybe, a market money can improve on what we had. But the government did it for us via The Fed. And that's why it's still here.

No politican is willing to bring the economy to a grinding halt (save Ron Paul) because of some fancy with The Fed. If The Fed abruptly ended, then all this stuff that greased our economy would disappear while the market worked out alternatives on its own. The politicians who brought about the end of times would not be reelected, and would serve as a calling card for the opposing party and socialism. "Look what unfettered individualism heralds, tearing our ability to buy food apart! We absolutely needed government to provide the Fed," they'd all say.

So in case you were ever wondering how something as crazy as a private bank hired by the government to technocratically control the monetary supply could stay in existance, now you know.