Directly ending the Federal Reserve System through legislation is the wrong goal, both morally and practically, for those who oppose the Fed. Rather, we should be concerned with abolishing the legal tender laws that largely force us to use Federal Reserve notes. If this is achieved, the Fed will collapse under its own weight, for the Fed note could not hope to stand up to competition with sounder currencies in the free market.
There has been much written about ending the Federal Reserve System in recent years, thanks to the magnificent traction given to the argument by former Congressman Ron Paul in his last two presidential campaigns. The movement seems to be aimed toward the right place when one considers the ruinous economic effects of inflation, the tendency of central banks to engender corporatism, and the ability of central banks to grant virtually untold power to any government that makes use of one. Advocates of ending the Fed strive for congressional action of various kinds that would grant transparency to the public and reveal Fed policy’s economic consequences. This would ultimately serve to legislatively end the institution, the coup de grâce for most of our economic and political ills.
Alas, I contend that most of this has been a waste of ink and effort. I fear that most of the tremendous momentum picked up by the Ron Paul movement on this issue has been, in fact, geared in the wrong direction. As terrible as the effects of Federal Reserve activity may be, it is not the Fed itself that needs to be gotten rid of, but merely the laws in place that force U.S. citizens to use Fed money. It is this restriction on individuals—and this one only—that allows the Federal Reserve to wreak havoc in its way. Unfortunately, it has been a somewhat neglected contention of Ron Paul’s, and what I shall focus on here, that the federal government should allow a free choice in currency.
A familiar charge brought against the Fed is that they are a counterfeiter of the money we use. Such a charge, however, is erroneous. Let us consider the situation in which the traditional counterfeiter finds himself. Any society that uses a certain commodity for money will inevitably spawn a few individuals who wish to produce lookalike money, say by way of imitative coins or paper notes. Doing this is not immoral or unethical in itself. It may be likened to a creative individual’s arts and crafts project. Where the creative individual slips, however, is when he passes it off as the real thing when he trades it. He sells his false coin under the guise of a true gold coin, say, thus deceiving the buyer of his money. Such action is fraud and—unbeknownst to the buyer—violates the terms of the trade. Only somewhere down the line does the holder of the false money realize that he is a victim of fraud. Of course, such fraud will be recognized eventually, and methods will likely be developed to prevent this kind of crime from happening in the future. So the counterfeiter finds himself hard pressed to continue his activities.
This must be contrasted with the actions of the Fed. The Fed’s printing of its own paper money is not counterfeiting; it is merely increasing the supply of its own money. Counterfeiting is passing a unit of money off as something that it isn’t (for instance, passing a metal alloy off as gold), which is not what the Fed does. In fact, the Fed is rather open about the fact that their money constitutes a piece of paper that comes easily off a printing press, per the present, political, Keynesian doctrine. (In fact, what makes people think of the Fed as a counterfeiter of money are the laws in place that prevent individuals outside of the Fed from creating lookalike Fed notes, which would be counterfeiting. But this must not be conflated with the Fed printing up its own money.)
Let us now examine the nature of money and its value. Every good is subject to what is called “marginal utility”. If I have a guitar, for example, it is very dear to me and very valuable. But if I have one thousand guitars, each particular one isn’t worth very much. Thus, the more guitars, the less each one is worth, and the fewer guitars I have, the more each one is worth. If everyone traded in guitars instead of paper notes like they do now, for instance, guitars would be counted as money. Now, money is any commodity that is used as a medium of exchange. As such, if the supply of money is low, each individual unit, say each coin, is worth more, meaning that it takes a small amount of coins to trade for other goods. (The numerical “price” level is low, because it takes only a small amount of valuable coins to purchase a good.) On the other hand, if there is a large supply of the money in existence, each coin has a small value, and it takes more units of the money—more coins—to trade for other goods. (The numerical “price” level is high, because it takes a higher amount of less valuable coins to purchase a good.) A money that has a stable supply—if the amount of the money-commodity is hard to increase or decrease—it becomes a trusted commodity to be used in exchange, because its value does not change on a whim. The commodity chosen by people in the market will therefore tend to be sound, or of stable supply.
Now if the commodity that is used as money becomes very abundant, it becomes worth less and less in relation to other goods. So, for example, if silver coins suddenly pour out of the sky, and there are more silver coins than any man could dream of, the value of silver coins would plummet simply because there is so much of it. It probably wouldn’t be used as money anymore because it would be as common as a paperclip. Instead, people would switch to things that are scarcer—and more valuable—as their money. They might switch to trading gold coins instead. Translated into a relationship of values, it would mean that one gold coin might be “worth” a truck load of silver coins. As silver keeps raining from the heavens, one gold coin becomes worth more and more silver coins. It is far more preferable, then, to use scarcer goods as money as opposed to something that is in as high a supply as a paperclip, or something that there is an endless supply of, like silver falling from the sky.
Thus, if a producer of money creates too much money, the money loses its value, and users of the money switch to other currencies that are more suited for trade because they are more valuable. Such overproduction of money is not a problem per se. Where the producer of money errs is when he forces individuals to accept such money in trade. He does not allow individuals to trade with other kinds of money if they so choose. This is undertaken most conspicuously by governments in the form of “legal tender laws”, whereby governments choose a certain kind of money and effectively allow no other to be used. (They recognize and enforce disputes in only the kind of money that they like, meaning, in effect, that arguments over any other kind of money will be not be allowed in the government’s courts. So it becomes a hard bargain to use gold, or anything else, as money instead of paper Fed notes.)
With legal tender laws in place which prevent individuals from switching to a currency of their choosing, a government may manipulate its chosen money to its liking. The government is then in a position to increase or decrease supply of its money to whatever degree that seems suitable to the government. If it prints so much money that the currency becomes of little value, the subjects of such a government have nowhere to turn. They must live and trade with it. Only in extreme situations like a hyperinflation in which officially chosen money is created in untold amounts—and is quite literally like silver falling endlessly from the sky—are people willing to take such bold action as trading with other currencies in spite of government dictums.
Thus, money is only able to be manipulated after force is used to ensure acceptance en masse of the currency. When individuals are forced to accept such money in trade, they cannot easily opt out of it. This is where the blame needs to be set: not on the producer of money—the Fed—for producing too much money, but for forcing victims to accept it in trade. To repeat, if a money suffers from a continual increase in supply and decreasing value, other kinds of money that are not as easily manipulated will be used instead, for they are more trustworthy to buyers and sellers in the marketplace; if it is realized that a common currency is under constant, systematic manipulation, people will naturally adopt different, sounder money.
It is perfectly within the Federal Reserve’s right to exist and print as much of their notes as they wish. Where it falls into immoral and unethical behavior is when it has the government coerce free individuals into using its notes. If such laws are lifted from the books, the Federal Reserve will collapse on its own. It will “end softly” and indirectly insofar as people are free to have a choice in currency. So it is not the Fed that we should be concerned with abolishing, but the legal tender laws enforced by the U.S. government that prop it up, and enable it to act in its way.
For further reading on the Fed and its effects on the economy, Ron Paul includes a reading list at the end of his book, End the Fed. Of those works, I would recommend the following for the average person. They give a more robust account of money, the effects of its creation, and how a free choice in currency is ultimately beneficial to society at large:
Chapter 23 of Economics in One Lesson by Henry Hazlitt
What Has Government Done to Our Money? by Murray Rothbard
The Mystery of Banking by Murray Rothbard
Economic Depressions: Their Cause and Cure by Murray Rothbard
The Inflation Crisis, and How to Resolve It by Henry Hazlitt
Choice in Currency by F.A. Hayek