End the Fed?

March 24th, 2013   Submitted by Christopher Zimny

FedDirectly 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

15 Responses to “End the Fed?”

  1. Seth KingNo Gravatar says:

    You write that “the federal government should allow a free choice in currency.”

    Why should it? What purpose would it serve the government to allow us free choice? That would destroy its own power.

    You’re supposing that the government’s goals are anything like that of the people’s goals.

    What the government should do is publicly rape and castrate any person who dares use any currency other than Federal Reserve Notes.

    Libertarians do a horrible disservice to themselves whenever they pretend that the government is at all concerned, even one iota, about justice and morality. It isn’t. Government is a criminal organization filled with psychopaths who feel it is their right and duty to tell other people how to live.

    When one is at war one does not ponder what their enemy “should” do in a moral sense. They only ponder what the enemy “should” do in a strategic sense. In other words, one is only concerned with getting into the head of their enemy to be able to better predict their enemy’s behavior.

    Have you ever played Chess? How much of your time do you spend thinking about what your opponent “should” do to help you win?

    Hopefully zero. Instead you’re spending your time pondering what your opponent “should” do to destroy you and claim victory.

    Everything else is mental masturbation and a waste of time.

    • GilNo Gravatar says:

      Well put.

    • UM...No Gravatar says:

      Tis very true.
      So, instead of hoping and wishing the government will do something, we need to just adopt that mentality ourselves and with each other. Become entrepreneurs instead of workers, and develop our own ways of exchange, become self sufficient and make our own goods, instead of depending on big businesses to do it for us.
      Big businesses, the government, and the fed reserve can’t operate successfully without our cooperation, so let’s stop cooperating.
      makes sense to me.

  2. MAMNo Gravatar says:

    What the government should do is die like a lot.

  3. Seth, it should because that is the right thing to do, regardless of its strategic purpose. In other words, I mean it in a *moral* sense, not in your sense. And by that standard, of course, the State *should* cease to exist, and the individuals who make up the compulsory government *should* progress toward that goal to any degree that they can.

    The thief who kills people in order to rob a bank would do well to begin to sustain from shooting people when he robs banks. In a strategic sense, the bank robber should also kill everyone inside and blow up the building because it is in the robber’s very nature to aggress against individuals, plus it would serve the important strategic purpose of destroying evidence. Instead, the robber might continue to rob banks without bombing the building or shooting everyone inside. This by no means excuses his robbery in the first place, but it is obviously a preferable state of affairs, and any aim toward the goal of ultimately stopping aggression is preferable to a goal that increases aggression.

  4. HReardenNo Gravatar says:

    I interpret ending the Fed to mean to end it’s monopoly on issuing currency and other
    mopolies it has on economic services that it engages in. When Jackson withdrew the
    funds the US government had in it’s account at the second Bank of the US that bank
    did not close the next day. It existed for a few years and operated in the manner other
    banks did. I did not get the impression that the author of the entry supposed the
    government is conceraned about doing the right thing. Stating that one should do the
    right thing does not suppose that they concerned about doing the right thinks.



  5. SleepySalsaNo Gravatar says:

    It’s always well-intentioned articles like this that irk me. Ok, well, getting on with it…

    First, Zimny is correct in much of what he says in terms of his analysis. Like I’ve written before, “The issue really centers on repealing legal tender statutes, for if the FRNs had to actually compete with other currencies, they would easily lose (which is why they need government protection in the first place).” [https://thelastbastille.wordpress.com/2012/10/04/fractional-rese rve-lending/) However, legislators, as agents of the State, have absolutely no incentive whatsoever to repeal those legal tender statutes; in fact, it could be argued that they have every incentive to perpetuate this coercive debt-money system upon us.

    Second, I don’t see Zimny proposing a plan of action (on our end) or even any suggestions for us on how to deal with the incentive problem. I see he was more than willing to complain about the problem and critique Ron Paul (which any fool can do; believe me, I should know), but I didn’t see any recommendations from him in terms of moving the cause of Liberty forward.

    Third, I almost had a flashback to Ellen Brown when I read this sentence by Zimny: “It is perfectly within the Federal Reserve’s right to exist and print as much of their notes as they wish.” Where they hell did he get such an completely idiotic notion? The Federal Reserve is a corporation that maintains a literal monopoly on the issuance of credit and currency, and a corporation is nothing more than a government created union for the rich who cheated their wealth by privatizing gains while simultaneously socializing losses. Zimny’s sentenced here could be sadly misinterpreted as an endorsement of corporatism, which I’m pretty certain that any and all branches of libertarianism where pretty firmly against, since it’s about as anti-capitalist or anti-market as you could get (even more so than socialism, in my opinion). Maybe Zimny should read up on the 14th Amendment [http://outpost-of-freedom.com/hh04.htm] before he goes on to say such divisive things that seem to me to be a tacit acquiescence to “corporate personhood,” which is one of the most pernicious evils perpetuated by the State.

    Fourth, the Austrian school has failed (to my understanding) to propose much of anything, other than some vague notions of “reinstating the gold standard,” which of course relies on the State to somehow act against its own interests. While I admit I enjoy an theoretical education from the Mises Institute, we also need a pragmatic means (praxeologically speaking) to actually act on our principles. Short of Bitcoin or local alternative paper currencies, we quite frankly don’t have much else going on our side, from what I can see. The closest thing I’ve seen to a plan is An Economic Solution [http://www.outpost-of-freedom.com/blog/?p=378]. I would like to see some debate on that monetary reform proposal, because I would truly enjoy the market to determine what it thinks is best, and in the attempt to do that is, as Konkin said, to provide equal access to the market as best as I can.