End The Fed? And Replace It With… ???

The celebrated investor Jim Rogers thinks we should abolish the Federal Reserve. Asked in an interview yesterday what he’d do as Fed chairman, he replied: “I’d shut it down.”

Rogers is a long-time critic of the central bank, and so his view is old news. He also has lots of company. Perhaps the most prominent and powerful critic is Rep. Ron Paul, head of the House subcommittee that oversees the Fed and author of End the Fed.

Attacking the Fed is an old sport, dating to the bank’s founding in 1913. Inspiring the legion of critics over the years is the simple fact that the central bank is far from perfect. As an institution run by humans, policy errors are inevitable. But closing the Fed, for all its populist appeal these days, wouldn’t solve much, if anything because something would need to take its place. Wouldn’t a successor institution suffer from all the problems that bedevil the Fed? What’s that? You have a solution to insure the delivery of superior monetary policy decisions? Really? Why don’t we apply those cures to the Fed?

The hard reality is that a modern economy needs a central bank. Some institution has to oversee monetary policy, unless we’re going to go back to bartering. Letting Congress assume these duties is asking for trouble. The Fed is far from immune from political influence, but imagine how monetary policy would be run via debates on the floor of the House of Representatives.

Some Fed critics like to argue for a return to the U.S. to a gold standard. That’s unlikely for a number of reasons. But let’s say the impossible happens. Even on a gold standard, a central bank is necessary to supervise the details and insure that the rules of the game are satisfied. Of course, one could argue that the country could return to the pre-Fed-era banking chaos of the late-19th century, but that’s the monetary equivalent of advocating the use of horses as a solution to the traffic problems created by cars.

The irony in all the recent calls to end the Fed is that inflation is quite low by historical standards. Paul and others worry that the Fed’s quantitative easing policy will soon unleash higher inflation. That’s always a concern, and the solution is, as always, enlightened decisions on monetary policy. Unwinding QE2 doesn’t have to bring higher inflation. It might, of course, but that’s hardly a reason to shut down the Fed. By that standard, we should close the Pentagon because it might make a mistake in the next war.

Meantime, some Fed critics point to rising commodity prices as a harbinger of things to come. Rising oil prices in particular raise fears of future inflation in the hearts and minds of many Fed bashers. Maybe, although as Bloomberg’s Caroline Baum points out, higher prices and inflation aren’t always one and the same:

For folks who use the term “inflation” interchangeably with higher prices — as in wage inflation or commodity inflation –they are not the same thing. A higher price for oil and/or other commodities is a higher relative price until ratified by the central bank.

What does the central bank have to do with it?

Inflation is a monetary phenomenon: too much money chasing too few goods and services…

Higher oil prices don’t cause inflation. They aren’t synonymous with inflation. Higher oil prices represent a relative price increase until proven differently.

None of this is an argument for giving the Fed a free hand. Debates about how the central bank—any central bank—conducts monetary policy are always fair game. There’s certainly room for improvement; the past decade has revealed quite a few lessons about how to run monetary policy. But that’s quite a different animal from calling for the institution’s demise.

It’s easy to say the Fed’s makes mistakes and therefore it should be closed. But what’s the follow-up plan? Will you create a new institution to run monetary policy? Are you willing to give Congress that power? The critics don’t usually have good answers to such questions. No wonder that it’s hard to take the kill-the-Federal Reserve-system crowd seriously.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

21 Comments on End The Fed? And Replace It With… ???

  1. Why replace it with anything? The problems with the Fed are inherent in any kind of socialist institution. Money, like any other commodity, is best handled by the free market.

    • We have a cartel of global bankers lending us reserve notes at interest.
      That is reason enough to abolish the federal reserve.These thieves used to be hung for such atrocities, but money buys presidents now days.
      I’m sure this guy knows full well the history behind this abomination, which leads me to assume he is purposely misleading the readers.
      It’s not working James Picerno, the PEOPLE are educated and will not allow it anymore.

  2. You do not have to shut down the Federal Reserve. You just have to allow competing currencies, including gold and silver or paper backed by some commodity, and let the people decide what they want to use. Forcing everyone to use a Fed note is the same as forcing everyone to drive a pinto van, it sucks and it’s guaranteed to fail.
    You also failed to point out the moral hazard of having a monetary system based on debt. The Fed is the only way we have been able to fund our current genocide in the middle east. Without the Fed we would not be at war, and I don’t care who you are, if you believe that it’s ok for us to be dropping bombs on people, you are evil and/or stupid.
    How do you think we will even pay for all of our accumulated trillions of dollars in debt with less than one trillion in paper notes?

    • Summarily dismissing war as “dropping bombs on people” is absolutely disgusting. No sensible person wants a war, given better options, but living under the delusion that all war is avoidable is a dream for children. No one is “evil and/or stupid” just because they disagree with your particular views.

      For that matter, getting rid of the Fed won’t get rid of public debt or the wars funded by it. World War II was a far more popularly accepted war despite domestic atrocities like the camps and weapon tests, because the people took part in a tangible way. If someone lead us to war without the Fed, they would fund it through public effort and war debt, and foster a mindset of a modern warrior culture. I fail to see how that is an improvement over the Fed.

      What needs to be done is a multistep process that has little to do with the Fed. First is a requirement to balance the budget. When the standard by which we run everything is irresponsibility, it creates an environment that expects bailouts, government aid and other unsustainable systems.

      Next is to pay off the foreign component of the debt. Up until recently in history we had the protection that our debt was owed to ourselves, and there is a case to be made for making the government indebted financially to its people.

      Next, ditch the WTO and NAFTA. Nothing supersedes your contract with your people, not even treaties. We are the largest single spending force on the planet, these people will still trade with us even if we aren’t a signatory on a document that puts us at a systematic disadvantage.

      Next, bring back tariffs. We became a wealthy nation because the balance of trade was in our favor. We kept it equitable through tariffs until diplomacy became the watch-word, and suddenly we have our companies that have raised their workers standards of living competing directly with companies overseas fifty or more years behind us in human rights. If you make it profitable to produce here, there will be greater employment here.

      Finally, reweave the safety net. As a “modern” society, we can’t have the poor starve in our streets, however, we can’t maintain a system which rewards systemic unemployment. Very few people are completely unable to work. The vast majority of the unemployed are on temporary unemployment, allowed to carry beyond its intended period for expediency in “depressed areas” and during cyclical recessions. Before these systems were in place, people moved to the jobs, often on foot. If people are forced to move again, we won’t have popular areas like California grow unreasonably in population and overheat the local economy to the point where it’s current disaster becomes inevitable. Set the minimum level for the safety net as something to be avoided, not a comfortable lifestyle, and you will see a positive difference. If not working means three MRE’s and a gallon of water a day in a cramped government housing complex, most people will be dying to find work. When it means a check in the mail at the home and debt level of your choosing, with luxuries like television and better foods accounted for in the check, you can let a day or two go by without beating the streets for a job.

    • You are right that no sensible person should want war, and that is precisely why those that wage war are evil. Should I be allowed to attack my neighbours that I view as a potential threat? If not, why are Governments allowed to literally drop bombs on other countries?
      Why is it childish to believe that a world without war is possible? If Governments were to actually protect people’s rights, and were not allowed to violate those rights, how could we have war or even a “warrior culture”?
      What’s childish is to believe that war is inevitable. 30 years ago, you probably would have called someone childish if they told you that in the future you would be arguing with strangers on a computer, yet here we are. My point is that just because we are far away from something does not make it a childish dream.
      Also, your proposed solutions are far more difficult to implement than simply allowing competing currencies, and they could have potentially devastating unintended consequences.

      In light of the Freedom of Information Act, here’s a recent example of the moral hazard created by Central Banks, How the Fed Undermines Foreign Policy:

      “The Fed lent huge sums of our money to foreign banks. This in itself was not surprising, but the actual amount is staggering! In one week at the height of the crisis, about 70% of the money doled out went to foreign banks. We were told that bailing out banks was going to stave off a massive depression. Depression for whom? We now know that the Fed’s bailout had nothing to do with helping the American people, who have gotten their depression anyway with continued job losses and foreclosures. But now we learn that a good deal of the money did not even help American banks!

      In light of recent world events, perhaps the most staggering revelation is that quite a bit of money went to the Arab Banking Corp., in which the Libyan Central Bank owned about a third of its stock. This occurred while Libya, a declared state sponsor of terrorism, was under strict economic sanctions! How erratic the US must appear when we shower a dictator alternately with dollars and bombs! Also, we must consider the possibility that those loans are inadvertently financing weapons Gaddaffi is using against his own people and western militaries. This would not be the first time the covert activities of the Fed have undermined not only our economy and the value of the dollar, but our foreign policy as well.”
      -Ron Paul

      Can you explain how the Fed’s actions in this case was the right thing to do, and how this would have happened if the Fed did not exist?


    • Talk of a world without war has been a child’s dreams for centuries, probably millenia. Arguing on a computer network is not a reasonable comparison, (particularly since it already occurred 40 years ago). Between your arguments for competing currencies and this notion that war can magically go away, you clearly need to review history. Government, by its very nature, does not protect freedom. Government protects safety by limiting freedom. While this may provide an environment in which limited freedom may exist (eg, freedom from criminal coercion), other freedoms have to be sacrificed to make that happen because it is the criminals freedoms that allow him to commit his crime. By the same token, a foreign nation which acts to harm us cannot be swayed by idyllic notions of peace. To stop an enemy your only option is to take away their ability to wage war, and that is by waging war of your own. And, despite your complaints, the bombs being implemented currently result in the lowest loss of life in doing so.

      And yes, you are allowed to attack your neighbors when they make themselves a threat. If the treat is immanent, you can defend yourself. If not, you can report them to law enforcement who will act on the knowledge they have to stop the threat. With Lybia, the threat was reported to the UN and the UN called its members to act as a policing force. You can argue, if you wish, about the UN or our cooperation with it, but the proper chain of authority was followed, and neither the UN nor the US were “evil” for having acted.

      As to the multiple currencies, we’ve done it. It didn’t work. Counterfeiting was rampant, notes from local banks would have no value beyond small circles of acceptance, exchange rates between banks were exploitive to an extreme, and it simply made trade within the states impractical for any but the largest organizations, and travel was even worse. Along with it goes any protection from fraud by the bank, because you simply would not have the funds to pursue it through courts, the bank having taken such funds. If you want to be paid in paper worth less than monopoly money, do so yourself, the rest of us will stick with a currency standard.

      As to what the Fed has done irresponsibly, do you really think that the people who chose to subvert our government funds to their own interests in these countries would not find another way without the Fed? Do you think they’re using just the Fed to do it now?

    • Slavery was also around for centuries. Was it a childish dream for people to want to end slavery? In fact, allowing a central bank to have a monopoly on creating counterfeit monopoly money is a form of slavery, and creating the opportunity for sound money to exist is the argument for ending our enslavement. Why would you or anyone be opposed to that? You still have people counterfeiting the Fed’s counterfeit money with today’s monetary system, but with competing currencies people would ultimately use the most secure, legitimate form of currency just as they do with any other type of commodity. Maybe in light of new competition, the FED would fix up and people would still want to use its monopoly paper.

      Also, pre-emptive attacks are not the same as self-defense. We have killed over one million people in the Middle East who did not attack us in any way. That is genocide. We cannot “win” because we have just pissed off the entire social networks of over one million people, and any new government will be viewed as a foreign puppet and a sham. Imagine if China took out Obama for his current killing spree and tried to set up a new Government in the US.
      Nobody wins in war so what is the point?

      If I went around killing over one million people just because I thought they could be a threat, I would be labelled an evil serial killer and executed. Why is that not the case when our Government does it?

      Even if freedom (i.e. sound money) and a world without war are childish dreams, I prefer to be on the side of the childish dreamers than the shills for the banks and the military industrial complex any day. Which side are you on?

    • Sorry, but I won’t indulge you further. Check your facts, don’t make others do it for you. History is important as an indicator of what the future holds. You advocate a system that failed horribly before, ignore facts of history and even current events that don’t support your wish for peace, and ignore the realities of true slavery today. Not the lack of absolute control you have over what only a tiny fraction is yours, but true enslavement that exists now.

  3. End The Fed? And Replace It With… ???

    Section 8 – Powers of Congress

    To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

    How about Congress does its job?

    • EXACTLY !!!! there’s something wrong with James Picerno’s brain.
      The US CONSTITUTION already says “with what ?”

  4. It does not take a genius to see that perpetual, exponential debt growth is not sustainable.
    You think that Nixon was just doing us all a big favor when he closed the gold window in 1971? You think that Nixon, with his infinite wisdom, saved us from the dark ages of sound money and took us into the ‘golden’ era of unconstitutional money based on debt?
    Our current monetary system is immoral and unconstitutional, and anyone who supports it is evil and/or stupid.
    Suppose we don’t shut it down or allow competing currencies, can you please tell us how we can pay for all the debt the Fed has created?

    • Dan.

      There are no debts its a fiat currency. The US debt is not convertible in to other currencies The US borrows in its own currency and they are the only one creating it. The debt can never default its the currency instead that progressively debase. Its a system that almost requires a perpetual deficit to sustain its self. Its as if the deficit is the money base and the debt the accumulated money supply.

      You are correct its immoral and unconstitutional.

    • You are right, the Fed really creates credit, but at the end of the day that credit becomes debt that grows exponentially through fractional reserve banking, investment banks, and insurance companies. People are leveraging money that does not exist to begin with, so how does all this spending actually get paid for with out massive defaults?

  5. “Inspiring the legion of critics over the years is the simple fact that the central bank is far from perfect.”

    Uh, no. Inspiring the critics is that the FED (1) has been a total failure, (2) holds an immoral, unconstitutional, and impractical monopoly on the creation of credit, and (3) finances regressive and illicit warfare of the military and economic sorts that otherwise would not have been undertaken. And that’s a tepid, bare-bones rundown.

  6. “Of course, one could argue that the country could return to the pre-Fed-era banking chaos of the late-19th century”

    Waw………Exception of the funny Lincoln money to finance the civil War how can yo say this ?

    During the nineteenth century, a dollar purchased 27 percent more in terms of goods from 1800 to 1913 when the Fed was created. During the the following 98 years the fed debased the currency by 96%. Who….. but but don’t tell me inflation was positive since “despite” of it we are better off.

    Why did this pre FED “deflation period also coincided with the spectacular transformation of the United States from an agrarian economy in 1800 to the greatest industrial power on earth by the eve of World War One”.

    As a matter of fact during the most rapid growth in U.S. history we find that the years from 1880 to 1896 prices fell by almost 30 percent, or by 1.75 percent per year, while real “income rose by about 85 percent”,

    You talk of pre-Fed-era banking chaos. What on earth are do you thing the post Fed creation “Depression” was? What exactly do you think the artificial interest rate and manipulation have just caused to the economy.

    Talking about chaos the FED result = 1929 depression that lasted until 1945, the long inflation and stagflation in the 70s, the 90s the artificial stock bubble and the NASDAC 70% crash, the 2000s artificial below logic 1% rate lowering rates as risk increased that was a rely brilliant signal to markets was it not ? All that lead to the worst real estate depression worst than 1929 but for some reason its still not called a depression. Finally we are now in a new covered up depression and the biggest asset transfer of wealth to bail out losing Investment Banks and inefficient Corporate failures which will further delay capital reallocation and economic recovery. The 0% interest rates are keeping inefficient businesses going, encourages money to move out of the US where rates are higher and only postpone the inevitable. We need the fed like a turkey need Christmas.

  7. i would sugest reading ron paul`s books and watch his videos-you may come to realize that we don`t need the federal reserve

  8. All the original founding three-hundred investors families (who still own the federal reserve and are the former central bankers who lost their 20 year charters because they were corrupt)of the federal reserve and all business & political officials who support (are bribed) by and for the federal reserve should all have a non biased jury find them ALL guilty of treason and then justly hang them as they deserve.

  9. It seems like a waste of print to put this article on this site. After reading Reich’s article about a coming double dip, seeing this makes me just think the author is a shill for media/bankers probably on the take. Congress can print money without an interest obligation. Do you think government debt is good? If you support the Fed, chances are you are either crazy or in on their game. Let’s see how long it takes for either A) another round of QE or B) the economy to crated into an asset deflationary and commodity inflationary death spiral.

  10. “The critics don’t usually have good answers to such questions. No wonder that it’s hard to take the kill-the-Federal Reserve-system crowd seriously.”

    The proponents of the Federal Reserve System merely hide the facts with strong rhetoric, debasing critics with insults. The American people are wiser to this sort of subversion than they were in 1913.

    Here are some fun quotes:

    “There are two ways to conquer and enslave a nation. One is by sword. The other is by debt.”
    ~John Adams~

    “I believe that banking institutions are more dangerous than standing armies… If the American people ever allow private banks to control the issue of currency, the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered”
    ~Thomas Jefferson~

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”.
    ~Henry Ford~

    “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”
    ~Alan Greenspan~

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