Forum Post: Freedom from the FED

Central banks exist for a single reason – to inflate the supply of paper currency. They are a currency-creating and currency-inflating institution. This serves two interest groups in the main. One is the fractional-reserve banks that they regulate. The other is the government that created them.

For the banks, the alternative to a central bank is to be subject to the forces of market competition. This is something they are striving to avoid. Without a central bank to issue paper currency to them at critical times when they become overextended, the fractional-reserve banks would compete for the safety of funds deposited with them. Gold would be an important currency. Banks that overexpanded into unsafe lending would face customer withdrawals that they could not meet. Competition would restrain bank lending. The central bank relaxes the constraints placed upon banks by competition. It organizes the banks into a banking cartel.

For the government, the alternatives are two. Either it must compete for funds in the market along side all other borrowers, or else it can directly (via its treasury department) inflate the supply of paper currency itself. The government does not want to compete in the market. It wants as much power and freedom of action as it can get. So the first alternative is anathema to it. The second alternative has been tried and found wanting many times historically. The problem with it is that most governments cannot control their own currency issues when they have direct control. They inflate too much. Usually, they destroy their currencies altogether.

Neither the fractional-reserve banks nor the government have an alternative to achieve their ends but a central bank. Central banks exist because these two interest groups are behind them. Neither wants market competition. Central banks are an anti-competitive institution.

Central banks exist to inflate paper currencies. That is their mission. That is their reason for being. If the currency in use in a country were gold, a central bank could not inflate. The supply of gold currency would be subject to market forces. It could not be inflated at the will of central bankers. Since neither banks nor the government want to be subject to market forces, they do not want the currency to be gold.

However, it is also not in their interest to have hyperinflation. Neither the banks nor the governments have complete freedom of currency issue, if they wish to survive. Therefore, many central banks still maintain holdings of gold and vary them through time. The reason for this is to restrain the issuance of paper currency to some extent. It is to influence the value of a currency in a direction that the central bank desires. Central banks do not hold gold merely as an historical relic or out of inertia or because they have nothing better to hold or because of time-honored custom. They hold it because it supports or backs the value of a paper currency.

Although central banks exist to inflate paper currencies, they do so within limits. When central bankers decide on how much to inflate, they are optimizing some sort of utility. They have value scales and they are making choices according to these value scales. Although there will be many influences on their choices, varying over time and from case to case, still the reason for their possessing the power to issue currency remains that they are at the helm of an anti-competitive institution designed to serve banks and the government.

If currency were gold, there would be no need for a central bank among those willing to compete in markets. Central bankers owe their livelihoods and power to the replacement of gold by paper currencies that they can issue at will, within limits that they themselves impose so as not utterly to destroy their currencies and their own livelihoods.

Most of the economists that attain positions of power in the central bank of the U.S., which is the Federal Reserve (the FED), have been trained and selected to be stupid, at least publically, when it comes to the central bank. In that way, they can convincingly deliver lies and misconceptions as if they were truths. They can avoid confronting the fact of why their central bank exists.

On October 22, 2011, Federal Reserve Governor Elizabeth A. Duke said

"...the Federal Reserve System's structure was designed by Congress to give it a broad perspective on the U.S. economy. Most of the Fed's actions are indeed focused on the whole economy."

The first sentence is myth. The idea that Congress created and designed the FED as a benign institution that might benefit the U.S. economy is myth.

The second sentence is at best a half-truth. Yes, the Fed’s employees spend a great deal of time concocting economic models and examining economic data. They believe themselves to be wrestling with all sorts of difficulties and economic issues.

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