"The Fed came about during a period of our nation's history called the Progressive Era, when the income tax and many new government institutions were created. It was a time in which business in general became infatuated with the idea of forming cartels as a way of protecting profits and socializing losses. The largest banks were no exception. They were very unhappy that there was no national lender of last resort that they could depend on to bail them out in times of crisis. With no bailout mechanism in place, they had to sink or swim on their own merits.... In the jargon of the day, the system lacked "elasticity."" (p. 13)
"The modern system of money and banking is not a free-market system. It is a system that is half socialized - propped up by government - and one that could never be sustained as it is in a clean market environment. And this is the core of the problem." (p. 18)
"In 1812, with war raging between Britain and the United States, the government issued notes to finance the conflict, resulting in suspensions of payment as well as inflation. Inflation during wartime is something you might expect, but instead of permitting normal conditions to return, Congress chartered the Second Bank of the United States in 1816. The bank aided and abetted ever more expansion and the creation of a boom-bust cycle.... Finally, the inevitable downturn occurred with the Panic of 1819. This panic ended peacefully precisely because nothing was done to stop it. Jefferson pointed out that, in any case, the panic was only wiping out wealth that was entirely fictitious to begin with. Today this panic is but a footnote in the history books." (pp. 19-20)
"The one aspect of the great promise that has been kept, not entirely but generally, is the promise that banks will not fail in the way they used to. But consider whether this is really a good thing.... In a capitalist economy, the prospect of failure imposes discipline and consumer service. It is an essential aspect of the competitive marketplace, whereas a promise against failure only entrenches inefficiency and in-competency.... In other words, bank failures are no more to be regretted than any other business failures. They are a normal feature of the free enterprise system.... Unsafe deposits would be loans to the bank that would be treated like any other risky investment. Consumers would keep a more careful watch over the institutions that are handling their money and stop trusting regulators in Washington, who in fact have not done a good job in ferreting out incompetence.... Consider the Soviet case: to my knowledge, no business ever went under in the Soviet system, but society in general grew ever poorer. Think of that Soviet system applied to the banking industry and you have the Fed.... In any case, William Greider is exactly correct that the advent of the Fed represented "the beginning of the end of laissez-faire."" (pp. 27-28)
"When lower interest rates result from real saving, the banking system is signaling that the necessary sacrifice of present consumption has taken place in order to fund long-term investment. But when central banks push down rates on a whim, the impression is created that the savings are there when they are in fact completely absent. The resulting bust becomes inevitable as goods that come to production can't be purchased, and reality sets in by waves. Businesses fail, homes are foreclosed upon, and people bail out of stocks or whatever is the fashionable investment of the day." (p. 30)
"Depression was not ended by the beginning of the war, as many still claim. War's mass death and property confiscation and destruction are never a benefit to the economy, yet the warning that bad economic times frequently lead to war - when a country can least afford it - is appropriate for today. War distracts from economic problems, a benefit to bad politicians. Unemployment rates go down when millions are engaged in the war effort, even forced into it. All too often these politically convenient wars are not at all necessary." (p. 35)
"Today's politicians in Washington, oblivious as usual to the dangers of inflation, show no concern for the dollar or the operations of the Federal Reserve. They are, instead, terrified of deflation. Think of what the word deflation means. Defined as a declining money stock, deflation can actually be economically clarifying. It causes banks to tighten up their lending standards and encourages businesses to run tighter operations. It can put the squeeze on government, as it becomes more costly to service the debt. None of these is a regrettable trend. Another definition of deflation concerns a falling price level. This is another way of saying that your money becomes more valuable over time. That is not something to regret, either. Business can operate and thrive under these conditions: look at the software and computer industries since the 1980s. And if we look back at the last quarter of the nineteenth century, increased purchasing power (deflation) was accompanied by the greatest period of economic growth in world history, with the benefits of capitalism spreading to all sectors of society." (p. 39)
"The failure of Bretton Woods was predicted early on by the Austrian economists, especially Henry Hazlitt, who was writing daily articles for the editorial page of the New York Times. Austrian school economists also knew, even in 1971, that the new paper standard would not provide stability to the financial system." (p. 46)
"It is no coincidence that the century of total war coincided with the century of central banking. When governments had to fund their own wars without a paper money machine to rely upon, they economized on resources. They found diplomatic solutions to prevent war, and after they started a war they ended it as soon as possible. But for European governments in the late nineteenth century, the fiscal limits on war were removed. Now with central banks, governments could just print what they needed, and therefore they were more willing to pull the trigger and pick fights." (p. 63)
"The economic downturn is the necessary correction of the artificial boom period produced by the central bank's easy credit and artificially low interest rates. The duration itself is a consequence of the interference with the liquidation of debt and malinvestment and adjustment in prices of labor, goods, and services. It's too much to ask politicians or bureaucrats not to centrally plan the economy, especially when the market is struggling to rectify all the mistakes that come as a consequence of the Federal Reserve Board policy." (p. 94)
"A central bank by its very nature is the opposite of a commodity standard of money. A gold standard does not require an authority to run it. If a central bank comes into being when a gold standard is in place, the purpose is to circumvent or eliminate the restrictions the gold standard places on those who want to enlarge the government over the opposition of the people. The only government involvement needed for a gold standard to work is to enforce antifraud laws and contracts." (p. 142)
"Inflation and debasement of currencies have been around for a long time. Before modern-day central banks, the government, a king, or a tyrant with monopolistic powers over the monetary system could choose to debase the currency for some ulterior motive, many times to pay for war and expand an empire. The irony is that once the power over money is used to build the state, in time the very process of monetary debasement frequently destroys the empire with an economic crisis of its own making. From the time of Constantine I, for six centuries, the Byzantine Empire thrived in international trade and commerce with a gold standard. Not only did Byzantium believe in honest money, it endorsed free trade and rejected the principles of mercantilism. The gold coin, the byzant, was used all over the Mediterranean and known throughout the world. For 600 years, the byzant maintained its value, keeping price inflation in check while the economy thrived. In 1071, Nicephorous III Botaniates reduced the amount of gold in what was then the world's most used coin. Fighting a war with the Turks was the excuse for the devaluation. Byzantium lost the battle against the Turks, and lost its currency. Financial chaos erupted and brought an end to the Byzantine Empire. Historians claimed the end of Byzantium resulted from "a financial tragedy."" (pp. 142-143)
"The Constitution is clear about no paper money. Only gold and silver were to be legal tender. Since the states caused themselves harm when they issued their own paper money, the states were prohibited as well from issuing paper currency under the Constitution. Article I, Section 10: "No state shall… make anything but gold and silver coin a tender in payment of debts." So there you have it, plain and simple: paper money is unconstitutional, period.... A central bank, theoretically, could exist with a gold standard, but a gold standard doesn't need a central bank to manage it. Without this need, the motivation for having a central bank has to be questioned. It's not difficult to come to the conclusion that the purpose of a central bank, when a gold standard exists, is to get rid of it." (pp. 165-166)
"Most of the tales of nineteenth-century banking are mythical.... The free-market system worked rather well. In research published by the Minneapolis Fed, two scholars have looked closely at the banking system from 1830 to 1860 and found that it was remarkably stable and safe, with no wide-spread fraud. Bank failures were fewer than people believe, and importantly, there was no "contagion" effect, that is, a failure of one bank didn't spread to other banks. This is not entirely unexpected. The bad reputation of nineteenth-century American banking - which existed during what was then the most explosive increase in prosperity ever seen in any country in the history of the world - is largely the result of turn-of-the-century propaganda agitating for the creation of the Fed. We need to look at the facts." (pp. 190-191)
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