August 13, 2009

Breaking the Bank

I think the Republican Party is about as likely to pursue an anti-Federal Reserve ?populist strategy? as it is to declare it no longer supports the troops and wants to apologize to Mahmoud Ahmadinejad. That being said, attacking the Fed and the ?money masters? should be a top priority of the Alternative Right, and thus it?s a good idea to take a close look at Sean Scallon?s recent essay in TAC, in which he calls for the GOP to follow the example of Andrew Jackson and appeal to the heartland by ?breaking the bank.?

But if we?re gonna go after the Fed, we first have to get our facts straight. 

Says Scallon,

Attacks on the Fed have since come from the Right as well, with free-market economists such as Milton Friedman and Murray Rothbard blasting the central bank for constricting the money supply in the 1930s (which led to the Great Depression) and the expansionist credit and currency policies of the 1960s and ?70s (which led to the Great Inflation).

TAC might want to step up its fact-checking? First off, I don?t know how actions taken in the ?30s could lead to the Great Depression. But the more fundamental problem with Scallon?s contention is that the Fed did attempt to expand the money supply throughout the decade; indeed, it lowered its discount rate to the then-unprecedented levels of 2 percent in 1930 and 1.50 percent in 1931. (The Federal Reserve?s discount rate is the rate of interest offered to member banks when they deposit money at the Fed. A low Fed rate means little incentive to store money at the Fed, which means high incentive for banks to lend out their capital, which means credit expansion. Robert Murphy has an excellent chapter on the Fed?s actions in the ?30 in his new book.)

Furthermore, I?m sure the people at the Mises Institute were squirming when they read Scallon?s conflation of Milton Friedman and Murray Rothbard. According to Rothbard, the pair diverge on the most fundamental level; and they certainly have differing, indeed, incompatible, interpretations of the causes of the Great Depression (as David Gordon lays out in a Takimag article from not too long ago).

In brief, Rothbard argues that the problem was the boom, not the bust. The Great Depression occurred due to the massive credit expansion? ?easy money??of the 1920s, which led to ?malinvestments? in the economy (Mises?s term for clusters of bad investments in capital-intensive sectors (like, say, real estate, equities, and start-ups)). The ?29 crash was necessary, and beneficial, in that it was the beginnings of a thorough cleansing of the system and liquidation of malinvestments. Hoover and Roosevelt, however, turned what would have been a sharp downturn into a protracted ?Great Depression? by lowering interest rates, thus encouraging capital to flow into the bloated sectors, and intervening into the economy to prop up industries (or at least the politically connected ones) and artificially raise prices and wages.

Freidman and Anna Schwartz, on the other hand, hold that the Great Depression was caused by a ?liquidity crisis? during the ?29 panic. The Fed could have swooped in and saved the day by dumping lots of credit and cash into the system. (They didn?t have helicopters in those days, but perhaps then-Chairman Roy Young could have made do with a hot-air balloon of some sort.)

Both Rothbard and Friedman are ?critical of the Fed?; however, Rothbard wanted, unequivocally, to abolish the institution; Friedman?s theory, on the other hand, has been embraced by Fed Chairman Ben Bernanke and used as the intellectual justification for his ongoing zero-interest-rate-and-quantitative-easing orgy of the past nine months. It?s Bernanke?s way of ?keeping his promise? to Friedman and Schwartz. As he stated at a UChicago conference held in celebration of Friedman?s 90th birthday, 

I would like to say to Milton and Anna: Regarding the Great Depression. You?re right, we [The Fed] did it. We?re very sorry. But thanks to you, we won?t do it again.

A more fundamental problem with Scallon?s essay is that he never informs us what he wants to take the place of the Fed after we?ve ?broken the bank.? What do we want? Free banking? (That is, should we allow independent entrepreneurs to establish private banks, perhaps even issue their own currencies, with no assistance and regulation by the federal government?) A national gold standard (like the one we had in the Good Old Days)? Or should we give the money printing and interest-rate powers to the Treasury or the Congress or the President?

One must answer this question for any kind of anti-Bank strategy to make sense.

The problem with the central bank, at least from my viewpoint, is that it inflates: the Federal Reserve Note has lost 90 percent of its purchasing power since 1913, and there seems to be no reason why the Fed would consider the remaining 10 percent any more sacred.

I want to get rid of the Fed; however, if it must exist, I?d want it to pursue policies of cold-hearted austerity?pace ?Milton and Anna,? it should raise interest rates in a crisis like we had last fall in order to recapitalize the banks, it should operate on a gold standard, which would severely restrict the government?s ability to launch ?stimulus? packages (not to mention new wars). Indeed, if I were the Fed chairman, I?d be so heartless and unfeeling as to dictate higher interest rates across the board, with loans going to wealthy people who are likely to repay them and to prospective businesses that have a high likelihood of profitability. The days of ?easy money,? the basis of wild speculation and social-engineering in mortgage lending, would come to an end.

But then there?s a whole other school of Central Bank skeptics who want pretty much the exact opposite of everything I just said. William Jennings ?Crucify Mankind on a Cross of Gold? Bryan was as anti-bankster as they come, but in 1896 he was explicitly arguing for inflation: he thought that there was not enough money in circulation for farmers to pay back their loans and that workers would be helped by an influx of silver coins. (My opinion of WJB is similar to Mencken?s, but perhaps he should be applauded for being so explicit about his inflationism (!), as opposed to all those Fed inflationists who yammer on about ?fighting inflation.?)

Let?s not forget that Barney Frank has been a long-time Fed skeptic, and he?s joined Ron Paul in his push to ?Audit the Fed? with HR1207. But unlike the Good Doctor, the Massachusetts congressman has no interest in hard money whatsoever. To the contrary, Frank getting in charge of the money supply would seem a fate far worse than the Fed (!), as Barney would soon ?make it rain,? printing up fresh dollar bills and sticking them, figuratively speaking, under the G-Strings of his constituents. He might even want to actually attempt some kind of Friedmanite ?helicopter? stunt! 

Anyway, because Scallon doesn?t think through issues like this, and never tells us what he wants to replace the Fed, he ends up making rather vague, potentially contradictory, statements like the following:

A new round of bank wars has the potential to wrongfoot the Democrats, unraveling the party by stealing the issue that built Jackson?s coalition in the first place. Two of the populations that have been hurt most by the bursting bubble and ensuing credit contraction are key Democratic constituencies: working-class Americans who live paycheck to paycheck and young Americans who need ample credit to start their own homesteads?not on the frontiers, perhaps, but in cities and counties across the land.

Sure. Working class people and young Americans are hurt by the collapse of the consumer credit and mortgage markets. But then does Scallon think that there needs to be more credit creation, more loans given out to young Americans so they can ?start their own homesteads.? This sounds like the same logic that brought us the housing bubble, only this time it?d be enveloped in some paleo-sounding language. 

It?s a reminder that when it comes to money, most ?populist strategies? simply amount to ?Print, Print, Print!?

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