Is the Fed Evil “Because it is Private?”

Critics of the Fed –especially these days when Fed criticism is mildly trendy– will often complain that it is such a corrupt and dangerous institution “because it is private.” The implied solution, of course, is to bring the central bank’s activities to Congressional control; because then the control of the most powerful central bank in the world will be held with “the people.” The proponents of putting Congress in charge argue that “the super wealthy shouldn’t control the banks” while the opponents worry that this will politicize monetary policy.

The fact of the matter is that both of these perspectives assume that there needs to be a centrally controlled institution which manages money, credit, and interest rates. The far better solution is to let the free market be in charge of money and credit. The Fed is damaging, not because it is private, but because it is a government-granted monopoly.  Because of legal tender laws and the fact that it does not face market competition, it is able to get away with the things (such as devaluing the dollar by over 95% since 1913) that it does without market forces challenging it.

In a free market setting, private banks would be able to create their own currency as they see an entrepreneurial opportunity to do so. This strikes many people as ridiculous; they might say, “but what would prevent a bank from printing trillions of dollars so that they are trillionaires!?” The answer is simple: who in the world would accept this currency in exchange for goods and services? That is about as likely as me taking all the cash in my Monopoly set and trying to buy milk with it.

Money is not just paper and coins. Money originated in the market as a medium of exchange; it was an every day good such as sugar, nails, tobacco, gold, silver, coffee (all of which, at one time or another, were used as monies) that was traded so often and was in such high demand throughout the economy that people began to accumulate this good because they knew it could be used in a later exchange to get what they really wanted (such as a plow or a horse).  Whenever a good is accumulated, not for its own consumption, but for the sake of buying something else, it becomes a medium of exchange. When a medium is used in a widespread way throughout the economy, it becomes a money.

Historically, banks arose which offered to warehouse this money in a secure setting so that people didn’t have to undertake the risk of stashing it all in their house. The warehouse bank would then issue receipts that represented the money in the bank. Different banks would issue receipts with their own engravings and brand on them. These receipts soon became currency as they themselves (since the money behind the currency was protected) began to act as the medium of exchange in the economy. Anytime someone wanted the actual money instead of the currency, they would simply walk to the bank and turn it it. Simple as that. This competing currency system enforced the idea that banks shouldn’t be fraudulently giving out receipts and then also giving out the money that should have backed up the currency (this leads to a discussion of “fractional reserve banking, which is a subject for another time).

Observe that this entire banking system is privatized. It is on the free market; no government intervention was needed to create a monopoly bank that created and managed the one currency that they entire nation was forced to use. In this way, banking should be privatized. It should be operated in pursuit of profit. But the solution to our current central banking paradigm is not to make banking more socialized (that is, give the control to the government), but rather to decentralize, allow competition in money and banking, and to tear down legal tender laws and taxes on commodities that were historically used as money such as gold and silver.

That would be an excellent start. We really ought to end the Fed and let the market system work.

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