At a time when the appeal of and demands for a new “democratic” socialism seem to have caught the imagination of many among the young and are reflected in the promises of a good number of political candidates running for high office, there is one already-existing socialist institution in America with few opponents: the Federal Reserve System.
The fact is, central banking is a form of central planning.
The Federal Reserve has a legal monopoly over the monetary system of the United States. It plans the quantity of money in circulation and its availability for lending purposes; and it sets a target for the annual rate of price inflation (currently around 2 percent), while also intentionally influencing interest rates, affecting investment spending, and supporting full employment.
Almost all discussions and debates concerning the Federal Reserve revolve around how it should undertake its monetary central planning: which policy tools should be used, what target goals should be aimed for, and who should be in charge of directing America’s central bank.
Today we are dependent on the decisions of a handful of central-planning executives on the Board of Governors of the Federal Reserve. What is their guide? The personal judgments of what they think the economy needs, based upon the prevailing macroeconomic theories used in the central bank about how the economy works and therefore how much money should be pumped into the banking system.
Our monetary fate is dependent upon whether the central bank experts, this year, are old-style Keynesians, new Keynesians, monetarists, new classical economists, Taylor-rule followers, supply-siders, new modern monetary theorists, or any number of other possibilities. In the old Soviet Union, it all depended upon whether Stalinists or Trotskyites were to be in charge; for the central planning of scientific research, genetics was or was not considered compatible with Marxism-Leninism as interpreted by the leadership of “the Party.”
Just as it is said that central banking needs to be independent so the “objective” and scientific monetary “experts” can guide the economy based on the latest and “correct” macroeconomic models, it was insisted under Soviet and all other socialisms-in-practice that it was all objective and scientific, being based on Marxian dialectical materialism, given what that meant in any particular situation. It’s all a politics and ideology of planning. A few say they know what is right for the many, and will use government to give it to them.
Just as Soviet central planners may have believed that they could coordinate it all for better and more successful outcomes than market economies, our central bankers never fail in their enthusiasm and arrogant confidence that this time they will get it right, that they “now” have the right macroeconomic model of how it all works; they, finally, have bigger and better statistical data and computer capacity to successfully read and measure the entrails of the economic goose. (See my articles ”Macro Aggregates Hide the Real Market Processes at Work” and “The Myth of Aggregate Demand and Supply.”
What they, in fact, bring about are the inflations and recessions, the booms and busts that they insist they are in the central banking business to moderate, if not to prevent. By their fruits you will know them: the post-World War I inflation and depression; the 1920s false promise of prosperity and stability, followed by the Great Depression; the booms and busts of inflations and recessions in the 1950s; the monetary inflation of the 1960s and especially the high price inflation of the late 1970s and early 1980s; then a relative calm in the 1990s, but followed by the monetary expansion between 2003 and 2008 that set the stage for the great financial and housing crisis of 2008-10; and now the great experiment with “quantitative easing” and the ballooning Federal Reserve asset portfolio filled with private sector mortgages. (See my article “Ten Years On: Recession, Recovery, and the Regulatory State.”)
The long history of central banking, and especially over the last 100 years of paper monies and out-of-control government deficit spending partly funded by “monetization” of the debt, has more than clearly demonstrated that the epoch of modern central banking needs to come to an end. And in its place, we need the opening and freeing of financial markets to private competitive free banking, with markets — meaning all of us — deciding what we want to use as money. (See my eBook Monetary Central Planning and the State.)
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