The Disaster Of The Federal Reserve

The Federal Reserve Has Been a Disaster for America

Paul Craig Roberts

Like all indoctrinated economics PhDs, I used to teach students that the Federal Reserve was created as a central bank in order to provide cash to banks experiencing a run on deposits so that bank failures would not become general and collapse the money supply and, thereby, employment and output.  It all sounds so reasonable and rational until you realize that finance least of all is idealistic.

The Federal Reserve was actually created in order to save the big New York banks from their greed-driven mistakes, and that is the Fed’s principal activity. 

In recent decades the Fed has gone beyond merely saving the big banks from their mistakes to helping the big ones concentrate more banking into their hands.  The Fed causes banking crises and then provides funds for the big banks to absorb the troubled regional banks.  

The Fed’s current policy of raising interest rates after a decade of negative interest rates has the entire banking system insolvent. This resulted in runs on the banks, which the Fed did not save by expanding reserves, instead permitting failure and acquisition.  Obviously, what I had been trained to teach was false.

This is true of so much of what is taught in every subject.

This bit of history is only a prologue to my expose of the Fed.  The Federal  Reserve has the sole responsibility for all inflation, depression, and recession since its creation.  Until the Fed’s creation, the purchasing power of the US dollar was essentially constant over massive periods of time.  Since the creation of the Federal Reserve (1913), today’s dollar is a small fraction of the value of a dollar in 1912.  I recently published a menu from 1914, around the time when my parents were born, showing restaurant prices ranging from 10 to 25 cents. Today you cannot purchase anything for 10-25 cents.

Milton Friedman and Anna Swartz in their Monetary History of the United States proved conclusively that the Federal Reserve caused the Great Depression of the 1930s by allowing the money supply to contract.

So, it was the Fed that was responsible for the ability of President Franklin D. Rosevelt, a destroyer of American liberty, to use the Great Depression to coerce the US Supreme Court with threats of packing the court with his stooges  and to force the US Congress to delegate legislative authority to new executive branch regulatory agencies.  Previously under the US Constitution Congress wrote laws that also governed their implementation. But with Roosevelt’s new regulatory agencies, this power passed to the executive branch.  Today Congress is nothing but an authorizing agency for the executive branch to make the law.

Economists, unable or unwilling if they were existing on bank grants to point a finger at the Fed as the cause of the money supply shrinkage that caused the Great Depression, misread John Maynard Keynes and blamed the Great Depression on the inadequacy of consumer, investment, and government demand.  The Keynesial solution was to increase demand.  Keynesians said the easiest way to do this was for the government to increase government demand by running a deficit in its budget.

Keynes himself said no such thing.  Keynes said that the problem was caused by central banks causing the money supply to shrink. https://www.paulcraigroberts.org/1999/04/07/michael-polanyis-economics/

But this explanation did not fulfill the aspirations that liberal economists had for fiscal policy.  Insufficient demand gave them an excuse for expanding demand via government deficit spending for causes and agendas that they supported.

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