Epic Fail: 100 Years of the Fed


FEE

….so so many analysis and investigations have been done on the failures of the Bretton Woods‘ financial and monetary system that I’m tired of reading the never ending reports. We’ve come to the tipping point to witness its collapse…contrary to popular views and beliefs of the ‘financial experts’, I’ve come to the conclusion that the term ‘failure’ is a misnomer. It would (of course) seemed as failures when seen from ‘inside-the-box’ by ‘blinded experts’, educated and trained by the perpetrators themselves. Taught one thing but practiced the opposite. That’s why the ‘experts’ are filled with aghast with their findings and could only offer “inside-the-box” solutions which are meaningless and counter-productive. Most economists today, however, have sold themselves to the enemy. The system was formulated by dirty banksters with agendas to suit and enrich themselves and gain control of the people on this planet. These scumbags know too well that it wouldn’t last forever and when its time (like it is now) they would collapse it…all by design, and then…start another one (yes! BRICS)!. The only way to stop this nefarious program is to get rid of it log, stock and barrel.

“Banking was conceived in iniquity and was born in sin.”Sir Josiah Stamp, President of the Bank of England in the 1920s

The Fed

How monetary nationalism wrought havoc, but cryptocurrency can save us

DECEMBER 17, 2014 by JEFFREY A. TUCKER

The most surprising monetary innovation of our time is bitcoin, a privately produced digital currency and payment system. It is a global system that provides a dramatic alternative to central banking and monetary nationalism as we know it. As with other innovations, such as email and texting, it could challenge the dominance of government policies.

What will we lose if the private system replaces the government-managed one? A look at the history of central banking — and the theories behind the history — shows that we only stand to lose a system that has proven unworkable and dangerous in every way. As government management has been for the mail, education, health care, and every other sector, so has it been for money.

Modern central banking began a little more than 100 years ago. Economists and elite political figures became enamored with the prospect of a perfect money and banking system. They believed that if they could gather the smartest minds, give them vast resources, and put the power of capital and government behind them — jettisoning competitive uncertainties — America could finally stabilize a monetary system that had vexed the developed world for the previous 50 years.

Looming large in their minds was the great panic of 1907, which had come out of nowhere to lead to massive bank failures, tumultuous real estate prices, and job losses as far as the eye could see. All elite opinion — which you can read about in the academic journals of 1908 through 1914 — promised a solution. They would bring science to the problem of money management.

Scientific naïveté

This was the first stage, the period of scientific naïveté. If science could bring flight, internal combustion engines, and breakthroughs in medicine and psychology, surely it could do the same for a new field called “monetary policy.”

Those who argued this way meant that monetary science needs government power. This power would permit the manipulation of interest rates, provide a clearing system to immunize banks against failure, put a stop to private production of money and “wildcat banking,” and coordinate bank policy with national economic policy. The goal was to control inflation, smooth business cycles, and stop systemic upheaval.

Central banks were created throughout the world, especially in the emergent empire of the United States. The Federal Reserve was born — and opened for business November 16, 1914 — as a better and more stable embodiment of the national banks of the 19th century.

The Fed Founders

The founding board of governors

What central banking actually did (which very few of its proponents realized it was doing at the time) was give government a blank check to do whatever it wanted without having to achieve that gravely difficult task: taxing its citizens. It created a cartelized, government-managed system that could issue debt, immunize that debt from a market-based default premium, create money, and grow itself to achieve the dreams of the political and financial elite. Suddenly, and for the first time in modern memory, there were no limits to what was possible with public finance.

Somehow, most economists hadn’t entirely realized the implications.

Funding the Great War

This first stage directly led to the shocker that few among the previous generations ever expected: World War I. As the economist Benjamin Anderson pointed out a few years after the peace, it was central banks in the United States, the United Kingdom, and Europe that made it all possible. Had this free-money spigot not been available, governments would have relied on the traditional mechanism of diplomacy to achieve peace, as opposed to a war they could not afford. Central banks became the “occasion of sin” that tempted governments to act in ways they otherwise would not have.

It wasn’t the case, as the textbooks often say, that the Great War “interrupted” the progress toward rational economic policy; rather, the new monetary institutions tempted governments to do something they otherwise might not have done. Central banks became the enabler of a most unwelcome horror.

The Great War was the first “total war.” It involved the whole developed world. It was accompanied by a universal draft, censorship, financial controls, and a suspension of the gold standard. It drew civilians into the conflict on a scale never before seen in the history of humanity. It employed poison gas, air bombings, and weapons of mass destruction that would have been previously unthinkable.

The resulting inflation led to revolution in Russia, central planning and price controls in the United States, and the first glimpse of modern despotism in Europe and England. The semblance of democracy replaced monarchy, government rule replaced markets in most countries, and new forms of political rule displaced old-world empires.

Most significantly from an economic perspective, the result of the war was massive debt accumulation, which meant that someone, somewhere had to pay. Governments’ debt obligations led to dramatic fiscal tightening in the early 1920s, giving way to the final stage of credit expansion in the mid to late ’20s.

In Germany, where the debt obligations and strict terms of peace were severe, the result was an incredible calamity: the Weimar inflation of 1921–23. This stage of stunning upheaval paved the way for the rise of Hitler as a demoralized and destroyed social order cried out for an iron hand. In the United States and Europe, there was Black Tuesday and the beginnings of the Great Depression. Just as a drinking bout leads to a hangover, the inflations of the 1920s created the conditions of the Depression.

The first wave of Keynesianism

Rather than recognizing the failures of central banking, the elites doubled down with new peacetime measures of central planning. This might be called the first wave of Keynesian economics. Remarkably, governments pursued what we now call Keynesian policies long before John Maynard Keynes released The General Theory, his magnum opus, in 1936. His book recommended inflationary finance, high government spending, and macroeconomic manipulation — precisely what governments were already practicing.

American schoolkids are taught every day that the New Deal saved the country from the Great Depression, which is false on the face of it given that the Great Depression lasted from 1930 all the way to US entry into World War II. The war intensified the privation.

Also contrary to what kids are taught in schools, the Federal Reserve during the Depression’s early years was not pursuing laissez-faire policy. The Fed was pushing down interest rates and manipulating reserve requirements in hopes of spawning a new inflation, which it failed to achieve due to a massive drop in velocity (a dramatic increase in the demand for cash). Both presidents Hoover and Roosevelt used government power to manipulate the system. Roosevelt devalued the dollar and even banned the private ownership of gold. He tried to patch the system with deposit insurance. Still, the hoped-for monetary stimulus did not arrive.

The second wave of Keynesianism

Following World War II, which was funded (like the first one) through debt issuance backed by inflationary finance, Keynesian theory was at new heights in terms of academic economic opinion. This was second-wave Keynesianism. Keynes himself was present at the 1948 Bretton Woods conference, which attempted to create a new global currency and a global central bank, even as the veneer of the gold standard were preserved. This system was obviously unsustainable, and it eventually collapsed in 1971.

The 1950s and 1960s saw the advent of a new system of social welfare, the Cold War of endless military buildup, regional military interventions in Vietnam, and an ever-larger expansion of government into the lives of citizens — all made possible by the blank-check policies of central banking. Had states had to depend on taxes and unsecured debt alone, none of this would have been possible. There would have been no debates and riots over war and the Great Society, because neither could have been funded out of taxes and unsecured debt alone.

It’s remarkable to consider the amazing failure of the intellectual class to see the errors of Keynesian policy in those days, but it was blind to them. The widespread opinion was that the only remaining problem in the world monetary system was the presence of gold, which was finally tossed out completely with the reforms of Richard Nixon. He closed the gold window in 1971 and introduced the age of fiat money in 1973 as the final step in bringing “science” to monetary policy.

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