My Uncommon Sense

End the Fed!- Kinda

There has been much talk in recent years about ending the Federal Reserve (”Fed”), the central banking system of the U.S. originally created by Woodrow Wilson in 1913. It is a government entity with some private factions (no matter how many extreme self-proclaimed libertarians claim that it is a private group of bankers, the power is strictly reserved to the public sector). Its purpose was to limit bank panics, as seen in the bank panics of 1907. The solution was to come up with a banking system that gave the government more power over the value/supply of currency. By producing more currency, the Fed can give more money to banks that are in need of it. They also print and coin money and are a “lender of last resort (though recently it seems they have been the first one to offer loans to businesses).

While it has its merits, the Fed ends up causing more trouble due to its centralized power over the money supply. Here are a few grievances:

It has almost absolute power over how much money can be printed and where that money goes. There is an extreme lack of transparency with the Fed, which makes its power so much worse. Not only do they have almost total control over the money supply, but they can make adjustments without reporting to investors, leading to miscalculations and ultimately poor investment choices.

It can artificially manipulate interest rates by hoarding securities, causing market bubbles to inflate and many times, pop, causing recessions more frequent than that of the normal business cycle. If markets were able to determine interest rates, these recessions would not occur.

Some argue that the very existence of the Fed is illegal, as the Constitution grants Congress the power to coin and print money, not the ability to pass the power on to some other entity. This is Rep. Ron Paul’s favorite.

Others complain that due to its absolute power over the supply of currency, it promotes and allows for rampant inflation. Monetary inflation ultimately leads to price inflation, which can be a severe detriment to citizens as it reduces the buying power of their currency, which has across the board negative effects on business and consumers alike.

Now those who often criticize the Fed usually want it to be eliminated and how the U.S. go back on the gold standard, or to back our currency with gold as a reserve currency. As of now, the US dollar has no reserve currency, and therefore can be very liquid. Most other countries back their currencies with the U.S. dollar, though many have called to have a new reserve currency as worries of inflation grow.

While the gold standard is better than our current system, it has a few problems. First, in the U.S. we have more money than there is gold. About twice as much as the total amount of gold on Earth. In order to back our currency with gold, the price of gold would have to be $2000 per ounce instead of just under $1000 per ounce. And that is just the U.S. currency. Secondly, while the gold standard has relatively low inflation over time, it still allows for rapid short term inflation and deflation. This occurs when investors overshoot or underestimate the amount of gold that will be mined. This played a small role in the events leading to the Great Depression.

What I would like to see is a currency that maintains its highest possible value, and never inflates. This can be achieved by removing the power from the Fed, giving the power back to Congress, and making their sole directive be monitoring the money supply. Then, by putting into immovable law that the money supply can only increase in proportion to the influx of wealth, and must be determined by a 2/3 vote in Congress, our currency’s value would forever be invariable. Having an equable currency from one year to the next provides the maximum transparency, helping consumers and business alike as it eliminates a variable and creates efficiency.

Some say that a currency with no backing, or reserve currency, has no value. I ask those who believe that our current money has no worth beyond that which it costs to produce the bill to send their money to me, and I will send them the respective value to them in gold. In reality, value is determined by humans. Is gold really that valuable? It is only has a certain value because there is a demand and an amount of gold. The same applies to paper money (it is actually 75% cotton and 25% linen, but I use the term “paper” loosely). People have a demand for money because it has utility. They can exchange that money for goods and services, therefore it has value. Should the supply never change, the value should stay the same.

Thus, the system would make the paper money be its own reserve currency. A big step in the right direction would be the passing of H.R. 1207: Federal Reserve Transparency Act of 2009, sponsored by none other than Dr. Ron Paul (R-TX 14).

The system change I am professing is no small change, as it would take a lot of power away from the federal government over the economy and money supply. Write to your congressman/woman and encourage them to vote for H.R. 1207. It has enough cosponsors to pass (237), but the more backing it has in the House, the more likely it will pass the Senate. I want my dollar to be able to have the same buying power when I am 100 years old as it does today. That is my dream.