America's Money Machine
Elgin Groseclose, an eminent monetary economist in the 20th century, rips the roof off the Federal Reserve in this wonderful history that takes us from the Fed's founding to the 1960s. He shows that the gap between the promise and the reality is shockingly massive, so much so that the Federal Reserve must be considered one of the greatest failures in the history of public policy.
My first thought when reading this book was: who these days has time for this in-depth level of research? Thanks goodness someone did it, because I've not seen what he digs up repeated in any other source. Grosecloses was meticulous, having spent many years culling through the archives of every institution and person involved with Fed decision making. In case after case, he chronicles the policy failure, and the relentless decline in money's quality from the Fed's inception and forward.
Groseclose is a case of a major figure in 20th century economic thought who has been unjustly forgotten. After his PhD (American University) he taught at the City College of New York and became the first financial editor of Fortune and served as a financial consultant to Iran, helping to restore a gold standard after the war and controlling inflation. For many years, he ran his own institute, which permitted him time to do the extraordinary research you find in this book.
As just one example, the opening chapters unearth an editorial from the New York Times, which denounces the idea of the Fed as an example of the "shallow sophistries of (Theodore) Roosevelt Socialism," and further said that the American people are too intelligent and have too much common sense to put up with a central bank like the Fed. So not only was there opposition to the Fed, it had a voice and its predictions of a coming calamity turned out to be right on.
He shows that at no time in its history has the Fed actually achieved what it promised: low inflation, economic stability, stable growth, reliable regulation of the banking system. Groseclose goes further to show that the Fed has generated unrelenting cycles and inflation and been the major fuel for the growth of government -- politicizing the whole of American economic life.
It is a great pleasure for the Mises Institute to be able to bring back this book, which contains singular research and will provide outstanding source material for a new generation of anti-Fed activists.
As a side benefit, the cover art of this book--though you can't see it in this photo--is actually built by thousands of tiny paper dollars. It is $15 in the store.
Comments (24)
Curious
Of course the Fed is a failure, as every other government entity is. Why to single out the Fed? Because it prints money? Money is an asset, just like any other, if I don't like it, I don't invest in it.
Published: June 9, 2009 1:04 PM
Rich
Good luck doing business without taking paper, when we have legal tender laws. Let me know how that works out for you.
Published: June 9, 2009 1:15 PM
Aurelia Masterson
It is such a major failure, and yet it continues to be sheltered, like a child who has made an innocent mistake. With most of the sentences written in this post, it seems as if Obama's name could just as easily be substituted for the Fed and it would make perfect sense.
Published: June 9, 2009 1:22 PM
Prowler
So none of you know that the Fed is a private corporation owned by the Rothchilds, Rockefellers and others? It is not a gov't entity.
Published: June 9, 2009 1:59 PM
Ohhh Henry
"Why to single out the Fed?"
The fake money created by the Fed makes many other abominable public policies possible. Debt and IOUs are the lifeblood of tyrants and oppressors.
Published: June 9, 2009 2:00 PM
Jeremy Matthews
Prowler,
Since no one has pointed this out to you I will:
The Fed can only do what it does because of government granted privilege. It was created by statute and would not exist without that statute. The legislation is the source of its powers and its organizational structure. Hence, the Fed is a government organization.
Published: June 9, 2009 2:14 PM
Curious
Rich said: "...we have legal tender laws". I agree. That doesn't mean that I have to hold US$ all the time. I can hold other assets and buy US$ only at the time when I need to repay an obligation, no?
Published: June 9, 2009 2:53 PM
Patrick
Prowler: the FED isn't a "private corporation". That is a populist myth.
Nobody "owns" the FED. It's fundamentally just a bunch of legislation. Just like nobody "owns" the minimum wage.
Published: June 9, 2009 3:48 PM
Patrick
Edit: that should be "minimum wage law."
Also, I should mention that, yes, the FED does have some assets--some buildings and land. Those are government owned!
Published: June 9, 2009 3:51 PM
Brian
How are we defining "success" and "failure" in this case? Given that the Fed is a government entity, shouldn't we expect it's primary function to involve redistributing wealth from the people to the government? If that's the case, then isn't the Fed one of the greatest successes of our national government?
Published: June 9, 2009 4:07 PM
Bruce Koerber
Money and Ethics
Tuesday, June 9, 2009
Bernanke Speaks Out On CBS '60 Minutes' Now And Later!
The narcissism of Bernanke is beyond belief. Here is a person that can lie and not even blink and the reason is because of his adoration of himself!
Outwardly then to the unConstitutional coup it appears that they have found the perfect person to serve as the Mother of All Counterfeiters. These fools who make up the inner circle of the unConstitutional coup did not realize how far the economic equilibrium pendulum had swung! It is on its way back and there is nothing these economic terrorists can do about it!
Under these conditions was it wise to appoint a mega-narcissist as their pivot man? Is Bernanke's love of self greater than his willingness to be the laughing stock of economic history, fired in disgrace as the economy continues to try to free itself from the fetters of the ego-driven interventionists?
Squealing is more in character with a mega narcissist. Do the members of the inner circle of the unConstitutional coup need to find hiding places to run to after Bernanke reveals their names?
Published: June 9, 2009 5:21 PM
Gil
"Debt and IOUs are the lifeblood of tyrants and oppressors." - O. Henry.
This is blatantly false. There's nothing wrong with creating IOUs for debts that you can service and intend to repay. How many businesses operate with the help of debt and aren't doing anything wrong? The true nature of 'debased' nature is when the paper money has ceased to be genuine IOUs (preferably an IOU for a fixed amount of gold for some) and becomes an empty token. That is to say, true fiat money doesn't represent anything but the force of legal tender and value is based solely on how much is in circulation relative goods and services. By the same token a Microsoft share is valuable if Microsoft intend to honour their obligations to its shareholder but if Microsoft doesn't then the paper ceases to be an IOU instead be a mere token of some sort.
Published: June 9, 2009 8:54 PM
Emil Suric
Curious
Even if you don't hold dollars you are still affected by the FED's money printing mandate. Printing money (ceteris paribus) means an increase in aggregate prices. But not all prices rise at the same rate, some will rise more relative to others. This is the major cause of bubbles and misallocations of resources. Some prices may actually fall during the FEDs inflationary process. It completely distorts the American economy, and further separates prices and production. A volatile American economy has serious international ramifications, as we have just seen. The FED affects almost everyone in the entire world, no matter what.
Published: June 10, 2009 1:24 AM
P.M.Lawrence
"Debt and IOUs are the lifeblood of tyrants and oppressors" is wrong another way, too. In his essay on Frederick the Great, Macaulay observed that one of his accomplishments in the Seven Years War was to keep the currency and finance sound throughout, even in desperate straits. If either had failed for even a moment, he would have been unable to get supplies or pay his forces and there would have been a collapse of his military-economic base leading to rapid defeat. Debt and/or IOUs would have done for him, if he had tried to use them as fundamental supports.
Published: June 10, 2009 4:49 AM
George
It's not legal tender laws, it's the income tax which closes the trap. Anyone is free to use other than US currency and make contracts without involving US dollars. But the IRS will calculate the income tax based on the US dollar so the inflation will be taxed as income...
Published: June 10, 2009 9:37 AM
Curious
Emil,
isn't money printing just a way to redistribute real wealth (the other being taxes)? Whether the government prints new money and buys something with it, or whether the government taxes and spends it on the same thing, makes no difference.
The cause of the problem is the government reallocating (misallocating) real wealth. Not the method they use to do it, no?
George,
if my tax rate is 50% and I make $10 without inflation, I pay $5 in taxes. If, with inflation, I make $20, I pay $10 in taxes. In both cases I spent half of my real profit on taxes. No difference. What am I missing?
Published: June 10, 2009 11:29 AM
David Spellman
"Patrick says:
Prowler: the FED isn't a "private corporation". That is a populist myth."
Patrick, you are sadly mistaken. The Federal Reserve is a stock corporation owned by its shareholders. Its vast powers were granted by acts of congress, but it is private and only pretends to be associated with the government to deceive people like you.
Published: June 10, 2009 11:44 AM
Michael A. Clem
The Fed may be "private", but the important factor is that it has been given special, monopoly privileges by the government, and of course, government appoints and approves its CEO (name another private company that has that kind of government involvement). The Fed is not a free market institution, but a central bank, private or not.
Published: June 10, 2009 11:52 AM
jomama
Just another failure of top down 'economics'.
What else is new?
See the projected results.
Published: June 10, 2009 12:32 PM
George
if my tax rate is 50% and I make $10 without inflation, I pay $5 in taxes. If, with inflation, I make $20, I pay $10 in taxes. In both cases I spent half of my real profit on taxes. No difference. What am I missing?
If you just sit there with $100 and inflation is 10% you lose money. If you "invest" in something which just holds it's value (no real gain) the IRS will say you made 10% and want 50% of the gain. You lose 5% of your capital.
At higher inflation rates it gets harder and harder to just stay even -- inflation plus the income tax is a tax on capital (but very well hidden). And it goes after savings, thus decreasing the advantage of savings.
You can avoid them (income taxes, inflation) to some extent, however you will encounter the third problem, risk.
So, inflation, income tax, and risk. You can usually avoid any two.
Published: June 11, 2009 10:38 AM
George
The Federal Reserve is a stock corporation owned by its shareholders. Its vast powers were granted by acts of congress, but it is private and only pretends to be associated with the government to deceive people like you.
The Fed is just Congress's version of an off balance sheet entity. Congress created it and can remove it, however, for now, it allows Congress to spend money they don't have. They don't want to give that up.
PS: So is Social Security...
Published: June 11, 2009 1:00 PM
Curious
"If you just sit there with $100 and inflation is 10% you lose money. If you "invest" in something which just holds it's value (no real gain) the IRS will say you made 10% and want 50% of the gain. You lose 5% of your capital."
George,
you are absolutely correct. I was wrong. Thanks for explaining it!
"You can avoid them (income taxes, inflation) to some extent, however you will encounter the third problem, risk."
Could you elaborate on this? How can you avoid it? The extra tax on the inflation is always there, no?
Published: June 11, 2009 7:48 PM
George
"You can avoid them (income taxes, inflation) to some extent, however you will encounter the third problem, risk."
Could you elaborate on this? How can you avoid it? The extra tax on the inflation is always there, no?
Start with a model without income taxes nor inflation. People invent new ways of doing things ("progress") so costs go down over time. Just sitting in cash might gain you 2% or so a year. You save your money and prosper...
Now slightly risker, you invest in a diversified bond pool, consisting of bonds funding things like proven economy enhancements (like utilities?). These are secured bonds -- if not paid the pool operator can seize the assets securing them and redeploy them to minimize the loss (or maintain some gain). Perhaps you get 2% interest on these. This is a total of 4% real return since we're still in the no income tax/no inflation case. Still not a lot of risk and this is the "perfect" model case for the non-speculator. All those retirement funds should really be in something like this.
However, we have income tax and inflation. Those bonds won't get paid back in anything worth what was loaned. And then the income tax will take a big wack at what's left. The result is a capital loss. So we migrate to ownership stakes (like the stock market or real estate) which avoids being tied directly to the shrinking currency. Also the current income tax rules avoid some taxes hitting until a sale is made rather than being taxed each year. But this is higher risk as some people have recently found out. And we haven't completely avoided the income tax, nor inflation.
There is yet another cost which we also bear -- the developments which won't happen in this environment. These are likely the largest cost and completely invisible...
In addition, the general mismanagement of the economy which is causing the inflation also raises general life risks -- it's harder to earn money, there are more economic "bumps" and it's harder to insure against the "bumps".
Published: June 11, 2009 11:40 PM
Dan
Then there are the increased excise tax bites. The creation of the Fed was inline with the trend toward centralizing power for 'social benefit'. The socialists can then use the Bank to distort the economy so that they stay in power until the nation collapses.
Published: September 19, 2009 6:46 PM