The Fed’s Counterfeiting Efforts

September 30, 2010 09:36

Inflation is a quiet but effective way for the government to transfer resources from the people to itself, without raising taxes.

by Monty Pelerin at Monty Pelerin’s World

The Fed argues we have too little inflation. Their stated goal is to increase the rate of inflation. What is the correct amount of inflation that a society should have?

If you answered zero you may be right, depending upon how you define inflation. If you define inflation in terms of changes in the money supply, then zero is the correct answer. If, on the other hand, you define it (incorrectly) as a change in prices, then zero is too high. In a society where the money supply is held constant, prices will decrease over time.

That is true because, at least within free markets, innovation and productivity increase the amount of goods relative to the amount of money. With steady or declining prices, savings is not destroyed and capital is created.

Prior to the formation of the Federal Reserve and other central banking schemes, a healthy economy was characterized bydeclining prices. During the 19th Century in the US, for example, prices consistently declined in all periods except the War of 1812 and the Civil War when money was printed to support the wars.

Ultimately, only more capital enables real wages to increase. Ludwig von Mises had much to say about capital formation and wage rates. Here are a few of his observations:

It is not in the power of the government to make everybody more prosperous.

Ludwig von Mises

Neither governments nor labor unions have the power to raise wage rates for all those eager to find jobs. All they can achieve is to raise wage rates for the workers employed, while an increasing number of people who would like to work cannot get employment.

Capital does not reproduce itself.

What the workers must learn is that the only reason why wage rates are higher in the United States is that the per head quota of capital invested is higher.

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.

The Federal Reserve was created purportedly to stabilize the banking system and the value of money. Those aims were stated [to] sell the nefarious purposes of the Federal Reserve and central banking in general.

One merely has to look at how well they have performed their job with respect to providing a stable value of money. Since the formation of the Fed in 1913, the purchasing power of the dollar has declined 96%. A family that had buried a fortune in 1914 would have only 4% of what they thought they had by 2010.

Much of the deterioration in purchasing power occurred after the US abandoned the gold standard in 1971. Thomas Sowell explains:

Inflation is a quiet but effective way for the government to transfer resources from the people to itself, without raising taxes. A $100 bill would buy less in 1998 than a $20 bill would buy in the 1960s. This means that anyone who kept his money in a safe over those years would have lost 80 percent of its value, because no safe can keep your money safe from politicians who control the printing presses.

In the same article, Mr. Sowell explains how Congress buried an attempt to restrict gold as a protection in the massive Obamacare bill.

A reasonable person might ask what such a provision is doing in that bill. After all, medical care has nothing to do with gold.
But that misses the scam of most of Congress’s acts. They rarely have much to do with their stated noble aims. After all, Obamacare had little in it pertaining to improving medical care.

That is what Washington is about. Take the stated purpose of any legislation and assume just the opposite results will occur. The creation of the Federal Reserve and Obamacare are merely two examples.

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