A Challenging and Worthwhile Exploration of the Fed’s Real History
Review of Money: Free and Unfree, by George Selgin (Cato Institute), 2017, 382 pages, ISBN-13: 978-1944424299; $16.96 on Amazon.com.
Money: Free and Unfree is an extraordinarily detailed collection of 10 essays about the history of American monetary and financial crises.
The book, authored by George Selgin of the Cato Institute’s Center for Monetary and Financial Alternatives and a professor emeritus at the University of Georgia, overturns conventional wisdom about the history of banking by tracking down and identifying the real source of financial disorder: government regulations and, for the past century in the United States, the Federal Reserve System, popularly known as the Fed.
Selgin tells the real story of the Fed, including the debates over financial regulation before its 1914 enactment and details of the Fed’s failures to meet its own goals throughout its history.
Falsely Blaming the Market
Starting in the 18th century and continuing to the present, people—including regulators—have failed to distinguish the effects of market forces from the results of government interference, causing people to mistake government’s missteps and bungling for flaws in the market system, Selgin states. Governments’ actions, Selgin says, caused sharp depressions in 1873, 1884, 1893, and 1907.
As the philosopher George Santayana wrote in his 1905 book Reason in Common Sense, “Those who cannot remember the past are condemned to repeat it.” Selgin’s retelling of the nation’s financial history demonstrates how regulators’ failure to learn from past government mistakes has led to the same errors being made repeatedly and the same consequences ensuing. In particular, scholars and policymakers are largely ignorant of the proven successes of decentralized monetary systems and the tendency of central banks to create unnecessary business cycles and disastrous monetary catastrophes.
“Instead of knowing about the actual record of past, decentralized monetary systems, most economists today simply take for granted that no country can avoid financial crises except by resort to substantial government regulation, including laws establishing a central bank capable of regulating its money supply and serving as a ‘lender of last resort,’” Selgin wrote.
“Given that so many economists today are unfamiliar with the non-central-bank-based monetary arrangements of the past, and so are convinced, in their ignorance, that such systems couldn’t have worked well, it should come as no surprise that few have bothered to seriously consider how other, still experimental alternatives, might also prove more conducive to financial and monetary stability than the Fed and other central banks,” Selgin wrote.
Government-Caused Booms and Busts
These central banks, we’ve been told, ensure credit’s continued flow, but they also fuel the economic sugar rushes preceding contractions and busts. This boom-and-bust cycle is not caused by the free market but by government regulation made possible by its monetary monopoly, Selgin writes.
“The fragility and instability of real-world banking systems is not a free-market phenomenon but a consequence of legal restrictions,” Selgin wrote. “This does not mean that deregulation is without its dangers. Dismantling bad bank regulations is like cutting wires in a time bomb: the job is risky and has to be done in carefully ordered steps, but it beats letting the thing go on ticking. Once the fuse—the legal restrictions —is dismantled, the payload—central banking and fiat money—can safely be disposed of.”
Selgin weaves a thought-provoking offensive against the common wisdom about central banks. As a lender of last resort, proponents of the central bank argue it ensures no financial collapse can occur, because fiat money allows the bank to print more money as needed, guaranteeing the lender can never go broke. Selgin exposes this conventional wisdom to be a circular argument.
“No Fed propaganda has contributed more to its stature than that devoted to convincing the public that any other arrangement would have resulted in a less stable U.S. monetary system,” Selgin wrote. “To support this belief, the Fed has had to overcome the American public’s long-standing resistance to the idea of having a central bank in the United States. The Fed’s architects were able to do this easily enough, by denying that the Federal Reserve System was a central bank at all, and official Fed publications still vaunt its ‘decentralized’ structure. But the Banking Act of 1935, in making the newly constituted Board of Governors the acknowledged seat of Federal Reserve power, put paid to that conceit, forcing Fed apologists to instead insist that a central bank was, after all, the only arrangement capable of providing the nation with a stable currency system.”
In place of a central bank, Selgin suggests moving to a system of decentralized banking, or branch banking, like the system instituted by Canada in the aftermath of the Great Depression.
“Canadian banks, unlike their U.S. counterparts, were free to issue notes on the same general assets that supported their deposit liabilities. … If we consider both Canada’s highly successful arrangement, which avoided all of the antebellum crises to which the U.S. economy had been subject, and the Fed’s own performance, to characterize the U.S. turn to central banking in 1913 as a second-best solution is perhaps being overly generous.”
Educated by Selgin’s illuminating essays, the reader will understand just how dependent commerce is on stable money and just how spectacularly the Federal Reserve has failed to achieve its stated purpose of “[providing] the nation with a safer, more flexible, and more stable monetary and financial system.”
Readers seeking enlightenment about banking’s true history and/or an education about the world of possible alternatives to our current central-banking regime should open their minds to this fascinating book, which will challenge readers to learn how government manipulates the economy through money creation and help them to begin imagining a world without the Fed.