Can We Live Without a Central Bank?

It’s no secret that I’m not a big fan of the Federal Reserve. In fact, I said as much just a couple weeks ago in Nashville, Tennessee, at the Irrational Economics Summit.

Our central bank has been around our entire lives (well, unless you’re over 100 years old!), and many believe it’s a necessary evil, like paying taxes and tolerating our governrnment.

Since its inception, Fed officials have led us to believe that its main functions are regulating banks, deciding on monetary policy to help guide the economy through booms and busts, and keeping the financial system chaos-free. Its purposes are, of course, in the public’s best interest.

Well, if you’re convinced that’s true, the Fed’s strategy worked.

The Fed isn’t a governrnment agency, and it sure wasn’t created in your best interest. (Especially if you consider how close we are to economic downfall.)

Before the Federal Reserve System was created in 1913, there were three failed attempts to launch a central bank in the U.S.

They all failed because the money they created out of nothing was for the sole purpose of funding the governrnment. This led to high inflation and resulted in a currency of dubious value. The public realized that notes issued by those central banks declined in value, and then sentiment for the central banks evaporated.

Thomas Jefferson, one of the Founding Fathers and the third President of the U.S., was a vocal critic of central banking. He argued that it was unconstitutional, and that even if it were, it would lead to the nation’s ruin.

Jefferson’s second term ended in 1809, and the end of the second attempt at a central bank followed two years later.

But it didn’t take long for Congress to intervene after the War of 1812 and start the Second Bank of the United States, the third try at a central bank on these shores. This time, Congress gave the bank the mandate to provide a stable currency, which ushered in monetary policy for the first time.

And, after creating high inflation in the first couple years by issuing notes to the U.S. governrnment, the bank was forced to “put the brakes on inflation” by severely tightening lending requirements. That sent the economy into a major depression.

Our seventh president, Andrew Jackson, was much like Jefferson, as he was against central banking here in the U.S. He saw firsthand the inflation the central bank created and resulted in putting the nation’s economy into a depression. Jackson also believed the bank was unconstitutional. But the tipping point was his objection to the fact that the bank had major foreign ownership and influence.

Jackson won reelection by a landslide in 1833, vetoed legislation to renew the central bank’s charter, and finally ended central banking. Two years later, he paid off the national debt. That’s a feat that hasn’t been accomplished since!

Believe it or not, the United States survived and thrived for nearly 80 years without the help of a central bank.

Then the Panic of 1907 happened, which saw a stock market crash as well as bank failures. A few very powerful bankers and politicians saw an opportunity (they always do): to harnrness the anger created by the panic and whip up support for monetary reform.

In 1910, six men who represented as much as a quarter of the entire world’s wealth met in secret to formulate a plan to stop growing competition in banking by taking control of reserve requirements and obtaining a monopoly over the nation’s currency while transferring the risk to the taxpayer.

But, first, they had to convince Congress that the plan was to protect the public.

I’m not sure how they convinced Congress that protecting bank profits and transferring the risk to the taxpayer is protecting the public. But, 104 years later, we still have the Federal Reserve System acting in the public interest…

Actually, I’m pretty sure that Congress saw the benefit of having the ability to raise money created out of nothing without having to raise taxes! Whether our representatives actually believed that it was in the public’s best interest is another question altogether.

Despite what Janet Yellen said earlier this year – that she doesn’t believe we’ll see another financial crisis in our lifetime – the Fed has no control over economic booms and busts.

In the 80 years without a central bank, there were 19 (panics, recessions, and a depression). In the 104 years with our current central bank, there was the Great Depression and 18 recessions, including the Great Recession of 2007-09.

The big difference is that now the Fed is bailing out banks and protecting bank assets by rescuing major corporations while putting it to the taxpayer. It all makes for a pretty bleak picture, something Harry’s been hammering for a while now. If you missed his recent video, check it out here.

You can prepare and profit from surprises in the financial markets, and specifically in the Treasury bond market, with Treasury Profits Accelerator.

Lance Gaitan

Editor, Treasury Profits Accelerator