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Going for the Heart

Mises Daily: Thursday, August 14, 2008 by

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"The lack of criticism of the Fed tells you all you need to know."

The heart of the modern state is the central bank. By heart I mean the very thing that makes it work, and without which the modern state would quickly wither and die. It is the thing that makes the money. As such, it purports to be our stabilizer, our source of employment, the fuel behind the economic growth that brings us technology.

In truth, it does none of these things. What it does do effectively is prop up the leviathan state and all its pomps. You would never know this from the textbook, of course. The subject is rarely mentioned in political science. Historians treat the establishment of the Fed as an event far less important than the creation of the Department of Labor.

It is interesting how rarely its existence is ever questioned, much less condemned. Instead, the head of the central bank is fawned over and courted by all sides of the political spectrum. He enjoys a level of immunity from criticism that no one else in politics has. Again, this is proof of the extent to which we do not believe in authentic freedom, since it is the central bank that is the true source of the decline of our freedom.

Why do we have such a hard time imagining a world without a central bank? In the United States, the central bank was a 20th-century invention. No central bank of the current sort existed anywhere in the world before the 19th century. Somehow we got along just fine because the monetary system was self-managing. It was rooted in real commodities that provided the stable link to real economic activity. Banks were treated as regular enterprises that had profits and losses, and could succeed and fail. What guaranteed their stability, even with the evil of fractional reserves, was the competitive system.

All that came to an end, gradually, with the advent of the central bank. Money lost its connection to anything real beyond the linen paper on which it is printed. Banks became protected from failure. Most important, the central bank started to guarantee government debt. With what did it guarantee that debt? More linen paper, stuff which can be printed up without limit.

With this innovation, the fiscal restraint on the state came to an end. All the talk about congressional authorization of spending and the constitutional restraint on the state became white noise or a tissue of lies. The people got out of the habit of asking, "How precisely do you expect to pay for this?" We all just assume that there is some magic money machine out there that will achieve our every dream.

The lack of criticism of the Fed tells you all you need to know. It is the one sacrosanct institution because it is the most necessary institution to modern statecraft. Without it, we wouldn't fund both welfare and warfare. We wouldn't dream of a world empire and debate policy the way we debate art, as merely a matter of preference. There would be strict, physical limits on what the state could and could not do.

Most all our debates about politics would come to an end. The point of the legislature and the executive would be to administer and oversee the state that exists, not dream up ever more far-flung excuses for attempting the impossible. No politician would plausibly claim the capacity to "lead us into the future" because their power to do anything at all would be so limited. Instead of Bush, Clinton, Reagan, Johnson, Truman, and FDR, our president would be more like Cleveland, Harrison, Arthur, Garfield, and Hayes.

You say that you don't know anything about those guys? That's the point. Deny the dictator the capacity to make all the money he needs at a whim, and his status shrinks dramatically.

The central bank is sacrosanct because its absence would force all sides to give up their fantasies of power. The Right would have to give up its crazed belief that it can do "heroic" things by seizing control of the state, things such as defend or overthrow any government in the world — or things such as make everyone in the country obey their own view of what constitutes the virtuous life.

The Left would have to surrender their vision of a state that uses coercion to achieve perfect equality, fairness, and distributive justice throughout the world.

Without a central bank, the political section of the bookstore would have to be reclassified as science fiction.

This is why you hardly ever hear a fundamental question on the right of the Fed to exist. This is why the political culture frowns on anyone who attacks the heart of the state. This is why it is so "unrespectable" to mention the case against the Fed, and why serious critics are treated to a kind of shunning — and why, if you want to go places in Washington, you must never entertain the idea that the central bank ought to be abolished. Indeed, you should fête and publish the head of the Fed.

"The Fed is the one sacrosanct institution because it is the most necessary institution to modern statecraft."

There is a great intellectual cost associated with the central bank. People today imagine that not having one would be the equivalent of anarchy. It would be as if we had a state that nationalized the shoe industry and after a time no one could even imagine how private enterprise could make shoes. Anyone who would suggest that the state dispense with the role would be treated like a crazy person.

But how crazy is it? The central bank has failed in its overt mission for nearly 100 years. It has destroyed our money, funded unjust wars, given rise to a ghastly bureaucratic state, and pumped up more credit bubbles than we can count. And yet we are supposed to chalk up all of this to miscues and mistakes along the way, and then believe the head of the Fed when he promises to do better next time. What's more, the Fed has never actually accepted real responsibility for any of its misdeeds.

Just who is crazy here? If we really believed in authentic science — not the pseudoscience of public policy — we could conclude that this failed central bank has got to go. Its creation is not a footnote, but a main step in making possible all modern tyranny. Its abolition is a key to freedom itself.