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Volume 9, Number 10
The Mysterious Fed
by Murray N. Rothbard
Alan Greenspan has received his foreordained reappointment as chairman of the Fed, to the
smug satisfaction and contentment of the entire financial Establishment.
For them, Greenspan's still in his heaven, and all's right with the world. No one seems to wonder
at the mysterious process by which each succeeding Fed chairman instantly becomes universally
revered and indispensable to the soundness of the dollar, to the banking and financial system, and
to the prosperity of the economy.
When it looked for a while that the great Paul Volcker might not be reappointed as Fed
chairman, the financial press went into a paroxysm of agony: no, no, without the mighty Volcker
at the helm, the dollar, the economy, nay even the world, would fall apart. And yet, when
Volcker finally left the scene years later, the nation, the economy, and the world, somehow did
not fall apart; in fact, ever since, none of those who once danced around Volcker for every nugget
of wit and wisdom, seem to care any longer that Paul Volcker is still alive.
What was Volcker's mysterious power? Was it his towering, commanding presence? His
pomposity and charisma? His strong cigars? It turns out that these forces really played no role,
since Alan Greenspan, now allegedly the Indispensable Man, enjoys none of Volcker's qualities of
personality and presence. Greenspan, a nerd with the charisma of a wet mackerel, drones on in an
uninspired monotone. So what makes him indispensable now? He is supposed to be highly
"knowledgeable," but of course there are hundreds of possible Fed chairmen who would know at
least as much.
So if it is not qualities of personality or intellect, what makes all Fed chairmen so indispensable,
so widely beloved? To paraphrase the famous answer of Sir Edmond Hilary, who was asked why
he persisted in climbing Mt. Everest, it is because the Fed chairman is there. The very existence of
the office makes its holder automatically wonderful, revered, deeply essential to the world
economy, etc. Anyone in that office, up to and including Lassie, would receive precisely the same
hagiographic treatment. And anyone out of office would be equally forgotten; if Greenspan
should ever leave the Fed, he will be just as ignored as he was before.
It's too bad that people aren't more suspicious: that they don't ask what's wrong with an economy,
or a dollar, that supposedly depends on the existence of one man. For the answer is that there's
lots wrong. The health of Sony or Honda depends on the quality of their product, on the
continuing satisfaction of their consumers. No one particularly cares about the personal qualities
of the head of the company. In the case of the Fed, the acolytes of the alleged personal powers of
the chairman are never specific about what exactly he does, except for maintaining the
"confidence" of the public or the market, in the dollar or the banking system.
The air of majesty and mystery woven around the Fed chairman is deliberate, precisely because
no one knows his function and no one consumes the Fed's "product." What would we think of a
company where the President and his PR men were constantly urging the public: "Please, please.
Have confidence in our product--our Sonys, Fords, etc." Wouldn't we think that there was
something fishy about such an enterprise? On the market, confidence stems from tried and
tested consumer satisfaction with the product. The proclaimed fact that our banking system relies
so massively on our "confidence" demonstrates that such confidence is sadly misplaced.
Mystery, appeals to confidence, lauding the alleged qualities of the head: all this amounts to a
con-game. Volcker, Greenspan, and their handlers are tricksters pulling a Wizard of Oz routine.
The mystery, the tricks, are necessary, because the fractional-reserve banking system over which
the Fed presides is bankrupt. Not just the S&Ls and the FDIC are bankrupt, but the entire
banking system is insolvent. Why? Because the money that we are supposed to be able to call
upon in our bank deposit accounts is simply not there. Or only about 10 percent of that money is
The mystery and the confidence trick of the Fed rests on its function: which is that of a banking
cartel organized and enforced by the federal government in the form of the Fed. The Fed
continually enters the "open market" to buy government securities. With what does the Fed pay
for those bonds? With nothing, simply with checking accounts created out of thin air. Every time
the Fed creates $1 million of checkbook money to buy government bonds, this $1 million quickly
finds its way into the "reserves" of the banks, which then pyramid $10 million more of bank
deposits, newly created out of thin air. And if someone sensibly wants cash instead of these open
book deposits, why that's okay, because the Fed just prints the cash which immediately become
standard "dollars" (Federal Reserve notes) which pay for this system. But even these fiat paper
tickets only back 10 percent of our bank deposits.
It is interesting that, of the rulers of the Fed, the only ones that seem to be worried about the
inflationary nature of the system are those Fed regional bank presidents who hail from outside the
major areas of bank cartels. The regional presidents are elected by the local bankers themselves,
the nominal owners of the Fed. Thus, the Fed presidents from top cartel areas such as New York
or Chicago, or the older financial elites from Philadelphia and Boston, tend to be pro-inflation
"doves," whereas the relatively anti-inflation "hawks" within the Fed come from the periphery
outside the major cartel centers: e.g., those from Minneapolis, Richmond, Cleveland, Dallas, or
St. Louis. Surely, this constellation of forces is no coincidence.
Of course, anyone who thinks that these regional bank presidents are insufferable anti-inflation
"hawks" ain't seen nothing yet. Wait till they meet some Misesians!
Murray N. Rothbard taught economics at the University of Nevada, Las Vegas.