Mises Wire

Woods Exposes the Federal Reserve System

The first thing to know about Dr. Thomas E. Woods, Jr.’s’ book Our Enemy, the Fed is he’s giving it away. Click the link, get your copy and read the whole book. Clearly, such intellectual charity is not only rare but in the educational spirit of Mises.org. The subject matter is light-heavy but Woods, author of the bestseller Meltdown (reviewed here), navigates it with the smooth skill of a master, making the reader experience satisfying from beginning to end.

The title reflects another insight, paralleling as it does Albert Jay Nock’s Our Enemy, the State. Most of us were raised to believe government and its agencies serve our best interests. As libertarian scholarship has shown the truth is the exact opposite, particularly with government’s sleazy relationship with money and banking. Admittedly, it’s a hard idea to accept since it involves a pernicious breach of trust, but Woods makes it abundantly clear. To our overlords we are easily-duped chattel.

Until Ron Paul decided to run for president and his End the Fed came along in 2009, the general public was mostly blind to the Fed’s existence. Austrians aside, the few who knew something about it — mostly university-trained economists on the take from the Fed — considered it a vital part of an advanced industrial economy. Yet the Fed had been around for 96 years when Dr. Paul’s book emerged. Given that it’s in charge of the money we use how did it remain in the shadows for tax-burdened citizens for nearly a century? What’s up with that?

The Federal Reserve Bank of St. Louis tells us the Fed’s congressional assignment is “to promote maximum employment and price stability.” (Bold in original) For these it talks about interest rates, and its aim is to increase the money supply so that prices rise gently at or around a 2 percent rate. 

How gentle is a two percent rate? After 10 years of two percent monetary inflation, it would take $121.90 to buy what $100 bought in year one. But that’s over a decade, and you might not notice it unless you’re one of the hungry poor not on welfare. The Fed’s inflation of the money supply has been ongoing since it began operations in 1914, draining 96 percent of the dollar’s purchasing power.

On what planet is a 96 percent devaluation considered stability? Its real purpose is to inflate then assure us it makes good sense. Never mind the boom - bust cycle it creates along with the debauchery of our currency. We’re being gaslighted. Where did all the newly-created money go? 

Dr. Paul, who had a long career in Congress whose confrontations with Fed Chairmen Alan Greenspan and Ben Bernanke have become legendary in libertarian circles, tells us:

Law permits this highly secretive, private bank to create credit at will and distribute it as it sees fit.

The chairman of the Federal Reserve can blatantly inject in a public hearing that he has no intention of revealing where the newly created credit goes and who benefits. When asked, he essentially answered, “It’s none of your business,” saying that it would be “counterproductive” to do so. [My italics]

The picture I get is of people in a hideout somewhere — in this case, the FOMC meeting in the Eccles building in Washington, D.C. — cranking out money then injecting it into the economy in some mysterious manner, while telling us in Keynesian doublespeak their operations keep us safe and prosperous. Is it really hard to fathom that those in charge might be up to no good?

Woods comes out swinging

After defining the Federal Reserve System — the Fed — as the American central bank enjoying “a government-granted monopoly on the creation of legal-tender money,” Woods proceeds to evaluate the Fed from a broad or macro perspective. 

What exactly did the Fed fix? Christina Romer who served under Obama as Chair of his Council of Economic Advisors found that “recessions were in fact not more frequent in the pre-Fed than the post-Fed period.” Even comparing the periods of 1796-1915 to post-WW II — thus omitting the Great Depression of 1930-1945 — “economist Joseph Davis finds no appreciable difference between the length and duration of recessions as compared to the period of the Fed.”

Woods takes us back through American history to see how banking and credit developed. Government, which has no money of its own, befriends ones that have it. During the period between the expiration of the first Bank of the US and the creation of the Second Bank of the US — 1811-1817 — the government granted banks the privilege of expanding credit unsecured by deposits while allowing them to tell depositors attempting to withdraw their money to “come back in a couple of years.” While banks could be charged with legal counterfeiting and embezzlement, Woods does not use the terms. In fact, nowhere in the book does he use the words “counterfeit” or “embezzle.”

When the Second Bank of the US started inflating in 1817 it created the Panic of 1819. He writes:

The lesson of that sorry episode — namely, that the economy gets taken on a wild and unhealthy ride when the money supply is dramatically and artificially increased and then suddenly reduced — was so obvious that even the political class managed to figure it out.

Many inflationists before the panic became hard-money believers after Condy Raguet and Daniel Raymond, a disciple of Alexander Hamilton, became hard-money advocates and wrote books on economics. John Quincy Adams cited the hard-money Bank of Amsterdam “as a a model to emulate.”

But the inflationists persisted and pushed for more government intervention, and Unit banking in particular:

In the nineteenth century, nearly all American states instituted a regulation known as unit banking, which limited all banks to a single office. No branch banking was allowed, whether intrastate or interstate. The obvious result was a very fragile and undiversified banking system in which banks could be brought to ruin if local conditions turned sour.

Fractional-reserve banking is a major cause of bank panics. But the US went further. Other countries did not “cripple their banking systems” with unit banking laws. Canada, in particular, had no unit banking laws and no banking panics. The Bank of Canada did not emerge until 1934:

As Milton Friedman was fond of pointing out, although the Great Depression claimed over 9,000 American banks, the number of banks that failed in Canada at that time was zero. American bank panics, it turns out, were in large part the result of government intervention — in the form of unit banking — in the first place.

Yet it was the market and the imposed pseudo-gold standard that took the blame, and Americans got Hoover’s meddling then FDR’s New Deal.

Later in the book Woods mentions the hands-off approach to the depression of 1920-1921, “which saw unemployment shoot up to 12.4 percent and production decline by 17 percent. Wholesale prices fell by 56 percent.” And the Fed kept its printing press quiet. According to the National Bureau of Economic Research the depression was over by the summer of 1921.

Falling prices are bad?

One of the strongest parts of Woods’ book is his treatment of deflation — falling prices. It is only in the inflationary world of larcenous economics that falling prices are the “It” to be avoided.

A few of the points he makes:

  • Increasing the money supply to support increased production is a fallacy. “Any supply of money can facilitate any number of transactions.”
  • The money supply under a hard money system grows “relatively slowly, and the supply of other goods and services increases more rapidly. With these goods and services more abundant with respect to money, their prices fall.”
  • The claim that people would stop buying things if they knew prices would fall ignores the fact that people “value goods in the present more highly than they do the same goods in the future. This factor offsets the desire to wait indefinitely for a lower price.”
  • If deflation is anticipated entrepreneurs and the firms they deal with would adjust their bids accordingly.
  • With the increase in money’s purchasing power people could save simply by hoarding.
  • Who’s hurt the most by deflation? The power centers in society — government and Wall Street. We hear hysteria over deflation because it hurts the establishment the most, “and only the mildest concern about inflation, which hurts everyone else.”


Tom Woods has published another gem and is giving it away. The war we’re fighting now depends for its outcome on sound information and, as always, personal integrity. Never forget, the Fed must go. His book provides much of the intellectual ammunition needed to neutralize the enemy and avoid repeating the mistakes that brought us this mess in the first place.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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