Monday, June 7, 2010

Dave Nalle on the Federal Reserve.

It's been said that a truly good teacher is one who can simplify the complicated while being true to the facts. It seems that Dave Nalle--political writer, game author, font designer, and National Chairman of the Republican Liberty Caucus--fits that definition to a tee!

We hear the cry, "let's return to the gold standard" as politicians dig us deeper and deeper into debt and inevitably inflate the currency. It sounds compelling...not so fast!

Read what Dave Nalle has to say about the Federal Reserve.

Blame the Bankers
Dave Nalle
June 5, 2010

Many of those who oppose the Federal Reserve system or any other kind of national bank do so in gross ignorance of history. They assume that it is the system which has led to economic problems and that going back to an older gold-based system would stabilize the economy. The problem is that the historical record does not bear this out.

The reason why we switched to a managed paper currency in the first place was that specie based money was unstable. Throughout the period when we used a gold based system we had repeated booms and busts and crashes and bubbles caused by market manipulation, the real estate market, credit shortages, natural disasters and other factors. Every crash from the south sea bubble to the great depression came during a time of specie-backed, real-value currency. Gold did nothing to make the economy stable because it was only one factor and by not floating relative to the market it made things less stable, not more.

The most stable basis for a currency is to have it indexed not to one commodity, but to many, as represented by a measure like the GDP so that the rise of one commodity is balanced out by the decline in others. That's exactly what the Federal Reserve was originally intended to use as its basis for the currency. The value of money was supposed to be tied directly to the GDP so that the money supply would grow in proportion to legitimate demand and productivity. That's a far more stable system than using any single commodity like gold as the basis for your money.

The problem is not the concept of the federal reserve, it is the misuse of the power of the federal reserve and the abandonment of the principle of tying the money supply to GDP which began in the 1970s. So long as the money supply expanded and contracted with the economy the system worked. When the bankers started inflating the money supply to create artificial booms they also created busts to go along with them.

But in a nutshell it's the abuse of the system, not the system itself which is the problem.

1 comment:

  1. With money comes power and greed; therefore, without enforced market and banking regulations there will always be abuse of the system. It's the nature of the beast.