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     Apr 11, '14


In Andrew Jackson we trust
By Noureddine Krichene

The birth of the US Federal Reserve in 1913 was a triumph for an anti-market union that fought for inflation, bail-outs and control of government. These forces, encompassing bankers, debtors, businesses, farmers, miners, academics and politicians, had been constantly defeated by sound money and free market forces since 1836. They triumphed with the "crime of 1913". Instantly, control of money was grabbed from the US Treasury and became vested in the Fed.

Today, the Fed is a central planning agency fully in charge of money, prices, employment, farmers, stock markets, housing, bail-outs, exchange rates and even re-electing presidents. In contradiction to the US constitution, money is inconvertible paper and the Fed's power is unlimited. Most absurdly, the Fed's power



is invested in a single person, be that Benjamin Strong, Allen Greenspan, Ben Bernanke or Janet Yellen - maestros of depression and misery.

The US Congress has virtually no say when it comes to money, which has become instead a policy tool for the Fed, with disastrous consequences. These are demonstrated by its century-long track record: the Great Depression and the confiscation of gold in 1934, inflation and unemployment in the 1970s, and the 2008 financial meltdown.

Fed inflationism destroyed the gold standard and the value of currency. An ounce of gold cost US$18 in 1914 and $1,300 in 2014; a barrel of crude oil cost a dollar in 1913 and is at $100 today. Debt, now exceeding 400% of gross domestic product, has no ceiling except the sky. Banking and capital markets have become vehicles for the redistribution of wealth.

A man of great foresight and faith in the US constitution, president Andrew Jackson banished central banking in 1836. Appalled by the robbery of inflationism, intense asset speculation, the defrauding of workers and the alliance of political and financial power, Jackson terminated the charter of the central bank, called the Second Bank of the United States.

Had he preserved central banking, the US would have remained a poor country. Instead, Jackson secured sound money and free markets, and immunized the capital markets against destabilizing speculation. Workers enjoyed significant real wage gains. Financial crises were rare from 1836 to 1914; when they appeared, they were narrow in scope, short-lived and self-correcting without government interference. They often penalized and weeded out corrupt bankers.

Jackson proved right about the dangers of central banking, but unfortunately, leaders with his foresight and integrity belong to the distant past. Thus everything that he feared ended up materializing. All prosperity prior to 1929 was wiped out by the Fed in the decade to 1939, replaced with agony and poverty. Likewise, all prosperity prior to 2008 was wiped out by the Fed between 2009 and the present.

The next century will be no different. Under the power of the Fed, it will be marked by financial chaos, robbery, stagnation and poverty. It could not be different, since the Fed's history is marked by repeated episodes of inflationism followed by monetary, fiscal and economic chaos.

Dominated by the powerful Benjamin Strong during the 1920s, the Fed dictated very low interest rates and inflation under the guise of helping farmers with cheap mortgages. It ignored the stock market speculation of 1926-29 until the market crashed on its own in 1929. The immediate response of the Fed was to re-inflate all prices through very low interest rates and massive liquidity injection. The response of the government was massive fiscal deficits, unemployment benefits, and forced increases in wages and prices, all part of the New Deal program. But cheap money and vast government spending only prolonged the depression by failing to restore employment. In 1939, unemployment in the US was at 20%, and real output was still below the 1929 level.

Ironically, it was World War II that eliminated unemployment. With the US entry into the war in 1941, president Franklin Roosevelt, an ardent socialist, suspended the New Deal and abolished all unemployment benefits. Labor unions lost power. And with the removal of government roadblocks, the US economy instantly went to full employment.

Likewise, the United Kingdom, which had generous unemployment benefits, high minimum wages and strong labor unions, saw its unemployment drop from 12% to negative rates. Neither the US nor the British government, no matter how deeply socialist they were, could continue to keep millions of workers idle, showering them with generous benefits, at a time soldiers needed food, clothing, and equipment.

It is no surprise that the years 2002 to 2014 were a repeat of the 1920-1939 episode. Dominated by powerful inflationist Ben Bernanke, who won the title Helicopter Ben, the Fed lowered interest rates to near zero and inflated away. It ignored stock market, housing, and commodities bubbles, claiming that core inflation was below 1% per year.

The Fed's response to the inevitable financial collapse was massive bailouts - exceeding $12 trillion - near-zero interest rates, massive money injection and re-inflation. The Fed created $3.8 trillion out of thin air - stolen property - from 2009 to 2014, or five times the amount of money it created from 1914 to 2008. It also destabilized exchange rates, forcing Japan, the euro-zone, the UK and emerging countries into following in its inflationary path.

Only a madman would repeat the mistakes of the 1930s. But the Fed justifies following the same failed inflationary path with its twin mandate of full employment and price stability. And politicians, academics, and the media believe that the Fed should be entrusted with these goals. But the reality is that full employment and price stability prevailed before the Fed came along, and were compromised forever after its birth.

Entrusting the Fed with either or both mandates is a pure absurdity. US politicians may believe that the Fed possesses the magic of full employment, but the historical record shows that it is best at killing jobs, spreading chaos, and distorting the economy. When the economy does create jobs, supporters of the Fed immediately give it the credit. This is akin to praising a thief for providing you with a new car because his theft forced you to buy another one.

Inflationists want to monopolize economic and monetary power in their own interests. Through its repeated reassurances to capital markets that it will sustain near-zero interest rates until the end of the world, the Fed has revealed its real interest: diverting free wealth to Wall Street and speculators under the guise of creating employment.

Politicians support inflationism for its taxation power. For instance, President Barack Obama nominated Bernanke and Yellen as chairs of the Fed based on their inflationary ideology, which fits perfectly with Obama's socialism and grandiose spending habits. Bernanke, Yellen and Obama know nothing about economics, but they are masters of demagogy, disorder, and spreading misery.

Their ideology unjustly rewards borrowers, speculators, and recipients of the government dole, while their inflation tax is falling painfully on the poor in Bangladesh and Mauritania. The more the Fed inflates, the more the vulnerable populations of the world are exhausted. They suffer more poverty as they pay for the capital consumed by the beneficiaries of inflationism.

Meanwhile, US debt, both government and household, rises beyond the bankruptcy level. The Fed has no option except to wipe out this debt via hyper-inflation, ruining creditors and causing another collapse, and setting the stage for the next inflationary round. Only Andrew Jackson knew how to stop this.

Noureddine Krichene is an economist with a PhD from UCLA.

(Copyright 2014 Noureddine Krichene)






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