One of the darker motifs of human history is that often the “expert” wisdom of an era turns out in retrospect to be little more than smug and lethal ignorance.
Take for example the received wisdom, as late as the American Civil War, on the best way to treat battlefield injuries. Open wounds were routinely stuffed with filthy germ- and bacteria-filled cotton nap, virtually guaranteeing deadly sepsis—pus-forming bacteria or their toxins—in blood and tissues.
Prussian field surgeons had abandoned this practice 100 years earlier—thereby saving a remarkably high number of lives toward the end of the Seven Years War. But French, British and American physicians saw no reason to change. To them, old theories of miasma (“bad air”) and “bad humours of the blood” remained congenial.
As late as 1876, U.S. physicians treated Joseph Lister—one of the primary founders of antiseptic medicine—with condescension. Only grudgingly, over succeeding decades, did surgeons begin to adjust.
This example of “ignorant consensus” from the recent history of human health unfortunately has its own dire parallels today. A critical one is in the field of U.S. economic health, where, every day, long-term damage perpetrated by the central bank penetrates ever more deeply and seriously into American life.
Consider the boom-bust history of the last decade. For those with more than a thimble-full of economic knowledge, this is a HUGE flare, arcing across the heavens of the entire Western World. It signals nothing less than that America’s central bank is desperately, destructively out of control.
Such an assertion, no doubt, sounds frighteningly radical to those who get their economics from CNBC or Time magazine. And it does go into the teeth of that Wall Street consensus that for years has sung hosannas to the mystical wisdom of Fed Chairman Alan Greenspan—whining all the while for ever-more interest-rate cuts.
But at a certain point, facts—rather than an ignorant consensus—must be honored. Those who have paid attention to the etiology of the Great Depression (the first catastrophic blunder of the Federal Reserve) and the prolonged stagflation carnage of the 1970s can’t help but recognize the emergence of one more Fed-created calamity. We also see the anti-capitalist demagogues on the rampage again—seeking to scapegoat business for a macroeconomic bust that springs directly out of the core nature of government central banking.
That nature is not, in essence, distinct from counterfeiting. With a mere bookkeeping entry, the Fed, a government-granted monopoly, creates money out of thin air, backed by nothing. Although the new fiat money adulterates the existing money supply, it is nevertheless placed in circulation with Federal Reserve member bankers, who happily lend it out—at new, lower interest rates.
During periods when the Fed has not recently embarrassed itself, business people tend to construe these bank offers of cheaper credit at face value. Taking out loans, entrepreneurs expand their current operations or start new ones. Unfortunately for almost everyone in the economy, however, the cheaper credit—like the funny money behind it—is also, in a crucial respect, counterfeit.
In a healthy, unmanipulated economy, interest rates come down when there is a cumulative increase in saving by individuals across the economy. Business growth based on such a drop in rates is real and sustainable.
When interest rates are artificially forced down by central bank goosing of the money supply, however, all that ensues is a temporary, credit-induced boom. It is not real and not sustainable. As soon as Fed adulteration of the money supply slows, availability of loanable funds again depends on the real rate of individual saving. Suddenly the credit environment for businesses is significantly more difficult and challenging. Firms that could exist in an artificial environment formed by bogus Fed money now can’t make it. All across the economy, these businesses—cases of what Nobel-Prize-winner Friedrich Hayek termed “malinvestment”—go under, throwing people out of work. The Fed’s funny-money boom is paid for with the arrival of its dark doppelganger, the all-too-real bust.
Should the central bank just try to keep the counterfeit money coming? To do so would be to produce runaway, Weimar-style inflation—wives collecting wheelbarrows of cash from their husbands on payday and rushing to the market to buy groceries before prices again go up. Central banks produce that kind of mass carnage only as a last resort, when the whole scam is coming apart.
Thomas Jefferson and Andrew Jackson both opposed the idea of a U.S. central bank.
They were right.
Steven B. Miller is policy director for the Nevada Policy Research Institute.