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The 'villain'? No, the hero!
Distorting History
The article's pro-statism slant is established right at the outset, via a short pro-central banking recounting of US monetary history that contains a number of truly cringeworthy distortions of the facts. Here it is:
“THE U.S. FEDERAL RESERVE was founded 99 years ago, as a bulwark to the banking system and an antidote to its frequent runs and panics. Strictly speaking, it was America’s third attempt at a central bank. The first, organized by Congress in 1791, was allowed to expire after 20 years, leaving the young republic with only a patchwork system of weaker state banks. During the War of 1812, Congress realized its error (in the absence of a central bank, inflation had run rampant), and in 1816, it chartered a second bank, again for 20 years. The Second Bank of the United States was, in the main, a success. Its notes were circulated as currency, and it astutely managed their supply so as to keep the economy humming. Alas, President Andrew Jackson, a fierce opponent of both paper money and national banks, campaigned in 1832 against renewal of the charter, and indirectly against the bank’s brilliant but impetuous head, Nicholas Biddle. Resentment against financiers was running high, and the election became a referendum on the genteel Philadelphia banker versus the rough-hewn war hero—and a referendum on the bank itself. Jackson won, and the Second Bank was, per his promise, destroyed. The U.S. economy promptly plunged into a severe depression. Biddle died not long after, in semi-disgrace, but the battle between bankers and populists never went away.“
In 'the absence of a central bank, inflation had run rampant'? Now, there can be no question that inflation can occasionally 'run rampant' in a fractionally reserved banking system with the power to create money from thin air, even in the absence of a central bank. This tendency is especially prevalent during wars, and usually instigated by the government (as was the case in 1812). There can be no doubt that at the time the Second Bank of the US was founded, there was monetary chaos and inflation was running high.
However, the absence of a central bank as such is by no means the 'reason' for this. In a relatively free banking system operating with specie money, such episodes are usually quickly cured in the deflationary busts that follow the credit expansions. However, if there is an institution that is able to perpetuate inflation, it is without a doubt a central bank.
As Murray Rothbard writes on the second Bank of the United States (BUS) in 'The Mystery of Banking':
“From its inception, the Second BUS launched a massive inflation´of money and credit. Lax about insisting on the required payments of its capital in specie, the Bank failed to raise the $7 million legally required to be subscribed in specie. During 1817 and 1818, its specie never rose above $2.5 million and at the peak of its initial expansion, BUS specie was $21.8 million. Thus, in a scant year and a half of operation, the BUS added a net of $19.2 million to the money supply.
Outright fraud abounded at the BUS, especially at the Philadelphia and Baltimore branches, which made 3/5 of all BUS loans. Furthermore, the BUS attempt to provide a uniform national currency foundered on the fact that the western and southern branches could inflate credit and bank notes, and that the inflated notes would then come into the more conservative branches in New York and Boston, which would be obligated to redeem the inflated notes at par. In this way, the conservative branches were stripped of specie while the western branches continued to inflate unchecked.
The expansionary operations of the BUS impelled an inflationary expansion of state banks on top of the enlargement of the central bank. The number of incorporated state banks rose from 232 in 1816 to 338 in 1818, with Kentucky alone chartering 40
new banks in the 1817–18 legislative session. The estimated total money supply in the nation rose from $67.3 million in 1816 to $94.7 million in 1818, a rise of 40.7 percent in two years. Most of this increase was supplied by the BUS. This enormous expansion of money and credit impelled a full-scale inflationary boom throughout the country.”
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Nicholas Biddle, president over the wildly inflationary Second Bank of the US. Dethroned prematurely by the 'populist' hard money advocate Andrew Jackson.(Painting by William Inman, 1830)
Poor Vilified Ben
After having established this etatiste pro-central planning view of history, Lowenstein continues:
“None of the invective heaped, of late, on Ben Bernanke would have come as a surprise to Biddle, and one doubts whether the Fed would fare much better with the electorate today than the Second Bank did in the 19th century.”
“Over the past four and a half years, Bernanke, 58, has presided over the most sustained period of crisis of any civilian official in recent history, with the fate of millions of unemployed and underemployed Americans hanging in the balance.”
Lowenstein continues:
“Since August 2007, Bernanke has deployed the Fed as the lender of last resort to the banking system and worked overtime to furnish an “elastic currency”—that is, to keep enough money in circulation for the economy to function.
These were the very tasks that the founders of the Fed envisioned. Bernanke has performed them by tripling the size of the Fed’s balance sheet—to an eye-popping $2.9 trillion—and by inventing a welter of new programs to lend to banks and other private-sector institutions. For most of the Fed’s history, popular opinion—being generally opposed to depressions—has favored such efforts, but today the public’s disgust with government, and with banks, has cast a shadow of suspicion upon Bernanke.”
This is the historical reality of the 'creature from Jekyll Island'. The commonweal was the last thing the founders of the banking cartel had on their mind. It was no coincidence that the Federal Reserve Act was voted upon just before Christmas Eve in 1913, when most Congressmen had already gone home. In this manner, passage was ensured.
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The Jekyll Island Hunt Club, where the plan to create the Federal Reserve was secretly hatched out by top bankers and their political allies.(Image via Wikimedia Commons)
You couldn't make this up. Yes, it was really difficult to 'identify' the housing bubble. How could anyone possibly have seen that things were 'off course'? Least of all an 'academic with faith in the essential rightness of the market'!
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A long term chart of the Case Shiller house price index from 1890 to the height of the boom. 'No-one could see it the bubble', least of all the guy who's allegedly supposed to 'take away the punch bowl' when the party gets going – click for better resolution.In spite of all this we are now supposed to somehow believe that enacting the exact same polices that were tried then – only on an even grander scale – have 'saved us from a depression'? That they somehow 'will work' this time around, only because the recent economic data look good and the stock market is in an uptrend? Three years of rising stock prices are 'proof positive' that Bernanke has 'saved' us?
Is there is no longer any reason to worry about the long term impact of his countless unprecedented monetary experiments? What if another economic bust were to strike a year from now? Will he then still be considered to have 'saved us'?
During the Great Depression, there was a five year long inflationary echo boom after FDR ascended to the presidency. At the time, the economy certainly appeared to be on the mend. The 'data' proved it after all. And yet, it turned out to be nothing but another illusion in the end. The very moment monetary and fiscal stimulus were withdrawn, the echo boom collapsed back into a heap. This proves ipso facto that it was not a sustainable economic expansion. You have one guess as to what will happen to the current echo boom once fiscal and monetary stimulus are ended.
Ben Bernanke may be a decent man and a faithful civil servant doing what he believes to be his duty. However, there is nothing new under the sun. Inflationist 'cures' of economic ills have been attempted over and over again throughout history. The idea that a credit contraction and economic bust can be 'fixed' by heaping more debt upon the already smoldering pile has occurred to people since medieval times.
Today it is easier than ever to actually implement these hoary inflationist doctrines. One need not even go to the trouble of clipping coins or printing additional bank notes. One need merely credit a few accounts with impressive looking numbers in the electronic aether. And yet, no way has been found as of yet to actually create one iota of new wealth in this manner. All that is happening is that yet another financial and economic Potemkin village is erected.
It will prove just as durable as its predecessor and when it falls apart, it will once again turn out that untold damage has been wrought by policies meant to achieve the exact opposite.
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The illusion of prosperity provided by money printing: a Potemkin village.
(Image source: The Web)
Kno's Comments: I edited out a good part of the article to sum things up. For those who have the interest and patience to read the whole article please click on the link.