Volcker, Greenspan, Bernanke: 25 Years of Fed Management

0:00In 1982, the year that Lew Rockwell founded the Mises Institute, you might have taken a trip to the grocery store in a new mid-sized Pontiac 6000 sedan that you paid $6,200 for, or a sportier but less reliable Ford Mustang that you purchased for $6,500. As you exited the supermarket and scanned your receipt, you would have noted that you were charged 50 cents per pound for blue bonnet margin, 99 cents for a five pound bag of white flour, 84 cents for a dozen eggs, 50 cents per pound for sliced white bread, $1.39 per pound for ground beef, $0.46 for a can of shaving cream, and $2.20 for a gallon of milk.

0:53You may have then driven to your local post office where you paid a monopoly price of $0.20 a piece of first class stamps. Needing to do some yard work, you might have crossed the street and picked up a garden rake for $1.66 at the hardware store. Realizing that your spouse's car needed new tires, on your way home you would have driven past your local tire dealer

1:44In the beginning, you would be confronting a large three-bedroom townhouse in a desirable New Jersey suburb within walking distance of a train station from which your commute to Manhattan would be 50 minutes. You would have paid $77,000 for this new townhouse as I did. You would probably have been satisfied with either purchase because you had read that the median price of a new home in the US was $83,900 that year. Having put away your groceries and other purchases, you might have turned to the chore of washing and drying your family's laundry using a top-quality Whirlpool washing machine and Whirlpool clothes dryer, which your in-laws gave you as a gift in 1980 for which they paid $239 and $228 respectively.

2:30It is now 25 years later, and in your driveway sits a 2007 Pontiac Grand Prix, GM's replacement for the Pontiac 6000, which you just purchased for only $4,000. Looking over the supermarket receipt for the groceries you just bought, you note the following $35 cents for a pound of margarine, $65 cents for a five pound bag of flour, $1.45 for a gallon of milk, $35 cents for a one pound loaf of white bread, and $0.90 for a pound of ground beef. The garden rake you picked up at the front of the store to replace your dilapidated 25 year old one cost you 99 cents.

3:16Remembering that your son's car needs new tires, you pick up your local newspaper and begin browsing through ads and find new firestone tires for sale at $65 for a set of four. Before putting the newspaper down, an article on the Op-Ed page catches your eye. It reports that overall prices have fallen by about 35% in the last 25 years, that is since 1982, which works out to a modest annual decline of 1.75%. The author of the article, an Ivy League economics professor with the improbable name of Guido Hulsman, argues that the ultimate cause of this quarter century increase in the value of the dollar was the abolition of the Federal Reserve system and its money creating powers in 1982 and its replacement by a free market gold standard.

4:12Hulsman goes on to argue that this is the natural outcome of a monetary system based on a market chosen commodity money. The reason is that since gold mining adds minimally to the existing supply of money each year, except in extraordinary circumstances, the progressive increase in the supplies of goods and services in a capitalist economy, due to technological advances and continuing saving and investment by households, naturally causes prices to fall. Hulsman further points out that an annual fall in prices of about the same magnitude occurred in the U.S. in the latter part of the 19th century when the gold standard was restored after the Civil War. A door slams and you awaken with a start. Guido could not be an Ivy League professor.

5:00You realize that you have been asleep on your couch dreaming. Your son rushes in and tells you that he just got a great deal of firestone tires, paying $220 for a set of four. This compares to the $100 you recall paying in 1982, and the $65 you paid in your dream world without the Federal Reserve System. Still groggy, it dawns on you that you paid $22,500 for the 2007 Pontiac Grand Prix in your driveway. More than three times the $6,200 you paid for a similar model in 1982, and five and a half times the $4,000 you would have paid in 2007 in a world where prices decline moderately each year, as they would tend to do in a dynamic, entrepreneurial and progressive free market economy with a sound commodity money like gold.

5:49Still groggy, you locate your latest supermarket receipt and are jarred back to reality by what you see. It is not the price of goods and services, but the value of the dollar that has declined over the past 25 years. The price of milk has risen from $1.99 to $4.69 per gallon, the price of margarine from $0.50 to $1.99 per pound, the price of white bread from $1.39 to $3.19 per pound, the price of a dozen eggs from $0.84 to $2.99, and so on. Why, if the If Fed is so diligently managing our money to fight inflation and promote the stability of the dollar, as it continually reminds us, have consumer prices increased by an average of about 113% since 1982, cutting the buying power of our dollar by more than one half?

6:45The answer is simple. Fed money management or monetary policy means the creation of money out of thin air, pure and simple. All the so-called tools that the Fed has at its disposal, setting a discount rate, conducting open market operations, changing reserve requirements for bank deposits, all of these arcane devices are suited to one thing and one thing only. facilitating the creation of new money at will and without limit, so it is the Fed and the Fed alone that is responsible for the rapid rise of consumer prices and depreciation of the dollar in the past quarter of a century, as well as for the occasional stratospheric rise in asset prices, the so-called bubbles in equity and real estate markets.

7:34Let us review the evidence.

7:43In 1982, the adjusted monetary base, sometimes called high-powered money, which is controlled directly by the Fed and consists of total currency and circulation plus reserves held by banks, totaled $152 billion. In 2007, the monetary base equaled $853 billion, an increase of 450%. Adjusted bank reserves increased in this period from $28 billion to $96 billion, or by three and a half times. Since increases in adjusted bank reserves can support a multiple expansion of dollars and checking deposits through fractional reserve banking, the overall money supply also exploded during this period.

8:28Thus, MZM, which represents money of zero maturity, the Fed's measure of the number of readily spendable dollars in the economy rose from $892 billion in 1982 to $7714 billion in 2007. This represents a more than eight and a half fold increase in the money supply. But how was the Fed able to accomplish this enormous expansion in the supply of dollars? Very simple. It purchased Treasury bills and other government securities from bond dealers in exchange for money that it conjured up on the spot out of thin air and wired to the banks of the bond sellers.

9:15In fact, these so-called open market operations continued to be repeated on a daily basis. Every morning, there's something called Fed Time. Between 9 and 11 a.m., the open market trading desk at the New York Federal Reserve Bank, located a few miles from here downtown in the financial district, establishes computer contact with 30 or so privileged bond dealers. It specifies what quantities and types of securities it wishes to purchase and then makes its purchases from those dealers who ask the best prices. In this way, hundreds of millions of dollars of new reserves are injected into the banking system daily. In short order, these reserves are lent out by the bank and eventually multiplied, in a few weeks or months, into billions of dollars of additional currency and checking deposits in circulation.

10:07To repeat, the dollars the Fed used to make these bond purchases were created right then and there by a keystroke in electronic transfer. If we inspect the books of the Federal Reserve System, we discover the evidence of these operations. In its H.4.1 release, released every week, innocuously titled, quote, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks, I would just call it a counterfeiting statement, We find that in the week ending October 10, 2007, the Fed held in its possession under the category of securities held outright about $780 billion worth of U.S. Treasury securities of different maturities.

11:03The Fed secured the funds to finance accumulation of these billions of dollars of securities over the 93 years of its existence by what can only be called legalized counterfeiting. The depreciation of the dollar in the past 20 years, 25 years, has gone hand in hand with the degeneration of economic thinking on money and inflation. During what has come to be known as the great inflation of the 1970s, most economists abandoned the simplistic and insidious Keynesian doctrines that money did not matter when it came to explain inflation and that monetary policy was ineffective. In the US, Milton Friedman was especially influential and effective in arguing the opposing case, though not without flaws in his argument.

11:49That monetary growth was the primary, if not the sole, cause of inflation. Friedrich Hayek exercised a similar influence in Great Britain, especially after he was awarded the Nobel Prize in 1974. Inflation was reduced in the 1980s in the US and throughout the developed world, The more and more central banks began to heed the lesson taught by centuries of theory and history and reigning the growth of their national money supplies. Unfortunately, by the end of the 1980s, there was backsliding into another pernicious doctrine that the Fed neither had the means to control the money supply nor even the ability to measure it. Of course, in the US, Alan Greenspan was the most influential proponent of this view. were twofold. First, it allowed the Fed to obscure its key role in the inflation process, and second, it shifted the focus of monetary policy back to the manipulation of interest rates again, which was the case under the Keynesian New Economists in the 1960s and into the 1970s.

12:55This movement of denying the central role that money plays in inflation and monetary policy has proceeded so far today that an article in the latest and highly respected Federal Reserve Bank of St. Louis commented on it. In the effectiveness of monetary policy, Robert Rashi and Marcella Williams lament, money has largely disappeared from discussions on monetary policy. They go on to point out that in the 1970s, 11 of 22 central banks in industrial countries reported using the money and credit framework to formulate monetary policy. But by the 1990s, only two of these banks maintained this framework. They also report a negative trend from 1970 to 2002 in the fraction of titles of articles in major economics journals that included the word money, Though the frequency of titles including the word inflation was relatively constant.

13:53Finally, they cite a study that found that the frequency of the word money in the annual reports of major central banks declined over the period 1996-2002. They also studied about 100 speeches of three central bank chairmen. And in those 100 speeches, money was mentioned less than 10 times. All of this has occurred at the same time that an increasing number of central banks have instituted so-called inflation targeting, a deliberate depreciation of the monetary unit at a fixed rate per year, usually between 2% and 3%. So I'm here to reiterate, one, that an increase in the money supply is the sole cause of persistently rising prices, two, that the Fed is the one and only agency that has the power and the means to control the money supply, and three, that inflation of the money supply is theft and counterfeiting, pure and simple. Thank you.

15:00Thank you very much.