The invisible hand is almost always smarter.

The statists have made this so complex that its quite difficult to understand exactly WHAT they are doing. They obviously printed their way out of our last recession, and without inflation that we have seen. It doesnt make sense that the chickens dont come home to roost, so I am wondering what will happen in the future. Can they just keep on doing things to make sure we have no consequences?

Indeed.

Wonderful article. It will get a second reading. I also just ordered your book and Thomas Sowell's latest. I have been interested in this topic since Obama took office, first reading a very old essay given to me by a senior friend, about the history of banking,. Then I became interested in the meetings in Basel, Switzerland and that influence. I became interest in the Federal Reserve during Clinton, well actually when I read "The Creature from Jekyll Island". I was stunned when I found the way the banks were the cause of our higher gas prices via their initial loaning and screwing over the Saudis. Your article has added to my understanding It is a oipic many more people should begin to learn more about.

Interesting stuff. I will say that I am relatively ignorant of this overall issue.

I did note that in the summary you noted that eliminating legal tender laws was one of the quickest ways to eliminate the Federal Reserve. I understand the manipulation caused by the Fed, but if that is controlled, I don't understand the problem with a central bank just issuing currency. Of course the gold standard is long gone. However, in any liquid exchange some units must be used. What units are sensible?

Actually it is not always fiat currency as a showed with respect to ancient Rome, however it always (one exception) requires legal tender laws.

Actually inflation is a transfer from producers to the government, not just savers.

Savvystreet links
http://www.thesavvystreet.com/what-is...
http://www.thesavvystreet.com/does-fr...

My Blog (only one earlier link)
https://hallingblog.com/2017/01/02/mo...

The answer is to look at the real cause of inflation, which almost always stems from fiat currency. It is very difficult to create something out of nothing. When a currency is simply an alternative note for an existing store of value, there is an inherent limit on the number of notes because of the corresponding scarcity of their backing. Thus it becomes nearly impossible for inflation to creep into the system, let alone be intentionally spurred on. If you look at the governments which experienced runaway currency inflation, you will find fiat currency and governmental currency manipulation behind it all.

Look at the current state of the United States Federal Government debt. The Federal Reserve and the Government have colluded to maintain an annual target inflation of between 1-2%. Why? Because it amounts to value transfer from savers to spenders. And contrary to what many like to believe, banks are spenders - not savers. Fractional banking is completely built on spending. The government, of course, goes along with it because it makes it easier for them to spend the money they would otherwise have to tax their citizens to get. They can spend more than they have because every year the value of the spent money decreases in comparison to this year's money. And even 1% of a trillion is a lot of money.

You either are ignorant of Austrian theory or you are just obtuse

"Fractional Reserve Banking

Let's see how the fractional-reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but can simply counterfeit it out of thin air. (In the 19th century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way."
https://mises.org/library/taking-mone...

Without legal tender laws there has almost never been inflation that I am aware of. One counter example is that Spain imported so much gold and silver when they first found the new world.

*Central banks and legal tender laws are the source of inflation, not private fractional reserve banks."

Does this mean that inflation cannot occur and has never happened without central banks and legal tender laws? I doubt that.
Examples of Zimbabwe and Venezuela support the proposition but there is much more wrong there than existence of central banking.
Now if you say- One of the causes, or the major cause. Yes.

"No actually Austrains do not have solid understanding of central banks." Let's just agree to disagree onthis one.

" The confuse central banks with fractional reserve banking."
Who you reading? Mises was clear on the misuse of power CB's give governments and its impact on the people. Re: FRB there are clear distinctions of the troubles caused by this ranging from a violation of individual property rights to being the cause of malinvestments

"They also ignore the importance of legal tender laws."
Damn libertarians always looking for individuals to rule themselves and not so called "legal tender laws" you got no vision Dood!

"Finally Austrian Business Cycle Theory give the Fed too much credit, not to mention it is just wrong"
Hope your right, but your not. I'd love to see what we could do without the Fed. I was having drinks at the San Fran Fed, chatting it up with one of their phd's when she said, " we don't know the territory we are in." It was during qe2 and they were designers without any exit knowledge.

" Why shouldn't it be tied to GDP or wealth creation? "
This is a powerful question. I remember the answer from_Macro_ now more than 20 years ago, but I can't help but think market participants as a herd might be smarter than central bankers, just as Wikipedia has more info than centrally-edited encyclopedias.

Could you provide a link to Part 1? I found Part 3. I could not find 1 and 2. Thanks.

I do not think the government has a good idea of how much is being created at any one time. They have influence, but not complete control, which I think they like.

Hello dbhalling,
Very good. Any government that believes it can use its central bank to print unlimited money and avoid insolvency should review the history as you have noted, of the Weimar Republic, or present day Venezuela. Venezuela is now printing a 20000 bolivar note. http://money.cnn.com/2016/12/05/news/...

It is quite confusing. I have never understood why there is not a simple rule that governs the increase of the money supply. Why shouldn't it be tied to GDP or wealth creation? Is it too difficult to measure the increased wealth of a nation in a timely fashion? It seems that money can be created by many means and sources, but the rules that govern printing of exchange notes are nonsensical. The government cannot create wealth, but it has the power to destroy it. Why then do we allow it to have so many tools to manipulate the money supply and market, that ultimately grant it further power to destroy wealth?

The opacity of our system seems to be intentional... a way for politicians and bankers to profit at the expense of the future and the value of the currency held by the citizens. If a small segment profits sufficiently enough that it outweighs the devaluing of the currency, it is only the little guy that is hurt, until the crash... Very short sighted, perhaps, but if those in the know profit and then convert their profit into other assets before a crash, aren't they able to shield themselves from the more serious pain of collapse?

Andrew Jackson where are you?
I find it a bit ironic that the Jackson is on our $20 bill.
http://thefederalist.com/2016/04/18/a...
http://www.history.com/this-day-in-hi...

Respectfully,
O.A.

hear hear

All the more reason for even politicians to be skeptical of their motives.

As I point out in the article, I think central banks are purposely set up to be confusing. I am convinced that central bankers do not completely understand what they are doing.

No actually Austrains do not have solid understanding of central banks. The confuse central banks with fractional reserve banking. They also ignore the importance of legal tender laws. Finally Austrian Business Cycle Theory give the Fed too much credit, not to mention it is just wrong.

We cannot fight the non-sense of socialism (Keynesian-ism) with nonsense.

Excellent article Dale but a lot of this is difficult for me to wrap my head around. I often wonder how I can convince the average person about the dangers of a Central Bank given that the official government statistics are pure fiction in my opinion. The reported inflation rate is less than 2% today but if it's calculated as it was pre 1980 it is closer to 10%. It's confusing to begin with but when you add in manipulated data it's mind numbing.

Well the Austrians do have a solid understanding of Central banking. Yours is ok, I had to fly thru more than a couple simple paragraphs.
if it takes this to reach objectivist sure but De Soto and Murphy do just fine.


Take " *When central banks change the interest rates it causes a one-time increase in inflation (deflation). Low interest rates do not."