How can we avoid disaster? By abolishing the Fed
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Thursday, December 11, 2008

Most of us don’t know much about the Federal Reserve, but we should learn more about this institution, as it poses perhaps the greatest threat to our nation.

Yes, greater than terrorism or even endless war, because the Fed is slowly destroying our money – and with it our lives and fortunes.

But this secretive and destructive establishment is not even necessary, despite what we’ve been told.

The Fed is a quasi-public, government institution with private member banks, created in 1913. (Three years after signing the Federal Reserve Act into law, President Woodrow Wilson admitted, “I am a most unhappy man. I have unwittingly ruined my country.”)

The Fed’s main purpose is to act as the “lender of last resort” during banking panics, and it provides FDIC insurance for depositors.

The Fed also serves as our central bank, issuing money printed by the U.S. Treasury. This is where we run into trouble, because the Fed purposely manipulates the money supply and interest rates in an attempt to “steer” our economy.

This (along with other government-caused distortions) is the cause of our economic boom-bust cycles, including our current recession.

The Fed is also largely responsible for inflation, a hidden tax that devalues our money 65% every 20 years. Because our money is fiat money (paper money not backed by assets like gold or silver), the Fed can print as much of it as government wants. And government wants to inflate our currency because we finance excess spending with debt, which is easier to repay with future inflated dollars.

But the major worry is this: Right now, the dollar is the world’s dominant currency, but at some point, the combination of inflation and accumulated government debt will cause foreign investors to lose confidence in the dollar.

When this happens, investors will quickly dump trillions of dollars, exchanging them for American assets, buying up everything they can find and causing hyperinflation such as we have never seen. Our economy will eventually collapse, an even Greater Depression than the last.

Of course, this all seems quite farfetched right now. Even with the crisis, things seem to be carrying on pretty normally.

But events have escalated in a worrisome way.

First, there’s the cost of the bailouts: it’s not just the $700 billion we keep hearing about. When you add January’s stimulus package, the Fed’s general currency swaps, Bear Sterns, AIG, Fannie and Freddie, the Detroit Big Three, Lehman Bros., Citigroup, and various other government guarantees, estimates put this year’s eventual total at $8 trillion – half our country’s annual output.

Then there’s our government’s increasing debt and unpaid promises like Social Security – already $52 trillion, or $450,000 per household – which will almost certainly mushroom under our coming “New Deal” president.

And any promised tax increases or anti-business policies will further slow investment and hiring, greatly worsening our current recession.

Large businesses, as well as tax-starved states, will then demand even more bailouts, multiplying our government debt. Will this be the tipping point, or will we keep going for another 50 years? Who can say?

So how can we avoid this inevitable disaster? The first step would be to abolish the Federal Reserve.

Yes, get rid of the Fed. But who other than government could issue our money? Simple: Banks could issue their own currencies, which would be accepted by other banks. It was done this way in a number of countries during the 19th century.

The banking panics that marked earlier eras would largely be avoided because in emergencies, banks could borrow from short-term credit markets, which would fulfill the lender-of-last-resort function of the Fed. And if deposit insurance were needed, banks could simply buy policies from insurance companies.

A “free banking” system would help avoid the approaching catastrophe by letting markets – not politicians with vested interests – control our money supply. Inflation would cease to be normal.

But we also need to start spending within our means. We need to learn how not to depend on government debt for our every need from cradle to grave. We have ourselves, our families and our volunteer communities to rely on instead, as our forefathers did in earlier times.

This is the only sane version of the future to leave to our children