To read “Government: America’s only legal counterfeiting machine (part one)”

A few weeks ago, I wrote about how the Federal Reserve and the concept of central banks printing paper money have hurt America. This week, I’d like to examine why this could be the case.

The Federal Reserve was created in 1913 as a reaction to the many financial panics of the preceding decades. Its expressed intent was to stabilize industry, regulate banking, control prices and inflation, and supply currency.

Yet there is a notable correlation between the creation of the Fed and rampant inflation, unstable prices, exaggerated market bubbles, the rise of endless warfare, and an unmanageable welfare state. Basically, the opposite of everything it set out to do.

American history is rife with examples of how central banking and fiat money caused inflationary bubbles and led to exaggerated boom-bust cycles.

The debt incurred from the Revolutionary War compelled Congress to begin issuing the Continental dollar in 1776 (a credit-based paper currency), which led to runaway inflation of such magnitude that the Framers of the Constitution were nearly unanimous in their opposition to allowing the federal government to make paper currency during the Constitutional Convention of 1787.

The convention set off a national dialogue between federalists and republicans about the establishment of a central bank. While no such bank is described in the Constitution, Alexander Hamilton believed the justification for instituting one was inherent in Congress’ power to carry out anything “necessary and proper” for executing the powers delineated in Article 1 Section 8.

Hamilton supported an expansive role for the national government in providing the necessary conditions for industry to thrive in America, and believed a national bank was the best vehicle through which the federal government could establish credit, regulate currency and animate economic conditions. The first Bank of the United States was established in 1791.

Conversely, Thomas Jefferson vehemently opposed the creation of a national bank, asserting “a private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army.” Jefferson argued that the Tenth Amendment, which states all powers not constitutionally granted to the federal government are reserved for the states and the people, rejects the notion of implied powers in the Constitution.

President Andrew Jackson was able to abolish the National Bank in 1833 and reduce the national debt to its lowest levels in U.S. history (temporarily eliminating it) in 1835. Unfortunately, a banking scare emanating from high demand for commodities and poor currency policy, cut short the potential for America to return to a commodity currency standard.

Economic recessions in American history prior to the Federal Reserve often didn’t last beyond a few years. The United States experienced a recession in 1920 that was worse in its first year than the Depression of 1929.

When government responded by basically doing nothing (they cut taxes and spending, and the Fed did nothing), the economy recovered in a single year. This stands in great contrast to the fifteen-year Great Depression, which was undoubtedly prolonged by the federal government’s wild interventions.

Obviously, banking scares and economic booms and busts are not new in the American experience. F.A. Hayek won the Nobel Prize in 1974 for his excellent presentation of the so-called “Austrian theory” of the business cycle.

The Austrian school essentially states free market economies are institutionally prone toward natural periods of booms and busts that, if left alone, are self-correcting. But economic “stimulus,” brought on by government intervention and central banking, artificially extend boom periods, thereby making the busts longer and more painful.

The great Austrian economist Ludwig von Mises compared this process to that of a master builder, who is under the false impression that he has 20 percent more bricks to build a house than he actually has.

If the builder were aware of his mistake, it might entirely change the way he would design his home. When would it be better for the builder to discover his error: after he has laid down two rows of bricks, or at the very end when he is laying his last bricks to the top of the house?

Wild speculation in the marketplace can lead to malinvestment in a particular industry. Whenever you see speculative booms (like the dot-com, NASDAQ, or housing bubbles), history and common sense should indicate to you that a corrective bearish market is around the corner.

But the Fed likes bubbles, because they stimulate the economy and make rich bankers wealthier. So they continue to print money and dump it into speculative bubbles, encouraging more malinvestment.

In doing so, the Fed is not allowing the spontaneous order of the marketplace to correct its own mistakes. It simply delays the inevitable bust that must come. However, instead of having to knock off two rows of bricks in a speculative bubble, Americans must knock down the whole house. The Fed always makes things worse.

It happened in the 1970s. It happened in the early ’80s. It happened in the late ’90s. It happened in the early ’00s. And it happened in 2008.

Austrian economists like von Mises, and newer thinkers such as Murray Rothbard, Lew Rockwell, Thomas Woods, and Ron Paul have been consistently and accurately predicting these busts for the better part of forty years. Only now are people beginning to listen.

We don’t have a dollar anymore. It’s lost 95 percent of its value since the Fed was created in 1913. In the last thirty years, the dollar value of oil has gone up 200 percent. In terms of gold, the price of oil has stayed completely flat.

The Fed is responsible for amplifying and extending most of the economic pain we suffer in our country today. Their endless supply of printable money is essential to maintaining our military empire and our welfare state.

If you are sick of seeing your leaders, your safety, and your prosperity tied down by private bankers with no governmental oversight and no record of authentic success, then it’s time to end the Fed.