President Trump’s relentless attacks on the independence of the Federal Reserve help remind us why the Constitution established a totally different monetary system than the one under which we have all been born and raised.
The reason that the Federal Reserve — or central bank — was established as an independent federal agency was because it’s a very bad idea to have a president deciding monetary policy. That’s because presidents inevitably want to use the monetary system to benefit themselves politically, which ordinarily means expanding the money supply to create an artificial sense of economic prosperity, which then enables a president to exclaim, “Do you see how beneficial my tariffs and other economic policies are?” Then, when prices of things start rising in response to the expanded quantity of devalued money in the system, a president can easily blame the rising prices on such things as greed, profiteering, Big Oil, and so forth, with hardly anyone realizing that the president’s monetary policies are the reason for the price rises.
By making the Fed independent of presidential control, the idea is that the people at the Fed would manage the money supply in a responsible, non-political way. Of course, this is pure nonsense. Throughout the long history of the Federal Reserve, there have been instances where Federal Reserve officials have responded and reacted to political events, oftentimes with the intent to benefit one political party over another.
But the most important thing to understand about America’s central bank is that it is based on the socialist principle of central planning, which, as Ludwig von Mises pointed out, produces “planned chaos.” That’s what we have had during the entire existence of the Federal Reserve — planned monetary chaos. That’s because no one, no matter how smart, can centrally manage something as complex as money, especially in a very complex market economy like that of the United States.
Thus, the establishment of the Federal Reserve in 1913 was a bad idea from the very start. While the ostensible purpose was to have a governmental entity that would stabilize money and the banking system, the result has been the exact opposite.
The Framers established a totally different monetary system — one that had no central bank as well as no paper money. Our American ancestors knew that if they established a paper-money system, the president or the central bank would end up printing vast quantities of paper money to finance their schemes and their wars. They knew that the inflation of the money supply would end up going on forever. The government would be able to plunder and loot the citizenry through monetary debasement — i.e., the indirect tax of inflation.
So, the Constitution established a monetary system based on the official money being gold coins and silver coins rather than paper money. The federal government was only given the power to coin money, not print money. Moreover, the states were expressly prohibited from making anything but gold coins and silver coins legal tender or official money.
In this way, presidents would not be able to play political games to benefit themselves by printing up more money because gold and silver cannot be printed. While the Constitution authorized the federal government to borrow money by issuing debt instruments such as bills, notes, and bonds, everyone understood that these debt instruments were not money but instead promises to pay money, with the money being gold coins or silver coins.
That monetary system, which lasted for more than 100 years, was one of the important factors (along with no income taxation, welfare state, Social Security, Medicare and economic regulations and minimal immigration controls) that contributed to the extraordinarily high level of economic prosperity in the late 1800s. In fact, people were actually using their savings to invest in 100-year bonds issued by corporations because they knew they would retain their value since they were payable in gold coins.
It all came to an end with President Franklin Roosevelt’s extraordinary “emergency” decree in 1933 that effectively amended the Constitution by ending America’s gold-coin/silver-coin monetary system in favor of a monetary system based on irredeemable paper money. Combined with the Federal Reserve, which had been launched in 1913, FDR’s paper money system put America on the road to planned monetary chaos, including booms and busts, ever-expanding quantities of money, and constant debasement of paper money.
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