The Intellectual Legacy of the Federal Reserve
Ron Paul and Ben Bernanke had an amusing exchange of words yesterday about whether or not gold is money. Needless to say, Ben answered in the negative and appealed to tradition during the conversation. Now, although I hesitantly agree with his conclusion (as in, strictly speaking, gold isn’t a widely used medium of exchange right now), I can scarcely agree with his modes of reasoning. Here, I consider the Federal Reserve’s intellectual legacy and outline a few possible reasons as to why central bankers generally fail to think and act prudently.
Group Thinking in the Prestigious Halls of the World’s Central Banks:
It has been noted by many great thinkers that the conclusions arrived at by groups can sometimes be quite, if not astonishingly, inferior to those arrived at by individuals. The quiet study seems to be rather more conducive to clear thought than the splendid halls of social intercourse.
For our readers who might be interested in the study of crowds, we highly recommend Gustave Le Bon’s book (available for free here, or at the greshams-law.com book store), The Crowd: A Study of the Popular Mind. Gustave Le Bon eloquently described this peculiar attribute of crowds when compared to individuals:
The very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. The decisions affecting matters of general interest come to be an assembly of men of distinction, but specialists in different walks of life, are not sensibly superior to the decisions that would be adopted by a gathering of imbeciles. The truth is, they can only bring to bear in common on the work in hand those mediocre qualities which are the birthright of every average individual. In crowds it is stupidity and not mother-wit that is accumulated. It is not all the world, as is so often repeated, that has more wit than Voltaire, but assuredly Voltaire that has more wit than all the world. If by “all the world” crowds are to be understood.
Perhaps it is naive or just harsh to argue that the officials of the Federal Reserve are constantly and forever subject to the dampening effects of group thought. Indeed, these people are typically well-accomplished (by consensual standards at least), and that probably means that they’re capable non-contradictory identification in some walks of life (for example, in mathematics). The real mystery and problem is why clear thinking, or to be more specific, the correct application and enactment of the products of clear thought are untenable in their realm.
Our guess is that the mystery can be explained by a combination of the following; there exists a vast legacy of muddled thinking dating back almost 100 years. For all its flaws, it is deemed to have ‘worked’ (i.e. the illusion is yet to be revealed to all!). Moreover, such institutions lack a legitimate profit-motive, so they act in a framework that is not dissimilar to a popularity contest! In the words of Gustave Le Bon (written in 1896):
To-day it is the traditions which used to obtain in politics, and the individual tendencies and rivalries of rulers which do not count: while, on the contrary, the voice of the masses has become preponderant. It is this voice that dictates their conduct to kings, whose endeavour is to take note of its utterances. The destinies of nations are elaborated at present in the heart of the masses, and no longer in the councils of princes…
… The divine right of the masses is about to replace the divine right of kings…
… The masses are founding syndicates before which the authorities capitulate one after the other…
So, even if we (conservatively) assume that Fed officials themselves aren’t weighed down by the drawbacks of group thought, we can confidently say they are subject to the scrutiny of the masses. Who, fortunately or unfortunately, tend to seek a cake that can be eaten and had at one and the same time!
Maintaining the Legacy:
Well, Ben Bernanke is certainly doing his predecessors proud. As was presented the other day, the bureaucrats of the early – 1930s had similar contempt for the precious metal. Indeed, they were bold enough to declare the patently false assertion that a government could merely issue ‘token money’, and that would be fine (!):
The issuance and control of the medium of exchange which we call “money” is a high prerogative of government. It has been such for many centuries. Because they were scarce, because they could readily be subdivided and transported, gold and silver have been used either for money or as a basis for forms of money which in themselves had only nominal intrinsic value.
In pure theory, of course, a government could issue mere tokens to serve as money— tokens which would be accepted at their face value if it were certain that the amount of these tokens were permanently limited and confined to the total amount necessary for the daily cash needs of the community. Because this assurance could not always or sufficiently be given, governments have found that reserves or bases of gold and silver behind their paper or token currency added stability to their financial systems.
As our readers probably already know; this is nothing but pure, unadulterated hogwash. As we explained here (scroll down to the ‘What is Money?’ section), money originates from a good, and has to remain – in some sense – a good! People aren’t as reality-denying as our public servants when it comes to ownership, profit and loss! ‘Bads’ don’t magically become ‘goods’ because some random guy pronounces it with the introduction of “I, hereby, with the blah blah blah power entrusted, invested, and ordained upon me…”!
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012