Our dollar continually loses value. This is because of inflation. Inflation is caused by too many dollars chasing too few goods. It is because government spends more money than they have, which causes deficits. Politicians are unable to restrain giving out “gifts” to the electorate in exchange for votes. The country was founded with “sound” money insured by the dollar’s value fixed to the price of gold. On a gold standard, if the politicians spent more than they took in, interest rates would increase, and the public would demand deficit spending stop. Because this became inconvenient to more recent administrations, the gold standard was thrown out.
And what is the proper interest rate, which is the price of money? Again, no one knows. We were taught that the Federal Reserve sets the interest rate, and of course they try, but over the years they have made mistake after mistake.
The Federal Reserve is our “Central Bank,” and this is a very important function. Our privately-owned banks take in deposit money from the public, and they then lend most of it out. That’s how the banks make money. But every now and then the country goes through a panic where everyone gets scared at the same time and the people then go to their bank and withdraw their funds. If too many withdraw at the same time, their bank runs out of cash, and it is called a Bank Run. Should this happen for any given bank, it will borrow from another bank to tide them over, but if too many banks have Runs at the same time, it can become a financial crisis for the whole country. It is at these time that we need to have a bank of last resort, and for us, this is the Federal Reserve. Backed by the power of the Federal Government, they have unlimited ability to issue money.
But the Federal Reserve has taken it upon themselves to also try to set the interest rate. This is socialism at its worst. A group of egg-heads meaning well, acting as central planners, think they can divine what the proper rate of interest is. They can’t. Only the private and free marketplace can determine the proper rate of interest.
When our country was founded, Alexander Hamilton borrowed the concept of fixing the value of the dollar to gold. Isaac Newton figured this out many years before in Britain, and this concept stabilized the British pound for a hundred years. Simply put, our country operated on a gold standard, and the dollar was interchangeable with a certain amount of gold; one was the same as the other. Today our monetary system is vastly different.
First off, Congress created the Federal Reserve and also by law gave the Treasury the duty of setting the policy on the dollar, not the Federal Reserve. What all this has done is that the President, with his Treasury Secretary, can tell the Federal Reserve to keep interest rates low. And if the Federal Reserve balks, the President always wins.
During WWI, President Woodrow Wilson’s Treasury chief made it clear that interest rates were to be kept low. The same was true during WW II, and after the war, President Truman insisted that the low-rate policy continue. After two years and removal of two Fed Chairmen, rates did go up. In the 1960s President Lyndon Johnson put severe pressure on the Fed to keep rates low. The Fed buckled, and the dollar weakened. President Richard Nixon put in a head of the Fed to speed up the printing presses to help his election, which action eventually destroyed the gold-based Bretton Woods monetary system. The George Bush Treasury wanted and got a weakening dollar, which played a pivotal role in the housing debacle and subsequent recession. The basic problem isn’t the Fed’s independence, but the lack of understanding that money is a measure of value and that it’s best, as Alexander Hamilton understood, when the value of money is fixed to gold. (credit to Steve Forbes, Forbes Magazine, 12-31-18).