There’s an idea rooted among some libertarians that the Federal Reserve was originally a sound institution but has grown corrupt. As a bankers’ bank, it was fine, they believe, but not as the monster it has grown to be. If we could only go back to the Fed’s founding charter, all would be well.
I’m thinking of two well-known financial analysts who are unsurpassed in their analytical brilliance and knowledge of markets and who rightly regard the bureaucratic Federal Open Market Committee (FOMC) as the father of bubbles, busts, stagnation, and market privilege. In their articles, Peter Schiff and David Stockman hammer the Fed relentlessly and rightfully for its cluelessness, corruption, and threat to our material and spiritual well-being. They have authored engaging bestsellers on the state of the economy and place blame where it belongs, on the monetary policies of the Federal Reserve.
Yet, strangely, their recommendations stop short of eradicating the cancer altogether. They want the Fed reformed, not abolished. In each case they believe the Fed in its infancy was an institution compatible with free markets. Peter Schiff writes:
The role of a central bank is limited: to control the currency so as to keep prices and interest rates fairly stable. . . . This sort of central bank is one I could have supported. But the Federal Reserve Bank of the United States never functioned this way, and it probably was never meant to. . . . We never should have trusted the Fed to respect its boundaries.
He adds,
The ultimate destroyer of the U.S. dollar was the Federal Reserve System, which was supposed to be the guardian of the currency. As I discussed in chapter 2, the original idea of the Fed was a good one: providing a uniform currency backed by gold.
In The Great Deformation, David Stockman tells us that “the Federal Reserve System, therefore, was intended to be a ‘banker’s bank,’ not an agent of national economic management. This founding charter has been literally blotted out of modern day discussions.”
In his closing chapter, Stockman lists various steps he believes will avoid the worst possible catastrophes. He begins with the restoration of the Fed as a banker’s bank and the adoption of sound money, by which he means a gold-backed dollar.