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The Federal Reserve Has Been a Disaster for America
Paul Craig Roberts

Like all indoctrinated economics PhDs, I used to teach students that the Federal Reserve was created as a central bank in order to provide cash to banks experiencing a run on deposits so that bank failures would not become general and collapse the money supply and, thereby, employment and output.  It all sounds so reasonable and rational until you realize that finance least of all is idealistic.

The Federal Reserve was actually created in order to save the big New York banks from their greed-driven mistakes, and that is the Fed’s principal activity. In recent decades the Fed has gone beyond merely saving the big banks from their mistakes to helping the big ones concentrate more banking into their hands.  The Fed causes banking crises and then provides funds for the big banks to absorb the troubled regional banks.  The Fed’s current policy of raising interest rates after a decade of negative interest rates has the entire banking system insolvent. This resulted in runs on the banks, which the Fed did not save by expanding reserves, instead permitting failure and acquisition.  Obviously, what I had been trained to teach was false.

This is true of so much of what is taught in every subject.  

This bit of history is only a prologue to my expose of the Fed.  The Federal  Reserve has the sole responsibility for all inflation, depression, and recession since its creation.  Until the Fed’s creation, the purchasing power of the US dollar was essentially constant over massive periods of time.  Since the creation of the Federal Reserve (1913), today’s dollar is a small fraction of the value of a dollar in 1912.  I recently published a menu from 1914, around the time when my parents were born, showing restaurant prices ranging from 10 to 25 cents. Today you cannot purchase anything for 10-25 cents.

Milton Friedman and Anna Swartz in their Monetary History of the United States proved conclusively that the Federal Reserve caused the Great Depression of the 1930s by allowing the money supply to contract. 

So, it was the Fed that was responsible for the ability of President Franklin D. Roosevelt, a destroyer of American liberty, to use the Great Depression to coerce the US Supreme Court with threats of packing the court with his stooges  and to force the US Congress to delegate legislative authority to new executive branch regulatory agencies.  Previously under the US Constitution Congress wrote laws that also governed their implementation. But with Roosevelt’s new regulatory agencies, this power passed to the executive branch.  Today Congress is nothing but an authorizing agency for the executive branch to make the law.

Economists, unable or unwilling if they were existing on bank grants to point a finger at the Fed as the cause of the money supply shrinkage that caused the Great Depression, misread John Maynard Keynes and blamed the Great Depression on the inadequacy of consumer, investment, and government demand.  The Keynesian solution was to increase demand.  Keynesians said the easiest way to do this was for the government to increase government demand by running a deficit in its budget.

Keynes himself said no such thing.  Keynes said that the problem was caused by central banks causing the money supply to shrink. See this.

But this explanation did not fulfill the aspirations that liberal economists had for fiscal policy.  Insufficient demand gave them an excuse for expanding demand via government deficit spending for causes and agendas that they supported.

The consequence was the rise of one-dimensional macroeconomics. 

In Keynesian economics demand (consumer, investment, government) is the only operative principal.  Supply is passive. It only responds to demand.

Prior to Alfred Marshall, economists argued whether price was determined by what people were willing to pay–demand–or by the cost of production–supply.  Alfred Marshall resolved this controversy by saying it was like arguing over which blade of the scissors cut the paper.  Price, Marshall said, was determined by supply and demand, and there it has rested since.

But in Keynesin macroeconomics there is only demand. This one-dimensional model has caused massive economic hardship.

The Federal Reserve in the past and currently fights inflation by fighting employment and by reducing output.  This is because the Fed only has a demand model.  The incompetent Fed is incapable of realizing that by fighting employment and output, the Fed is reducing supply, thus rising prices.

The current “inflation” is a supply-side inflation caused by Covid lockdown and Russian, Iranian, etc. sanctions that have without any doubt reduced supply. Simply observe the inflation in the UK and Europe. It cannot have anything whatsoever to do with “excess consumer demand” in the U.S.  Prices will fall as a result of disrupted and destroyed supply chains being reestablished, not because of the incompetent Fed’s high interest rates. The Fed’s high interest rate policy is interfering with the rebuilding of the damaged supply chains.

The Fed’s high interest rates only serve one purpose–bank insolvency, the result of which is more concentration in the hands of the Big Banks.  The Federal Reserve chairman recently said that inflation was caused by a strong labor market driving demand and that more interest rate hikes would be necessary.  The stupidity of this position is incomprehensible.  People working and earning money by providing goods and services is inflationary!  Amazing stupidity.  But stupidity is all that can be found in Washington.

What the Fed is doing is frustrating the lives of people who want to sell and buy homes, frustrating businesses who need loans to finance inventories, frustrating investors by driving down the value of their financial instruments.  No good purpose is being served.  It is amazing that Americans tolerate an institution that seeks to make them unemployed, to prevent them from selling and buying homes, that drives up prices by driving up the cost of borrowing.

Listen to Jerome Powell and you will hear a harmful policy described as beneficial.

An alternative view to Jerome Powell’s view of a hot labor market.


Hon. Paul Craig Roberts is the John M. Olin Fellow at the Institute for Political Economy, Senior Research Fellow at the Hoover Institution, Stanford University, and Research Fellow at the Independent Institute. A former editor and columnist for The Wall Street Journal and columnist for Business Week and the Scripps Howard News Service, he is a nationally syndicated columnist for Creators Syndicate in Los Angeles and a columnist for Investor's Business Daily. In 1992 he received the Warren Brookes Award for Excellence in Journalism. In 1993 the Forbes Media Guide ranked him as one of the top seven journalists.

He was Distinguished Fellow at the Cato Institute from 1993 to 1996. From 1982 through 1993, he held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies. During 1981-82 he served as Assistant Secretary of the Treasury for Economic Policy. President Reagan and Treasury Secretary Regan credited him with a major role in the Economic Recovery Tax Act of 1981, and he was awarded the Treasury Department's Meritorious Service Award for "his outstanding contributions to the formulation of United States economic policy." From 1975 to 1978, Dr. Roberts served on the congressional staff where he drafted the Kemp-Roth bill and played a leading role in developing bipartisan support for a supply-side economic policy.

In 1987 the French government recognized him as "the artisan of a renewal in economic science and policy after half a century of state interventionism" and inducted him into the Legion of Honor.

Dr. Roberts' latest books are The Tyranny of Good Intentions, co-authored with IPE Fellow Lawrence Stratton, and published by Prima Publishing in May 2000, and Chile: Two Visions - The Allende-Pinochet Era, co-authored with IPE Fellow Karen Araujo, and published in Spanish by Universidad Nacional Andres Bello in Santiago, Chile, in November 2000. The Capitalist Revolution in Latin America, co-authored with IPE Fellow Karen LaFollette Araujo, was published by Oxford University Press in 1997. A Spanish language edition was published by Oxford in 1999. The New Colorline: How Quotas and Privilege Destroy Democracy, co-authored with Lawrence Stratton, was published by Regnery in 1995. A paperback edition was published in 1997. Meltdown: Inside the Soviet Economy, co-authored with Karen LaFollette, was published by the Cato Institute in 1990. Harvard University Press published his book, The Supply-Side Revolution, in 1984. Widely reviewed and favorably received, the book was praised by Forbes as "a timely masterpiece that will have real impact on economic thinking in the years ahead." Dr. Roberts is the author of Alienation and the Soviet Economy, published in 1971 and republished in 1990. He is the author of Marx's Theory of Exchange, Alienation and Crisis, published in 1973 and republished in 1983. A Spanish language edition was published in 1974.

Dr. Roberts has held numerous academic appointments. He has contributed chapters to numerous books and has published many articles in journals of scholarship, including the Journal of Political Economy, Oxford Economic Papers, Journal of Law and Economics, Studies in Banking and Finance, Journal of Monetary Economics, Public Finance Quarterly, Public Choice, Classica et Mediaevalia, Ethics, Slavic Review, Soviet Studies, Rivista de Political Economica, and Zeitschrift fur Wirtschafspolitik. He has entries in the McGraw-Hill Encyclopedia of Economics and the New Palgrave Dictionary of Money and Finance. He has contributed to Commentary, The Public Interest, The National Interest, Harper's, the New York Times, The Washington Post, The Los Angeles Times, Fortune, London Times, The Financial Times, TLS, The Spectator, Il Sole 24 Ore, Le Figaro, Liberation, and the Nihon Keizai Shimbun. He has testified before committees of Congress on 30 occasions.

Dr. Roberts was educated at the Georgia Institute of Technology (B.S.), the University of Virginia (Ph.D.), the University of California at Berkeley and Oxford University where he was a member of Merton College.

He is listed in Who's Who in America, Who's Who in the World, The Dictionary of International Biography, Outstanding People of the Twentieth Century, and 1000 Leaders of World Influence. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: [email protected]


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