Wednesday, August 25, 2010

On Abolishing the Fed and Replacing It with Nothing

Why not abolish the Fed and replace it with nothing . . .

Producing money has historically been a sovereign monopoly, but it’s not a public good. Barons, kings, and bishops outlawed private mints so they could gain monopoly profits on the seigniorage.  Is monopoly ever good? 

The U.S. and Britain went the opposite way, charging zero seigniorage so that private mints were unprofitable. But when gold and silver were discovered in the American west, the government was a bit slow to establish a branch mint. A private mint quickly sprang up in Denver, charging seigniorage a bit below the cost of shipping metal to Philadelphia and back.

The Fed doesn’t need to be ‘replaced’, not by the government anyway. The market will provide money, one way or another.

I know, we would have to do without all the brilliant policies that central bankers use to smooth out the trade cycle. But they aren’t working out so well, are they?

The U.S. had its first trade-cycle downturn in the 1820s, when the Second Bank of the United States was in operation.

Has our economy been generally less unstable with central banking than without?  I do not think so. 

The median voters ideas about what money is and how the monetary system works are so far from reality that they cannot be expected to oversee the system and in a democracy the  median voters rules.

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