Phil Gramm was a long-standing senator from Texas and had a reputation as a “free market conservative.” The fact that Gramm’s beliefs were interpreted by the political and media establishments as being consistent with the “free market” speaks volumes about the colossal ignorance that animates discussions, particularly the discussion of economics, at the highest levels of this country. As Phil Gramm’s record makes clear, while he was in favor of “free markets” and deregulation in many economic aspects, he was even more adamant about the need for an all-powerful central bank to actively control the money supply and finely tune the economy.
However, there is an irreconcilable conflict between a free market and an all-powerful central bank, dominated by a monetary dictatorship, which exerts active and total control of the money supply. It is completely inconsistent for anyone to believe in any sort of “free market” while also supporting a central bank with even a fraction of the power the Federal Reserve currently wields. Indeed, because of his advocacy for an all-powerful central bank, the free market that Gramm, correctly, desires can never come into existence. The various bailouts of Wall Street organized by the Fed and the criminally irresponsible monetary policies of the Greenspan-Bernanke era fueling enormous bubbles in stocks and housing prove this conclusively.
As an example of Phil Gramm’s fealty to an all-powerful central bank, here he is in February 2000 – one month before the peak of the tech stock bubble – praising Alan Greenspan and Greenspan’s monetary dictatorship as it was exercised through the Federal Reserve;
“But as I look at the record of Alan Greenspan, I can stand on the floor of the Senate and say, without any fear of contradiction, that Alan Greenspan’s record is the finest record that has ever been established by a Chairman of the Board of Governors of the Federal Reserve since we created the Federal Reserve and it began operating in 1913. I believe a strong case can be made that Alan Greenspan is the greatest central banker in the history of the world…”
The Fed was originally envisioned to fill the classic central bank role of “lender of last resort.” As the lender of last resort, the Fed would only serve as an “emergency” source of credit and the Fed’s role in the economy would largely be limited to “lending freely against good collateral at a high rate of interest.” What the Fed has clearly become has nothing to do with the classic role of a central bank and everything to do with the classic role of a central planner. In the same way that murderous communist tyrants all over the world were incapable of ever figuring out how many eggs chickens should lay, the idiotic monetary tyrants of the Federal Reserve remain completely incapable of ever figuring out how much interest a local bank should charge when it lends money to a plumbing contractor.
The incompatibility between a free market and a powerful, active central bank – which will always be subject to political whims and the influence of powerful people – was best expressed by the great Wilhelm Röpke;
“If in the production of goods the most important pedal is the accelerator, in the production of money it is the brake. To ensure that this brake works automatically and independently of the whims of government and the pressure of parties and groups seeking “easy money” has been one of the main functions of the gold standard. That the liberal should prefer the automatic brake of gold to the whims of government in its role of trustee of a managed currency is understandable.”
Röpke was the intellectual architect of the free market reforms behind the “Wirtschaftswunder” – the miraculous recoveries of the West German and Austrian economies after World War II. In the observation above, Röpke makes clear the value of gold in a monetary system, is not the value of gold itself. Instead, it is the requirement to hold gold which keeps a central bank from actively interfering in the economy. Röpke’s belief in a passive central bank and the critical role this plays in a free economy is buttressed by the considerable real world successes of the policies based on this belief.
In exactly the same way a free market is in total conflict with an all-powerful central bank, Röpke’s economic philosophies are completely incompatible with today idiotic economic theories pouring out of places like MIT. These idiotic theories – which are all based on the transparently bogus notion that enormous national economies can be accurately modeled with equations – provide the fully fraudulent justification for central banks to wield enormous power. With the hard sciences like physics or engineering, professionals in these fields are always comparing their theories to reality. Theories are only valid when they match the phenomena observed in the real world. In sharp contrast, the witch doctors at Ivy League economic departments and the Fed never bother to reconcile their theories with the real world.
Even after the enormous damage caused by an active, enormously powerful Fed has been made manifest, the economics departments at schools like Harvard and MIT show no signs of revisiting their theories and identifying the enormous fallacies and sophisms that are obviously at their core. As the example of Phil Gramm should make clear, powerful, world-destroying central banks have also become an entrenched part of the political firmament; no one questions their legitimacy. Because of the support they receive from Ivy League academics and the political leaders of both parties, the Fed’s power – to this point anyway – has remained unassailable.
See Art Laffer (#32) for another supposedly “free market” economist who believes in an all-powerful central bank.