Abolish The FOMC Now!(Part 2)

There is a fundamental and crucial difference between historical central banking and today’s form of monetary central planning via manipulation of the printing press. The former presumed a sound and automatic monetary function in the form of the gold standard. So no printing press money was necessary except specie-backed hand-to-hand currency that was immediately convertible and which was more transactionally convenient than either gold bullion or gold coins. Even checking account money was backed by gold, meaning that new checking account money arose out of main street commerce, not the whims of an open market desk (FOMC) at the central bank.

Accordingly, central banking was not focused on the broad macro-economy or what are today the major components of the GDP such as investment, retail sales, employment, housing and industrial production, but was far more narrowly focused on the health, stability and liquidity of the commercial banking system. In particular, the job of the central bank was to ensure that main street banks would always be able to meet their legal cash reserve requirements without having to  liquidate their loan books and thereby trigger an old style banking panic and recession.

Needless to say, even by the time of the Fed’s founding in 1913 there was no general theory that claimed central bank management of the banking system was a necessary precondition for the health, growth and prosperity of the broader economy. In fact, the idea of stimulating growth and jobs was not even discussed in the debates that preceded the Fed’s creation, and the very notion of managing the inflation rate would have been laughed out of court. The gold standard handled that matter automatically and with aplomb—no PhDs domiciled on the banks of the Potomac were remotely necessary or considered.

Of course, public officials desired a stable and solvent banking system as a protection for depositors and customers. And they also obviously wanted to avoid periodic banking panics, which did give rise to a temporary setback to economic advance and rising living standards. But insuring the safety and liquidity of the banking system didn’t know from (or care) in the slightest as to whether the aggregate unemployment rate was 3.5% or 5.2% or whether inflation rates posted at 2.00% or 3.6o%.

Stated differently, aside from times in which government decided to make war on their neighbors and suspend gold convertibility, the inflation rate was 0.00% over any reasonable period of time. And growth and jobs were the function of free market capitalism, which knew its own route to rising societal prosperity and increasing wealth.

Thus, between 1870 and 1914, real GDP rose by 3.8% per annum, per capita income tripled and the price of wheat specifically, or the overall price level generally, was the same at the end of this 44 year period as it had been at the beginning—once the disruption of civil war finance and greenback money issuance had cleared the system.