Monday, November 2, 2015

Lowenstein's Stranger Than Fiction Story of the Fed

By Ad Libertati

The Los Angeles Times carries an Op-Ed from Roger Lowenstein which is the most revisionist piece of U.S. banking history I've ever seen.  Lowenstein appears to be a major apologist for the Fed (and central banking in general), and launches several attacks on sound banking and libertarians.  Here's a sampling:
The Fed's unpopularity would make sense if it had, say, failed to intervene and save the system during the 2008 financial crisis. But, in fact, the Fed did rescue the economy ... 
Its reputation would likewise make sense if it were jacking up interest rates, foisting hardship on ordinary Americans. But the Fed has maintained a low rate policy, stimulating the economy while keeping the dollar strong and inflation low.
Firstly, the Fed rescuing the economy bit is propaganda.  The reality is that the Fed injected a bunch of new money, re-inflating the bubble and preventing a necessary correction from clearing out all of the malinvestments.  And, the low interest rates do foist hardship on ordinary Americans, especially those on fixed incomes.  It has stimulated the economy, sure, but that is a negative, as it is the cause of the dreaded business cycle.
At Alexander Hamilton's urging, Congress first chartered a national bank — the ur-Fed — in 1791. However, Thomas Jefferson, who famously mistrusted banks (he thought agriculture more virtuous), and who was fearful of a strong central government, opposed this development. After 20 years, the Jeffersonians won and Congress let the charter expire. 
This decision led to disaster: ruinous inflation.  
Hamilton was completely corrupt and the First Bank of the U.S. immediately embarked on an inflationary policy.  The inflation occurred throughout the bank's charter with wholesale prices rising 72% between 1791 and 1796 alone.  The bank's charter ended in 1811, and an inflation occurred shortly thereafter.  Why?  Because there was a war starting in 1812, and during the war the government encouraged reckless banking practices, creating additional money to loan to the government.  Yes, the inflation occurred because of war, not because the bank was ended ... in fact, had the charter been renewed, it likely would have led to greater inflation, as the government could have asked the First Bank to keep giving it more money.  The fact that Lowenstein leaves this information out shows that he's simply a propagandist for central banking.  But, we continue:
So Congress chartered a Second Bank of the United States, which began in 1817, providing the growing country with a better, more uniform currency and improved its public finances. But success couldn't save it. Andrew Jackson despised the Second Bank as a tool of East Coast elites, and it too was abolished.
Sure.  And the Second Bank immediately "launched a spectacular inflation of money and credit" [note:  the real facts here are from Rothbard, with more info at the bottom of this post].  The Second Bank had a much lower reserve ratio than the First Bank and its policies led to the first major banking crisis in the U.S. (the Panic of 1819).  Again, Lowenstein has left this out.  Monetary inflation by the Second Bank caused dramatic price inflation and a recession.  It did "improve its public finances", if by that you mean, allow the government to obtain more money cheaply.
For most of the 19th century, the U.S., unlike most nations in Europe, did not have a lender of last resort. Frequent panics and credit shortages were the result ... 
After a financial panic in 1907 virtually shut down the banking system, reformers began to press once more for a central bank. 
The panics in those countries with central banks are ignored.  The frequent panics of the 19th century in the U.S. were a product of "wildcat" banking (excluding those panics during the First and Second bank periods, which have already been touched on).  Wildcat banking was essentially a practice where banks would set up, and issue their own bank notes in dramatic excess of their gold reserves.  The wildcat banks would be located where other banks would find it difficult to send the bank notes for redemption in gold, allowing rapid credit expansion.  And, due to the highly inflationary credit practices, when the bust would occur, the various U.S. State governments would allow the banks to suspend payment in gold.  With no real consequences, the wildcat banking practices continued, relatively unabated.

The only really accurate part of the article is the one I'm not including (the conspiracy in Jekyll Island to create the Fed).  And again Lowenstein points to panics when there is no central bank and ignores them when they are.  The Fed had been around for more than a decade when the Great Depression happened (due to the Fed's monetary expansion in the 1920s), but that's far from the only one.  We also have the banking crisis of 1920, the stagflation of the 1970s, the 1980s recession, the savings and loan crisis, the early 1990s recession, the dotcom bubble, and of course, the financial crisis of 2007.  Curious how Lowenstein points to the frequent panics in periods without a central bank, but ignores them in periods where there is one.

Lowenstein then finishes the article with:
The Federal Reserve today is not perfect. But it is more transparent than ever, thanks to reforms instituted by the previous chairman, Ben S. Bernanke, and it is no less necessary than was a central bank in 1791. Americans' paranoia is unjustified, just as it has always been.
He is correct in all of this except the last sentence.  The Fed is not perfect.  It is more transparent than ever, but that's not saying much, as it's never been transparent.  And it is no less necessary than was a central bank in 1791, in that, neither was or is necessary at all.  But American paranoia is fully justified as the Fed continues its monetary expansion unabated.  And the next central bank induced crisis will inevitably occur at some point, and apologists like Lowenstein will then tell us how the Fed saved us all.

Lowenstein is peddling his book (America's Bank: The Epic Struggle to Create the Federal Reserve), which should only be read for the laughs, I presume (based on this article).  Instead, if you want a real history of U.S. banking, I recommend Murray Rothbard's "A History of Money and Banking in the United States:  the Colonial Era to World War II".  It was the source of the facts in this article used to rebut Lowenstein (of course, any errors would be mine).


  1. Again, their endless lies and refusal to engage us demonstrates that they cannot refute us. And they know it.

    This is no different than the failure of the MSM and Fox to mention that Obama installed Nazis in Ukraine or that ISIS is the spawn of the western powers. The fact that they consistently and relentlessly lie shows that it is no accident.

    1. It's typical to see Keynesians and Friedmanites claim that the Fed saved the economy during the financial crisis. What made it clear that this was counter-factual propaganda was when Lowenstein blamed a lack of central banking for the inflation caused by the War of 1812. He can't possibly believe that.

  2. You may be tired of hearing me say this, but what the Fed and Bernanke did in 2008 is to effectively steal (by debasing) the wealth of the productive classes to cover the bad gambling debts of the crony classes. People have ended up at the bottom of the East River for far less.