Central Banking, The Fed, and Why It Should Go

When the government has the ability to create money out of thin air it no longer needs to levy direct taxes to support its spending. But remember government can not spend anything that it does not tax away from the citizenry in some form. Thus the creation of money itself, either through debt or just outright, becomes the tax, with every new dollar that is put into circulation devaluing each existing dollar by a proportional amount. This process is slow and typically goes by unnoticed by the public, but the fact that the dollar has lost 95% of its value since the inception of the Federal Reserve in 1913 shows that the process does indeed occur.

The inflation tax does not affect everyone equally however. Those who receive the new money first get to use it before the devaluation has spread through the system, while the last to receive it bear the brunt of the devaluation. So we only have to ask who uses the money first and who last? It is obvious that the politically well-connected receive the new money before all others and have the benefit of spending it first, while the poorly-connected only receive it once it has worked its way through the system. Inflation is an insidious regressive tax that disproportionately harms society’s most vulnerable.

Another consequence of central banking is that it gives the government the ability to finance its spending without imposing any direct taxes. This in turn gives the public the illusion that something can be had for nothing. Unfortunately there is no free lunch and the public pays with a devalued currency and the erosion of personal liberty, and sadly once the cat is out of the bag, once the spending commences, history has shown that it does not stop until disaster befalls the spendthrift governments that embark on that path.

Eventually the out of control spending makes the very notion of small government a farce. However, if the government‘s expenditures were directly tied to its ability to collect taxes every spending program would immediately illicit the response, “and how were you planning on paying for that?” The size of government would be automatically put in check by the citizenry’s disdain of paying taxes. However when taxes are not levied directly, but underhandedly through inflation, the public liberty just sits like a frog in a pot of cold water as the fire is slowly applied. And like the frog the public liberty is slowly boiled away.

To control the size of government, we must control its spending, which means we must control the currency, which means we can not have a bunch of political hack central bankers in charge of it. The currency must be a product of the market. It must not be controlled by any single entity, and it must be based upon something that is of inherently limited supply. Only with sound honest money can we  have limited government.

Does that mean I imply this is a utopia. No. Private currencies will fail, and inevitable some individuals will be damaged by those failures. However, even it these failures happened frequently they would happen on a small scale, and the effects on the overall system would be negligible. By admitting to this and taking for granted that no system is or ever will be perfect we can at least keep ourselves away from the types of centralized systems that take down everything around them when they inevitably fail. And without a doubt for all systems that are a product of human creation it is simply a matter of WHEN not IF they will fail.

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