THE LIBERTARIAN ENTERPRISE
Number 191, September 23, 2002

SO WHAT DID WE GET?

Review: CRASHMAKER: A Federal Affaire
by James J Odle
jamesjodle@earthlink.net

Special to TLE

[Part III of III]

Time out - Background on the FED

The FED is what is known as a quasi-government agency. Half of its members are appointed by the member banks, the other half by the President. The President also appoints the Chairman of the Board of Governors with the approval of Congress. The Chairman is not directly answerable to the President; i.e. the President cannot fire him. The President can decide whether or not to reappoint a Chairman once his term is up. The FED is supposed to manage the nation's monetary affairs for the good of the nation regardless of what the politicians and political parties want. The FED is setup this way in order to insulate it to some extent from the politics of Congress and the ruling political party.

This is the theory anyway.

What's All This Fuss About the FED?

The confused reader might be asking, "Why should we care about the FED? Personally, I'd rather carry folding money than lug around pounds of gold coinage."

Before the recent revelations of corporate accounting 'irregularities,' before the collapse of the 'dot.com' boom, the economy had already taken a downturn. You see, Alan Greenspan, the current Chairman of the FED thought he saw a little inflation out there and he raised interest rates on the money member banks borrowed. No inflation ever appeared, then or now, yet he continued to raise interest rates, until the economy foundered.

This should teach us all a very important lesson. When you concentrate power into any bureaucracy, you also concentrate something else - vulnerably. We are all economically vulnerable to whatever decisions the FED's Board of Governors make. They determine the affordability of homes, cards, credit cards, etc. Why should any small group have this kind of power over our economic lives? Its central planning of the economy and the collapse of the Soviet Union should have taught us a thing or two about that.

Also, the FED's mismanagement of the money supply [along with other government interventions] is what caused the great depression. How? Here's what Leonard Read has to say [3],

Phase I: The Business Cycle

The Great Depression was not the country's first depression, though it proved to be the longest. The common thread woven through the several earlier debacles was disastrous manipulation of the money supply by government. For various reasons, government policies were adopted that ballooned the quantity of money and credit. A boom resulted, followed later by a painful day of reckoning. None of America's depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions.

Most monetary economists, particularly those of the "Austrian school," have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this "easy money" in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of or even contract the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards.

One of the most thorough and meticulously documented accounts of the Fed's inflationary actions prior to 1929 is America's Great Depression by the late Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, Rothbard estimated that the Federal Reserve expanded the money supply by more than 60 percent from mid-1921 to mid-1929. The flood of easy money drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the "Roaring Twenties."

By early 1929, the Federal Reserve was taking the punch away from the party. It choked off the money supply, raised interest rates, and for the next three years presided over a money supply that shrank by 30 percent. This deflation following the inflation wrenched the economy from tremendous boom to colossal bust.

The "smart" money - the Bernard Baruchs and the Joseph Kennedys who watched things like money supply - saw that the party was coming to an end before most other Americans did. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, "only a fool holds out for the top dollar."[3]

When the masses of investors eventually sensed the change in Fed policy, the stampede was underway. The stock market, after nearly two months of moderate decline, plunged on "Black Thursday" - October 24, 1929 - as the pessimistic view of large and knowledgeable investors spread.

The stock market crash was only a symptom - not the cause - of the Great Depression: the market rose and fell in near synchronization with what the Fed was doing.

[Also discussed on page 515-16 in CRASHMAKER.]

Conspiracy Theories - Why Take Them Seriously?

"Do you believe everything that happens in politics is the accidental result of disconnected actions of atomistic individuals each of whom proceeds independently on the basis of his own idiosyncratic ideas, with no input, influence, or involvement of others?" Lara challenged him.

"Of course not," Dominic conceded. "Politics is a collective phenomenon."

"Then in principle you are a conspiracy theorist," Lara concluded...

"Do you believe that things often happen in politics because people agree to pursue common goals by complementary means?"

"I suppose so," Dominic conceded again...

"Then in principle you are a conspiracy theorist," Lara added to her advantage. "Do you believe some groups take action intentionally to advantage themselves at others expense?"

"Sure," Dominic conceded once more. "The purpose of politics is to obtain benefits through governmental coercion - and that's usually a zero sum game."

"Then in principle you are a conspiracy theorist," Lara pressed her point. "Do you believe some people knowingly use immoral or illegal means to achieve otherwise legitimate political goals?"

"I'd be living in a fantasy world if I didn't," Dominic admitted.

"Then in principle you are a conspiracy theorist. Do you believe evil people willfully seek power in order to abuse it?"

"More than sometimes."

"Then you definitely are a conspiracy theorist," Lara laughed.

"Just as is every thinking person who pries the lid off the garbage can of politics and peers in to see the maggots crawling around."

[Pages 441-2]

The trouble with people who subscribe to conspiracy theories is that they tend to look for complicated explanations involving 'secret societies,' when simpler explanations are readily available.

Lets take, for example, the formation of the FED and the events that took place a Jekyll Island, GA in 1910.

We know that a clandestine meeting took place involving banking elites Nelson Aldrich, Paul Warburg, John D. Rockefeller, and others. We know that the participants denied having the meeting for several years thereafter. We also know that it was there that the keel of the Federal Reserve System was laid[4].

Nevertheless, do we succumb to the normal conspiracy theory of saying, "These guys were part of some secret Masonic society that has been hell-bent on taking over the planet since the dawn of time?" Or do we say, "These guys were simply doing what the minions of business interests always do. They were creating legislation and national policy that would benefit their particular business interests." Personally, I think it was the later.

There is also the problem of people who believe that Jewish banking interests hold everybody's' economic fortunes hostage and control our politicians like puppeteers. {I'll get to the racism in a minute.}

Ask yourself this question, in reality what would be the political difference in a USA wherein our politicians dance to the tune of 'hidden controllers' and a USA without such interference? Answer: none. Even without 'hidden controllers', politicians would still want a Federal Reserve System and the bottomless pool of 'wealth' and power it produces. Therefore, as far as modern day politics is concerned, this issue is irrelevant. In business we would call this a 'sunk cost.'

Why the authors take conspiracy theories seriously, I'll never know. They seem far to intelligent for this. Perhaps they thought it was an interesting plot device.

Those Pesky Jews

It annoys me no end to have to write this section. I shouldn't have to do it, but you see, there are idiots among us - people who cannot be safely entrusted with serious thinking. And, to this day, in the year 2002, these morons pop up on talk radio moaning and groaning about 'evil global Jewish banking cartels.'

Do the authors of this fine novel subscribe to this idiocy? Fortunately, no. On page 864 we find...

"All those theories of a Jewish conspiracy are meshuggeneh...It's only natural for Jews in any country where they are a distinct minority to serve the politically powerful for protection from discrimination and for advancement in both public and private life. It's a matter of self-defense and self-preservation. In America, many Jews...became liberals because that opened up opportunities for careers in government agencies, foundations, academia, entertainment and the media. Of course, the more Jews prospered and the more power they exercised, the more loyal they became to liberalism as their greatest benefactor. Conspiracy had nothing to do with it. Simple self-interest - that makes sense."

Conclusion

This is an interesting and an intellectually challenging novel this is well worth the time of anyone who enjoys wrestling with political, moral and economic ideas.

And well written, too. The fact that I actually read every word is testament to how well the authors present their ideas. Normally, if a book bores me, I set it aside after 20 pages or so. The fact that the authors kept me reading is testament to their 'word-craft.'

Nevertheless, I must point out a possible blemish on the authors' otherwise libertarian armor. It may be unfair to impute to the authors beliefs they assign to one of their characters. One of the 'good guys' [dos Santos] believes that the War on Drugs is a great idea - that it is simply being fought stupidly. His solution, form inner city militias and run them drug dealers out of town.

Frankly, nowhere in the book do the authors explicitly state that they are libertarians. However, its plain from the contempt that they display for republicans, democrats and other political 'faiths,' that they couldn't be anything else.

If you are a 'high concept' individual who enjoys thinking the 'big thoughts,' then this novel is for you. Just don't take the conspiracy stuff to seriously.

By the way, I found out about this novel from talk radio. And it was there that I heard it described as the ATLAS SHRUGGED of the financial markets {which it certainly is.} I never heard about it from reading any libertarian literature or catalog. I don't belief the libertarian community knows that it exists.

______
[3] See Lawrence Read's, Great Myths of the Great Depression, downloadable in PDF format.

[4] Murray Rothbard, The Case Against the FED G. Edward Griffin, The Creature from Jekyll Island



James J. Odle holds a BS degree in Management from Arizona State University. This doesn't necessarily qualify him to commit about economic matters even though one of his courses was 'Money, Banking and the Economy.' Further, unlike the vast majority of so-called 'public servants' he has a real job in the private sector performing real work, which a real employer voluntarily pays him to perform.

He is also a Life Member of Gun Owners of America.


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