The State’s Best-Kept Secret

The existence of a central bank, which is often seen as a necessary component of a modern economy, can have its origins in less than savory means. According to George Fort Smith's audiomemoir, "Money is Never an Object," the state's monopoly on force allows it to engage in activities that might be considered fraudulent or even criminal in the private sector, such as counterfeiting, as long as it serves the state's interests. This is how the concept of a central bank came about in the United States, with the Federal Reserve being established under the guise of preventing economic panics and ensuring stability, but with the added benefit of providing the state with a virtually unlimited source of funding for its activities. This system, which relies on the cooperation of corporate media and the acquiescence of the public, has allowed the state to grow and maintain its power despite the absence of direct competition.

The astronomical levels of civilian and military casualties throughout history can be linked to the unlimited production of fiat money by central banks, leading to inflated economies and panics. This shift from gold-backed currency to fiat bills allowed governments to engage in counterfeiting, or what they call "monetary policy," as a profitable revenue source. To make this possible, governments had to take control of the minting business and separate the name of the currency from its true base in the underlying value of the coin. This lengthy process involved seizing the mintage monopoly and fostering the use of the currency's name, all while avoiding the label of counterfeiting. The profits from this policy are often hidden from the public, making it a highly profitable and largely unknown aspect of government finance.

The shift from using actual weights of gold and silver as currency to patriotic names (dollars, marks, francs, etc.) gave governments the power to manipulate money and control the economic system. This was made possible through the use of paper money, bank deposits, and legal tender laws, which allowed money substitutes to become money. Governments could mint and re-coin coins, diluting their weight and keeping the leftover gold or silver for themselves. This transition drew monetary power away from money owners and made it easier for governments to issue new money and control the economy. Despite the potential for manipulation and counterfeiting, few complained due to the patriotic label on the currency. This marked the beginning of absolute governmental control over money in recent centuries.

The creation of the Federal Reserve System in 1910 marked a shift from commodity money, like gold, to fiat money controlled by a central authority. The Federal Open Market Committee (FOMC) was established to manage the supply of money through monetary policy. Milton Friedman, an influential economist, noted that the principles of monetary policy are simple, but in reality, they are not. The proponents of the Federal Reserve believed that price stability is essential for economic prosperity, while opponents argue that market-determined money, like gold, allows individuals to control their economic lives. The historical period of price declines during the late 19th century and the subsequent rise of high-tech industries are examples of the benefits of lower prices. However, the ignorance of the general public about the Fed and its monetary policy is a significant concern.

The Federal Reserve, which has been identified as the source of destructive inflation by figures like Ron Paul, continues to be a concern for many, yet the public remains largely unaware or complacent about the root cause of economic instability. The best solution, according to this perspective, is to remove the government's monopoly power over money and allow for a truly free market. This may seem radical or chaotic to some, but it represents a return to a historical norm where governments did not have the ability to create and manipulate the money supply at will. While this idea may be controversial, those interested in learning more about the benefits of a free market economy and the destructive consequences of central banking are encouraged to explore the resources available at Mises.org.