There is an old joke about a central-bank official picking up a pizza. (Perhaps it’s Chairman Bernanke, on his way home after a long day of quantitative easing.) The clerk asks, “Do you want it cut in six slices, or eight?” The central banker responds: “I’m feeling extra hungry today; better make it eight.”
Of course, dividing the stock of goods and services by a larger quantity of money does not create wealth. One of the most important lessons of economic theory is that the only way for a society to generate economic growth is to consume less than it produces. The surplus (real savings) can be invested in the production of capital goods (and innovation) that allows for greater production in the future. Conversely, one of the oldest economic fallacies is the idea that the economy sometimes gets “stuck” with low production and high unemployment due to a shortage of money, and that the way to get it unstuck is to print more money to increase “total spending” — to consume more than the economy produces. Some 60 years ago Ludwig von Mises ridiculed this as the “spurious grocer philosophy” (the merchant’s view that his products aren’t selling because buyers lack enough currency), noting that this fallacy is essentially the philosophy of Lord Keynes, the 20th-century apostle of central banking and macroeconomic stabilization policy.
Keynes was wrong. Cheap credit does not help bring an economy out of recession (particularly when it was cheap credit that caused the recession in the first place). More generally, a monetary system controlled by an all-powerful central bank is inherently destabilizing and harmful to economic growth. The mistakes made by the Fed before and after 2008 are not isolated incidents, mistakes that can be corrected by making minor changes to the Fed’s charter, structure, or independence; they are the predictable result of giving control of the monetary and financial system to a government agency. The best option is to replace the central bank and let the market be in charge of money.
The position advocated here is often dismissed as radical or extreme, a kind of “market fundamentalism” (to use a derogatory term). But it is a reasonable, pragmatic, realistic view. Economics and management scholarship teach that monopoly providers are inefficient and ineffective, and a government monopoly on money is no different. Markets are not perfect, but neither are Fed chairs. It’s time to make the supply of money independent of political interference.
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