Fed's Grasping Invisible Hand
by George F. Smith
Adam Smith explains, the free market brings its wonders to the world by
virtue of an invisible hand. Individuals cooperating under the
international division of labor and seeking generally to satisfy their
own wants end up promoting the general welfare, often without intending
to or without realizing it.
Not to be outdone, government too has developed a systemic hand that is
usually not seen. Unlike the market, when this hand moves, we
lose. Through inflation, government snatches the market’s bounty
for its own purposes, enervating our lives accordingly.
As a “stealth tax,” inflation requires no legislation to impose, no
agency to collect, and diverts responsibility for damages onto
politicians’ favorite whipping boys. It gives government the
ability to buy almost anything for nothing, while creating endless
problems that serve as a pretext for intervention. Inflation is
the foundation of arrogant government and a prescription for our own
Government inflates through its central bank, the Federal Reserve
System, which it created in 1913. The Fed does many other things,
but its foremost responsibility is to keep diluting our money supply
with unbacked dollars.
To repeat: The Fed is the engine of inflation in this country.
Inflation is not some curse of capitalism. It’s government
policy. It is any increase in the money supply. We see this
alluded to in the Fed’s charter, which calls on it “to furnish an
elastic currency.”  Fed Governor Ben
Bernanke almost boasts about it: “[T]he U.S. government has a
technology, called a printing press (or, today, its electronic
equivalent), that allows it to produce as many U.S. dollars as it wishes
at essentially no cost.” 
If this sounds like counterfeiting, be advised that almost no one sees
it that way, especially government and Fed officials. According to
the MSN Encarta dictionary, a counterfeiter is a person who makes “a
copy of something, especially money, in order to defraud or deceive
people.” Does that shoe fit the Fed? You decide.
The Fed’s inflation is often part of a process called “monetizing
the federal debt,” a stultifying expression describing the hocus-pocus
used to cover government’s deficits. In simple language,
government puts ink on pieces of paper and calls them “securities,”
in response to which the central bank puts ink on pieces of paper, calls
it money, and buys the securities.
Like magic, the federal government has new money to spend – thanks to
the tooth fairy known as the Fed.
When government imposed its central bank on us in 1913, pulling money
from a hat was more of a challenge than it is now. If the Fed
printed too many paper tickets, people would begin to wonder if the
banking system could redeem them in gold on demand, as stated on the
tickets. The fear of a bank run acted as a brake on inflation.
Since inflation is the increase in the money supply, gold imposed a
limit on the amount of government debt the Fed could buy, which in turn
put restrictions on government spending. If gold could be
eliminated, those restrictions would go away.
When the Fed was being sold to the public, its advocates told people it
would prevent panics and recessions by virtue of its power to provide
money and cheap credit on demand. Eight years after its inception,
the country slid into a recession (1921), and after another eight years
the stock market crashed. By the time a new administration took
power in 1933, the economy was on its knees.
Assured the free market had failed them, a bewildered public turned to
government for deliverance. On April 5, 1933 President Roosevelt
issued Executive Order 6102, in which he ordered all persons to turn in
their gold or face a possible 10-year prison sentence and a $10,000
fine. He gave them until April 28 to comply. 
For this and countless other New Deal interventions, most historians
regard Roosevelt as a demigod for “saving” capitalism.
After the gold heist, dollars were no longer redeemable, at least
domestically. Foreigners were allowed (though not encouraged) to
swap their dollars for gold until August 15, 1971, when President Nixon
repudiated the government’s redemption obligations.
With gold completely severed from the dollar, our monetary system lost
its best defense against political caprice. Not surprisingly,
inflation rose to double digits by 1973. As economist Ludwig von
Mises tells us, the gold standard makes the supply of money depend on
the profitability of mining gold.  The pure
fiat dollar faces no obstacles to its production, other than the
integrity of government and Fed officials.
Nevertheless, spokespeople for government’s monetary monopoly assure
us the proliferation of unbacked dollars helps the economy.
Indeed, people at the Fed, such as Governor Bernanke, refer to their
inflationary practices as an “accommodative monetary policy.” 
What happens when the Fed “accommodates” us by increasing the stock
First, it reduces the value of the dollar. More dollars
means each one buys less, putting upward pressure on prices. Technology
and improvements in production tend to push prices downward, but because
of inflation fewer people can afford admission to the market’s bounty.
As a rough idea of how far the dollar has plummeted, $5,000 in 1913 had
greater buying power than $95,000 in 2004. 
Second, a depreciating dollar discourages savings. Why put money
away if it’s going to lose value? Instead, millions of
investment neophytes put their funds in the stock market in an attempt
to protect themselves against Fed printing presses. Has this been
a successful hedge?
During the biggest bull market in history – 1984 to 2001 – the
S&P rose 14.5 percent a year. But frequent trading by fund
managers and high fees reduced the average rate of return to 4.2 percent
annually. According to Vanguard group founder John Bogle, if you include
the results of 2002, the average return from equities was under 3
percent per year – less than the inflation rate. 
Third, new injections of money spur a tinsel prosperity,
and the Fed keeps injecting new money to feed the boom. With so much
borrowing and spending, prices may rise even faster than the rate of
As the public broods over higher prices, a semantic shift takes place.
Inflation comes to mean not an increase in the money supply, but the
rise in prices itself.  Thus, businesses
that charge higher prices become the villains, while government
officials that threaten price controls wear the halos. Most
people have no idea what the Fed does, so government can scapegoat
business and appear to be defenders of the public weal. Nor do
most people understand that price ceilings create shortages, by
encouraging consumption and retarding production. Shortages, in turn,
bring on government-imposed quotas, which foster corruption, black
markets, and violent crime.
Fourth, as the influx of dollars drives prices higher, some
industries find themselves at a disadvantage with foreign competitors,
tempting them to lobby Washington for protection from imports.
Protective tariffs and quotas, of course, push prices up further, while
sometimes sparking trade wars as other countries retaliate on American
exports. And trade wars can lead to shooting wars.
In June, 1930, with the economy fighting the recession brought on by Fed
monetary policies, President Hoover signed the Hawley-Smoot Tariff Act,
raising tariff levels to the highest in U.S. history. Other
countries immediately retaliated, markets shut down, and economic
conditions worsened worldwide.
Fifth, inflation raises nominal incomes, pushing people into
higher tax brackets, which increases government tax revenue. As
people’s wealth goes out the window in depreciating dollars, taxes
consume more of what remains.
Sixth, inflation shifts wealth from people who can’t or don’t
know how to defend themselves from monetary destruction to those who
can. As a simple example, a person living on a fixed income may
find his buying power so depleted he sells a family heirloom to pay for
an unanticipated expense. Or a bank that was part of the lending
spree that helped drive prices skyward may foreclose on the homes of
some of its borrowers, whose incomes were ravaged by monetary
Seventh, Mr. Bernanke’s “accommodative” measures keep
people working much later in their careers because they cannot afford to
live off their deteriorating pensions. Dollar depreciation is a
huge reason why both husband and wife work in many families.
Eighth, because government often gets the new money first, it can
fund controversial measures such as war and bailouts without drawing
taxpayer ire. Government simply puts the funding on its charge
card, prompting the alchemy of Fed debt monetization. We get the
bill, of course, but this way it’s spread over everything else we buy,
so we never see it itemized.
Ninth, because inflation has an uneven affect on prices, raising
some faster or sooner than others, people have a hard time
distinguishing illusion from reality. As cheap credit abounds,
business people, investors, and cube dwellers hear the siren call of
can’t-miss profit opportunities. Fortunes are made then lost,
and companies find it harder to keep employees when they’re losing
Tenth, government may pose as the savior of a group of voters
they’ve impoverished, such as the elderly, by subsidizing their
medical expenses. New entitlements create the need for more
revenue, which fuels more inflation, pushing the dollar closer to a
Eleventh, as Mises observed, “under inflationary conditions,
people acquire the habit of looking upon the government as an
institution with limitless means at its disposal: the state, the
government, can do anything.”  People today
want government to ensure a democratic Middle East, universal health
care, free education, a missile defense system, a guaranteed retirement
income, and a trip to Mars. They want government to do all that
But we can relax – Mr. Bernanke’s printing presses stand ready to
“accommodate” these wishes.
If gold is the barbarous relic its many detractors claim it is, we might
expect the Fed’s fiat currency to be a better deal. But
even Fed Chairman Greenspan admits that it isn’t, telling a New York
audience in 2002 that “the price level in 1929 was not much different,
on net, from what it had been in 1800. But, in the two decades
following the abandonment of the gold standard in 1933, the consumer
price index in the United States nearly doubled. And, in the four
decades after that, prices quintupled.” 
Lord Keynes, the 20th Century’s guru of deficit spending, never
spelled out how deficits should be financed, admitting only that
increased taxation was not the answer. 
Perhaps he had pangs of conscience about calling for inflation outright.
Writing after World War I, he noted: “There is no subtler, no surer
means of overturning the existing basis of society than to debauch the
currency. The process engages all the hidden forces of economic law on
the side of destruction, and does it in a manner which not one man in a
million is able to diagnose.” 
Iraq and terrorism dominate the news, but how little we hear about the
policies nurturing these issues, one of which is government’s power to
confiscate wealth with the Fed’s invisible hand.
We should wipe every trace of the Federal Reserve from our lives and
allow the market to freely choose our monetary standard, which most
likely would be gold. In the meantime, we should shut down Mr.
Bernanke’s printing presses for good.
Federal Reserve Act
by Governor Ben S. Bernanke, November 21, 2002
Executive Order 6102
4 Mises, Ludwig von, Economic
Freedom and Interventionism
by Governor Ben S. Bernanke, January 4, 2004
Bureau of Labor
7 Bonner, William and Wiggin, Addison, Financial
Reckoning Day: Surviving the Soft Depression of the 21st Century,
John Wiley & Sons, Hoboken, New Jersey, 2003. p. 245
8 Sennholz, Hans F., Age of Inflation, Western
Islands, Belmont, Massachusetts, 1979. p. 69
9 Mises, Ludwig von, Economic Policy: Thoughts for
Today and Tomorrow, Regnery Gateway, Washington, D.C., 1979, p. 66
by Chairman Alan Greenspan, December 19, 2002
Keynesism in a Nutshell, 1982
John Maynard, Economic Consequences of the Peace, 1919