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Source link: http://archive.mises.org/8170/the-feds-war-on-the-middle-class/

The Fed’s War on the Middle Class

June 4, 2008 by

The middle class actually faces many important economic problems, but in reality they boil down to three current problems and one that looms large in our future. All four problems stem from a common cause — the Federal Reserve. History tells us that we either root out this cause or face economic demise. The first and most obvious problem is price inflation. Gasoline and milk are now almost $4 per gallon. Corn oil is now $15 per gallon and the price of the olive oil I buy was just increased by 25%. I recently snuck up on the manager of the grocery store where I shop (he was marking up the prices of goods already on the shelves). Behind his back I remarked, “Hey, stop causing inflation.” He turned around with a worried look on his face and said softly “yes, I know, the prices of everything are going up.” FULL ARTICLE

{ 26 comments }

Fephisto June 4, 2008 at 8:35 am

I like the little anecdote:

‘I recently snuck up on the manager of the grocery store where I shop (he was marking up the prices of goods already on the shelves). Behind his back I remarked, “Hey, stop causing inflation.” ‘

KY Leong June 4, 2008 at 8:57 am

I have yet to read Schumpeter’s History, so I am very appreciative of your concluding quote here.
“It [the gold standard] is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditures directly, for example, to foreign policy…”
This reminds of a piece I wrote for FSU a couple of years ago: The Fed Connection, linking the Fed to the scoundrels of the world
http://www.financialsense.com/fsu/editorials/2006/0727.html

Matt June 4, 2008 at 10:26 am

“The Federal Reserve plays the blame game and they blame you for this mess. The truth is that they are the ones to blame.”

Very True, however the blame goes deeper than that. The Federal Reserve is the creation of Congress which too benefits greatly and allows for deficit spending with practically no limits. Both are in this together and both benefit at the expense of the public at large. Special interest groups too are aware of this looting and want in on the action.

Alas, the public at large in their economic ignorance keeps voting for those that upon closer examination are bankrupting the nation. Most Politicians must be aware of the crookedness they are perpetrating, but privately they go along because “In the long run we are dead” let’s get what we can in the short run.

Overall an excellent article and should be required reading in all educational institutions, but then who sets the agenda for the curriculums? What a mess!

Robin Anderson June 4, 2008 at 11:01 am

While I agree with the author that the Fed is causing many problems and that it ought to be abolished, blaming central banks for wars seems a little outlandish.

And this quote looks like it comes from an Obama speech: “However, the distribution of income has been in favor of the wealthy and has been working against the middle class. Many Americans earn over $1 million per year and a few now earn over $1 billion dollars per year, including several hedge-fund managers. At the same time we have working-class people whose inflation-adjusted wages have stagnated or have even fallen. This type of result could be a very natural result of economic forces, but it can also be the result of government policies that systematically favor one economic class over another.”

Does the author have any facts/statistics to back this up? What is wrong with someone earning over $1-million ?

Jeremy June 4, 2008 at 11:22 am

Hi Robin,

What more facts do you need than that banks and all of those who borrow large amounts of money directly benefit from lower than free market interest rates and sometimes direct bailouts? Interest rates lower than the market by, say, 3% add up to quite a bit of money, year after year, when you are borrowing large amounts of money.

Also, with a 100% gold backed currency, the only way for politicians to get money is taxation or borrowing from individuals or other governments – they can’t monetize their debt. History has shown that those who adhere closely to the gold standard wage far less war – look at 19th century America.

Eric June 4, 2008 at 11:35 am

Robin:

“While I agree with the author that the Fed is causing many problems and that it ought to be abolished, blaming central banks for wars seems a little outlandish.”

The first central bank, the Bank of England, was chartered because the king of England wanted to finance a war.

The US would not have been able to finance WWI so easily had there not been a FED.

The FED then decided to bail out England after WWI and they generated enough inflation that led to the 29 crash. These troubles led to world troubles and Germany elected Hitler, someone they would never elect had their currency not gone to zero. And we know where that all ended.

There is plenty of evidence that the practices of Central Banks have historically led to wars.

My one disagreement with the article is with: “Of course the major beneficiary of the Federal Reserve’s inflation is government itself”.

For each $1 that the FED counterfeits and loans to the government the banks also benefit. However, that $1 is peanuts compared to the $9-10 the commercial banks are now permitted to counterfeit and loan out at interest.

So, who’s the real the beneficiaries of the cartel controlled by the FED? While the government certainly benefits, they only get 10% of the action. After all, why would the bankers have created the FED if it was not to their advantage.

And now, the FED is even bailing out banks that even while sitting on a pile of counterfeit money can’t even keep themselves in business. If this doesn’t show the damage that the FED causes and who wins and loses, then nothing will.

Walt D. June 4, 2008 at 12:41 pm

Blaming the Fed misses the real problem. Free market economies only grow if successful businesses are allowed to thrive and unsuccessful business are allowed to fail.
The Federal Government is the problem. By intervening, they create a moral hazard. The Fed could not bail out insolvent financial institutions without the authority of the Federal Government. When the Federal Government intervenes and creates more problems the problem is attributed to lack of regulation and the solution is more regulation.
Government programs, by providing subsidies and protection from competition, produce inefficiency and stifle technological improvements.
The zeroth law of Economics is that the Federal Government can not give you anything – it can only give you something that it has taken away from someone else.
Until the middle class grasps this concept, they are open to the pandering that has elected the politicians who have got us into this mess in the first place.

Matt June 4, 2008 at 3:27 pm

Robin:

I’m not qualified to speak for Dr. Thornton, but the way I understand his article is that he has no qualms with someone making over $1 million/year.

His point is that the policies of the Federal Reserve are responsible for the transfer of wealth from the poor and middle class to the upper class of society. Wealth transfer is the inevitable consequence whenever an institution is granted a monopoly over currency issue.

Although the quote you cited could be expanded upon using misguided socialist themes in one of Obama’s speeches, I think Dr. Thornton’s Fellowship at the Mises Institute and PhD in economics will convince he’s no friend of socialism.

Charles Hanes June 4, 2008 at 5:32 pm

James Livingstone’s “Origins of the Federal Reserve System” makes it clear that one of the motivations for the creation of the system is that it was too difficult to get unions to accept wage reductions as industrial productivity caused the real value of the gold-based dollar to soar and product prices to decrease in nominal terms. There is a good account of the conflict between Andrew Carnegie and US Steel vs. the steel workers. By inflating the currency, the Fed could shift purchasing power away from the workers without changing their nominal wages.

nick gray June 5, 2008 at 2:39 am

Eric, do you mean that the protectionist laws passed by Congress in the 1920es had nothing to do with the Great Depression?
And didn’t Sir Isaac Newton put Britain on the gold standard when he was governor of the Bank of England? A standard maintained for over two centuries?
Just asking.

Dr. Mark Thornton June 5, 2008 at 6:34 am

Indeed, I have no trouble with people earning a billion dollars a year! Its the FED that makes it possible for people to earn money via its financial manipulations and injections of credit that I have a problem with.

Flix June 5, 2008 at 6:45 am

Nick,
Smoot-Hawley was just the icing on the cake, the Fed induced bubble was theb whole cake.

And yes, a Gold-standard central bank is better than a fiat central bank… but no central bank is better. Trusting Kings and politicians with that power is just asking to be robbed.

England went off the gold standard during WWI and the Napoleonic wars, BTW.

Mike S June 5, 2008 at 6:54 am

There is anecdotal evidence that some of the money center banks with cooperation of the fed and sec have again raped the middle class by speculating in oil futures to try and generate enough ill gotten gains to cover their huge losses in sub-prime mortgages. It’s enough to make me pull out my old Mother Earth magazines and head back to a mountain cave near a natural spring.

billwald June 5, 2008 at 11:05 am

Say there is a dollar of gold for every paper and electronic dollar in circulation – what is the price of gold?

Would there also be a dollar of gold for every dollar on deposit in every bank? CD, money market funds, savings accounts? What would be the price of gold?

And a dollar of gold for every credit card balance carried forward? or is this included in the money in circulation?

If every employer paid every employee on the first of every month instead of every 2 weeks would this increase the total required cash in circulation and thus raise the price of gold? I can’t quite think this one through.

Mike Sproul June 5, 2008 at 3:50 pm

Billwald:

You’ve hit on one of the many inconsistencies of the Austrian view of money.
Each credit card dollar is backed not with a dollar’s worth of gold, but with IOU’s worth one dollar of gold. Every dollar owed to employees is backed not by gold, but by employer IOU’s worth a dollar of gold. Austrians fail to see that there will always be various kinds of money that are not 100% backed by gold, but they continue to insist that banks hold 100% gold reserves for the money they issue. Then they try to wriggle out of their own inconsistency by claiming that credit card dollars, dollars owed by employers, etc., are not really money.

Michael A. Clem June 5, 2008 at 4:11 pm

When you use your credit card, the credit card company pays the retailer, with their money, and then you pay the credit card company back, plus interest. Exactly where is the “new money” being created?

Mike Sproul June 5, 2008 at 7:02 pm

Michael Clem:

As one credit card dollar is paid off, another is issued, so there is a permanent flaot of credit card dollars that are never actually paid off. These have as much claim to being called money as checking account dollars. Checking account dollars are often created by loan, and eventually paid off. But there is a permanent float of checking account dollars that are never paid off. Back in 1710, when paper money was a new thing, people claimed that they weren’t really money, until someone pointed out that there is also a permanent float of banknotes that are never really paid off.

Frank Shostak June 5, 2008 at 10:11 pm

This is very sad. Sudha was a gian in economics. May she rest in peace.
Frank Shostak

Frank Shostak June 5, 2008 at 10:11 pm

This is very sad. Sudha was a giant in economics. May she rest in peace.
Frank Shostak

Jeremy June 5, 2008 at 11:57 pm

“You’ve hit on one of the many inconsistencies of the Austrian view of money.
Each credit card dollar is backed not with a dollar’s worth of gold, but with IOU’s worth one dollar of gold.

@Mike – you don’t speak for all Austrian economists, so please don’t make sweeping generalizations like this.

Let’s take credit cards: Any payment the credit card company makes should be real money: ie 100% backed by gold or another commodity.

First, realize that a credit limit is not the same as a demand deposit – one is already part of the money supply, the other is not until it is used. This is clearly seen by people who suddenly have their credit limits reduced dramatically – could this happen if it was money in the first place (without said customer’s bank going bankrupt)?

Credit card companies under a 100% reserve backed system would have to make payments with real money. If they ran out of money, their clients could not use their balances.

This could be handled by always having enough real money on hand to meet the projected spending needs of their customers – when spending exceeded this projection, real borrowing (borrowing backed up by real savings, not demand deposits) from banks or individuals could supplement the extra demand for credit. In this way, credit card companies could exist in a system of 100% reserves.

Store credit is something else entirely. No new money is being created when a store decides to give an item first and accept payments down the road. They are taking on a promise of payment, not a form of money.

Another quote from above:

“Every dollar owed to employees is backed not by gold, but by employer IOU’s worth a dollar of gold. Austrians fail to see that there will always be various kinds of money that are not 100% backed by gold, but they continue to insist that banks hold 100% gold reserves for the money they issue. Then they try to wriggle out of their own inconsistency by claiming that credit card dollars, dollars owed by employers, etc., are not really money.”

Um… how are wages owed the exact same thing as money? They don’t become money until the employer pays their employees. Before that, it’s just a promise to pay.

David C June 6, 2008 at 10:15 am

Fephisto said:

I like the little anecdote:

‘I recently snuck up on the manager of the grocery store where I shop (he was marking up the prices of goods already on the shelves). Behind his back I remarked, “Hey, stop causing inflation.” ‘

…..the tragedy is in the shopkeeper’s reply, which began with a resigned ‘I know…..’. It demonstrates that even he has been bamboozled into believing that his price increases are the drivers of inflation.

sad sad sad.

Florida Economist June 6, 2008 at 11:28 am

The position that the Fed takes actions which in turn negatively impact the so called middle-class is perfectly valid. However, the Fed does not wage war on the middle class. The Fed uses it as a tool. This is not to be taken as a positive in any way, shape or form. It cushions the blow of Fed actions by absorbing price increases and other negatives on a truly enormous scale. Price increases that the rich would never tolerate, if they were proportional to their income (as they would be if there was no middle-class) and which the poor can not absorb as the financial resources are just not present.

The Fed has no desire to see an end to the middle class, as it stands to reason that an end to the middle-class would mean the disappearance of the Feds great equalizer. In contrast, it would be to the Fed’s advantage if the middle class were to grow by the poor moving up and stepping into it. At which point there would be two economic populations the rich and the sponges, oops! I mean surviving. The Fed would then have the world’s strongest population of sponges; there I go again, to cushion the blow from its monetary policies that consistently favor the individually and corporate rich.

“If your enemy is making you stronger, then strengthen your enemy” – Florida Economist

Robert June 6, 2008 at 9:23 pm

“If the American people ever allow private banks to control the issue of currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered”.-Thomas Jefferson

OK. Nearly four decades since the federal government completed the transition (Nixon, 1971 if I’m not mistaken) from the gold standard for our money system. Let us assume, just for discussion, that the Austrian School guys are correct and that the backing of money by gold or some other reasonably suitable commodity is the lynchpin to sound monetary policy. What exactly is it that the Austrians suggest for making the transition back to better monetary policy? What exactly does the transition look like and where is the political impetus to make it happen?

I think I understand the “monetary system” as a layman participant and have some grounding in macro economics and monetary policy. There seems to be no effective leverage point in the system to realistically begin the transition, never mind the lack of political will amongst the people. I’d love to hear or read about any realistic plans to make the transition back to sound money.

To date, all I hear or read about are superficial assertions of the “correctness” of the sound money method; show me the way to implement it in the current political environment. I am happy to help make a go of it!

Walt D. June 9, 2008 at 12:00 am

It seems we have two types of problems in the energy industry.
Technical problems such as we don’t know how to produce a sustainable break-even fusion reaction, or we don’t have the technology to use the methane or hydrogen from the moons of planets or the planets themselves in the outer solar systems.
Political/psychological problems. Even though we already have the technology, we don’t have a stable enough political structure in the US to build modern nuclear power plants to replace obsolete coal plants, or to build refineries to turn coal into diesel fuel.
My contention as to why the latter is so is due to a breakdown in the education system. In particular almost complete economic illiteracy. I would guess than less than 1 person in 10,000 understands the basic operation of the Federal Reserve System – something that is easily available on this site.

fundamentalist June 9, 2008 at 8:09 am

Robert: “I’d love to hear or read about any realistic plans to make the transition back to sound money.”

It won’t ever happen. There is simply too much money to be made with unsound money. Plus, Austrian econ is still a minority opinion, a very small minority. Keynesian econ still rules, and Keynesians say unsound money is best for the economy.

The best monetary policy we had since the creation of the Fed, I believe, was during Greespan’s early years. As Fed chair, he targeted the price of gold, attempting to keep it between $350 and $250. That policy led to some of the best real growth in the economy in many decades. Then he went senile.

Peter Pensotti May 21, 2009 at 11:23 am

Fundamentalist,

Change won’t happen unless we the people demand it. It’s time to speak up and be heard. Contact your representatives, demonstrate and take to the street. Support HR 1207 and 833. Also let our VP Biden know he is after all on the Task Force for the Middle Class.

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