- Should the Federal Reserve System be abolished?
- If so, what monetary system should take its place?
My answers to these questions are:
- No, the Federal Reserve System should not be abolished. If some people want to continue to use Federal Reserve notes as money they should be able to do so. However, they should not be able to impose their choice on others.
- The only monetary system to take the place of Federal Reserve notes, if they were to fall into disuse, should be a voluntary one; a monetary system in which people freely choose what they use for money.
These may seem surprising and even contradictory responses, so please read on to understand my reasons for answering this way.
Money is a commodity people use to facilitate their exchanges with other people. Economists refer to money as a commonly used medium of exchange. For long periods of history, money has usually been characterised by having a large value relative to its bulk and weight; by being homogeneous (one part being just like every other part); by being easily divisible into smaller parts (with each smaller unit retaining its proportional value to the whole); by being durable (not easily destroyed); and by generally maintaining its exchange value relative to other desirable things.
In a free society, the production of money would be a matter left to private enterprise. Money producers would compete with one another to offer the best product at the lowest cost. Such a system would be devoid of State coercion and government interference. The law of natural displacement (the best money will be used by traders and will displace less suitable ones) would minimise useless innovations because people would only accept new forms of money if they saw value in the improvements offered. Monetary freedom means that whatever is chosen for money must be able to survive on its own merits. A money that people must be forced to use has already lost its credibility. If the money the government wants people to use and accept had any inherent advantages over other monies, then there would be no reason to pass laws that force them to use it.
Just as there is more than one kind of credit card and payment system, e.g., Visa, MasterCard, PayPal, etc., there could be more than one kind of money, each touting its advantages to the end user. No one can tell in advance what form these monies might take because no one can know for sure what choices individuals would make or what new technologies might be discovered. Laws forcing people to use the Federal Reserve System money have frozen monetary developments at a certain stage. There is no way to determine the advances that might have occurred due to the government’s discouragement of competition. Just imagine if Congress had protected the Post Office by passing laws that would have prevented people from communicating via the internet. We would never have experienced the marvels of e-mail. What we do know, however, is that ever since the Civil War between the States, the federal government has successfully prosecuted competing providers of money. As recently as 2011, the principal of NORFED, the National Organisation for the Repeal of the Federal Reserve, was convicted of violating the provisions of 18 United States Code, Sections 2, 371, 485, 486 and 1341, which prohibit the creation of “private coin or currency systems [designed] to compete with the official coinage and currency of the United States” government. At the conclusion of the trial, the United States Attorney for the Western District of North Carolina, Anne T. Tompkins, issued a press release (March 18, 2011), reiterating the government’s harsh attitude in suppressing potential competition: Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism. While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country.
Despite the government’s claims to the contrary, it is not necessary that money be provided by government or that there be only one monetary system in place. Gold and silver were commonly used media of exchange for centuries. No person or institution has the right to prevent people from using their property and exchanging it in a peaceful manner. The history of private gold coinage in the United States shows what happened when the government was not there to force people to trade with a certain type of money. It was a natural right of the miner to pan or dig for gold. He could coin whatever precious metals he found so long as he did not counterfeit or imitate the coin of the United States government. Congress, at the time, did not believe it had the power to prohibit him from weighing and assaying his pieces of gold, marking upon them their weight and fineness, and exchanging them for whatever other people were willing to give for them. In Rutherfordton, North Carolina members of the Bechtler family coined over two million dollars of gold between 1831 and 1840; in Denver, Colorado the Clark & Gruber mint produced over half a million dollars of gold coins between 1859 and 1863, and in California immediately after the 1849 Gold Rush there were numerous private issues of coin and ingots. During this time, the common law right of the private coiner to issue gold coins was fully recognised by both the public which used them and the government that tolerated them.
When exchanges take place they are either voluntary or coerced. No voluntary exchange takes place unless both parties expect to better themselves. When people are forced to trade, it is obvious that their best interests (as they define them) are not being served. Coerced exchanges only benefit one party at the expense of the other. This, in fact, is just what happens when people are forced to use Federal Reserve notes in their daily transactions. But because they are so accustomed to this form of government intervention in their lives, very few people recognise the government’s threat of violence or the economic disutility arising from the use of force. Political controls and struggles over money and credit have continually disrupted our society from its very inception and have made economic calculation increasingly difficult. As Gustav Stolper pointed out in his 1942 book, THIS AGE OF FABLE, “A ‘free’ capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all governmental controls short of expropriation.”
Now all this has been offered by way of showing why we should not have a governmental system of money. But why argue that the Federal Reserve System should not be abolished? Because if a voluntary monetary system is to be achieved it must be brought about in a peaceful, voluntary way. If most people are wedded to a money produced and operated by a quasi-government institution with powers to enforce coercive legal tender laws and a government monopoly over the production of money, then to “demolish, destroy, or put an end” to that system against their wishes would only result in the erection of another similar system in its place. A voluntary money system cannot be forced upon people. It must come about naturally, over time, as the result of millions of freely-made individual choices and exchanges.
The Federal Reserve System will only be replaced permanently if people come to understand the morality and practicality of a voluntary system. When a sufficient number of them recognise its merits, then instead of abolishing the Federal Reserve System, they will simply abandon it in favour of using better money. At that point, laws supporting the Federal Reserve would be rendered ineffective by people’s refusal to obey them. In such a situation, it would become nearly impossible for the government to prosecute, convict, and imprison all those who refuse to handle Federal Reserve notes.
Not only is it inconsistent to force men to be free, but people who have been forced to be free do not understand why they should accept personal responsibility for their own lives. Button-pushing (as in pushing the button to abolish the Federal Reserve System) would probably result in chaos because most people would still be looking to government to produce the money they use. To abolish is to resort to compulsion, and the free man does not force others to be free. The free man controls himself. He decides what he shall use for money. He recognises the right of others to choose how they will live. This includes their freedom to choose what they will use for money.
Make use of the following additional resources to expand knowledge and understanding of the topic covered in this unit.
The entire unit, including all additional resources, can also be downloaded as a workbook to be used offline.