Congress is on a spending binge. With all the calls for bailouts,
economic stimulus and other assorted handouts, there is a real risk of
inflation in our future. If we do have a rapid inflation, it's likely
that Congress, as they did in the financial meltdown, will blame it on
everybody except themselves. Before Congress begins to shirk their
responsibility, let's understand what an inflation is and is not.
Several prices rising are not inflation. Only when prices across the
board rise is there inflation. But just as in the case of diseases,
describing a symptom does not necessarily tell us the cause. That is
the same with inflation; it is a symptom of something else. Nobel
Laureate and noted monetary theorist Milton Friedman explained,
"(I)nflation is always and everywhere a monetary phenomenon, in the
sense that it cannot occur without a more rapid increase in the
quantity of money than in output." Put another way, inflation results
from an increase in the supply of money relative to the demand for
money.
That being the case, who is responsible for inflation? It's not you or
I because if we privately increased the supply of money to finance
profligate spending, we would be charged with counterfeiting and go to
prison. The Federal Reserve Bank, our central bank, is the only entity
legally permitted to increase the supply of money, to finance Congress'
profligate spending. The Federal Reserve Bank is supposed to be
independent but it typically accommodates the wishes of Congress and
the White House.
Central banks are villains in most countries; ours is just not as bad
as others. In 1946, Hungary's central bank gave it the world's highest
inflation rate. Prices doubled every 16 hours creating an annual
inflation rate of 13 quadrillion percent. Last October, Zimbabwe's
central bank produced history's second highest rate of inflation.
Prices doubled every 25 hours, giving it an annual inflation rate of 80
billion percent. By comparison, Germany's inflation rate, which brought
about the social disruption responsible for Hitler's rise to power, was
a mere 30,000 percent that saw prices doubling every four days. You
say, "Williams, that couldn't happen here." Except during the
Revolutionary War and the War of 1861, our inflation has never exceeded
20 percent, but keep in mind that any hyperinflation was once 20
percent.
Knowing the dangers posed by central banks, we might ask whether our
country needs the Federal Reserve Bank. Whenever I'm told that we need
this or that government program, I always ask what we did before. It
turns out that we did without a central bank from 1836, when President
Andrew Jackson closed the Second Bank of the United States, to 1913
when Federal Reserve Act was written. During that interval, we
prospered and became one of the world's major economic powers.
The justifications for Federal Reserve Act of 1913 was to prevent bank
failure and maintain price stability. Simple before and after analysis
demonstrates that the Federal Reserve Bank has been a failure. In the
century before the Federal Reserve Act, wholesale prices fell by 6
percent; in the century after they rose by 1,300 percent. Maximum bank
failures in one year before 1913 were 496 and afterward, 4,400. During
the 1930s, inept money supply management by the Federal Reserve Bank
was partially responsible for both the depth and duration of the Great
Depression.
It is not wise for us to permit a few people on the Federal Reserve
Board to have life and death power over our economy. My recommendation
for reducing some of that power is to repeal legal tender laws and
eliminate all taxes on gold, silver and platinum transactions. That way
there would be money substitutes and the government money monopoly
would be reduced and hence the ability to tax -- some people would say
steal from -- us through inflation.
