Congresses, together with presidents, call on the Fed to “maintain long run growth of [the quantity of government money] in order to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Constitutionally, this violates the rule that the legislative branch must perform all lawmaking and exceeds the enumerated powers to produce coins of metal money and to regulate the weight of metal contained in those coins and in foreign coins.
In practice, this has a whole host of problems.
The single actuation variable (the quantity of government money) can drive only a single measured variable (employment, prices, or interest rates) to a setpoint.
Control of each of these measured variables involves large deadtime, which makes control poor. This is because after the Fed makes a change in the money quantity, the resulting change in employment, prices, or interest rates isn’t immediate. Until then, the Fed has to fly blind:
- Employment changes take time. To employ fewer people, producers may first build labor-saving processes, and must decide, then lay off. To gain employment, workers may first learn new skills. To employ more people, producers must decide, then interview, then hire.
- Price increases require producers to decide to risk making customers consider other producers.
- Interest rates aren’t finalized by Fed manipulations of the money quantity. To borrow more, borrowers must plan, then decide, then get approved. To borrow less, borrowers must earn and save, then pay off loans. To save more, savers must earn more or spend less, for a while.
Employment decisions aren’t up to the Fed, either directly (since the Fed doesn’t hire people to produce products other than money) or indirectly (since the Fed doesn’t execute statutes or regulate producers other than banks).
Thus, prices can be made stable only by harming savers, producers, and customers:
- Producers increase their productivity and reduce prices quickly to satisfy customers, so real prices decrease. The Fed can only keep nominal prices stable. To do this, the Fed mustincrease the money quantity by having bankers create money. But then savers earn less interest, so people save less.
- Also, producers try not to miss opportunities, so they borrow more. But many of these investments can’t pay off, because the created money isn’t savings that savers will later spend. Bankers create money to loan, and then when people pay back loans, bankers destroy the money. Money is like energy. Investing using saved money is like using a battery that’s fully charged. Investing using banker-created, banker-destroyed money is like using a battery that lets you get started but otherwise is fully discharged.
- Everything that’s produced is ultimately used by people and must be paid for from people’searnings. The total of people’s saved past earnings, present earnings, and borrowed future earnings must be sufficient to pay for the new products that result from investments, or people can’t buy all of these new products. This happens.
- Overall, that makes investment of created money unsustainable. Eventually in their roles as workers, people lose raises, jobs, and opportunities. In their roles as customers, people receive less added value, borrow more, and pay more interest. The only people who gain are government people, who borrow and spend more, and bankers, who rake in more interest.
Interest rates can’t be known by the Fed to be moderate. People are harmed if banks create money, as described above, so government people shouldn’t have banks create money. Instead, savers should earn and save money. Then savers and borrowers together work out what interest rates maximize value-adding.
Given massive governments, value-adding now grows slowly or stalls.
The key process producing these frequent government money error cycles and these massive governments that slow people’s value-adding is fractional-reserve banking:
- Government people let bankers promise to return depositors’ money on demand without holding 100% of depositors’ money in reserve. This makes banks vulnerable to runs at all times.
- Government people also have bankers create money to loan it out, and then destroy the money when borrowers repay the loans. This makes producers’ resulting investments financially unsustainable, as described previously.
Then savers will earn and save whatever additional money bankers loan out. Savers and borrowers will together work out loan prices (interest rates) and loan volumes.
Some projects will fail, and other producers will start using the underlying assets better. More projects will pay off, so more workers will be employed.
At some times—say, due to disruptive innovations, or due to disasters—taxpayers will earn less income. At these times, governments will take and spend less money.
At all times, most decisions will be made by savers, by producers adding value, and by customers shopping for the resulting products.
James Anthony is the author of The Constitution Needs a Good Party and rConstitution Papers, publishes rConstitution.us, and has written in Daily Caller, The Federalist, American Thinker, American Greatness, Mises Institute, and Foundation for Economic Education. Mr. Anthony is an experienced chemical engineer with a master’s in mechanical engineering.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.