November 4, 2011

The Eminently Real Free Market (XLVI): Sketchy Stories (34): Ferrara’s Reserve of False Notes: Banking on Ignorance, Insinuation, and Insolence (2)


Mr. Ferrara’s tenth sketchy story is entitled “The Federal Reserve System” (30). In the previous post we showed that his interpretation of the Austrian case against fractional reserve banking as exonerating its capitalist prime movers is without merit. As he pursues this bootless gambit into an area in which Austrian scholars long ago distinguished themselves, he invites the suspicion that the indispensability of the State in the establishment of the relevant moral hazard is not a topic he wishes to pursue. He does this by reprising the worn-out tune that corner-cutting by some market players somehow negates the deeper social ontology of trade, the font of the eminently real free market that ever presses against the confines of statist distortion.
Mr. Ferrara’s insolent tone is undiminished. Whereas before it was “even a scholar of the Mises Institute recognizes that this [fractional reserve banking] capitalist scheme is a fraud. . . .,” now it’s: “Even Rothbard describes it [the Fed] as a “cozy government-big bank partnership, the government-enforced banking cartel, that big bankers had long envisioned.” (32; emphasis not in the original, as the reader by now has grown to expect.)
Yes, big bankers long envisioned it, but they could not effect it without the State. The State is the sine qua non of this vast criminal enterprise. Mr. Ferrara obscures the key causal connection: the bankers could not have achieved their goal of expedient expansion of the money supply without first achieving the intermediary institutional goal of an enforceable cartel. The State is the enforcer.
Private cartels are not self-enforcing and therefore vulnerable to “runs,” that is, demand that cannot be satisfied. That’s why bankers “envisioned” their instrumental relationship to government: it backs their vision with the threat of violence. Yes, the bankers made government its partner, if not also its tool. But they always will endeavor to do that.
Again, what it the great compensating advantage of this territorial monopoly of violence called the State such that we should maintain this moral hazard in business?
Rothbard had been writing about the malevolent anti-market forces behind the creation of the Fed, many of whom started out as market players, throughout his scholarly life. In a passage from his 1963 America’s Great Depression we see an example of his judicious balancing of factors:
Instead of preventing inflation by prohibiting fractional-reserve banking as fraudulent, governments have uniformly moved in the opposite direction, and have step-by-step removed these free-market checks to bank credit expansion, at the same time putting themselves in a position to direct the inflation. In various ways, they have artificially bolstered public confidence in the banks, encouraged public use of paper and deposits instead of gold (finally outlawing gold), and shepherded all the banks under one roof so that they can all expand together. The main device for accomplishing these aims has been Central Banking, an institution which America finally acquired as the Federal Reserve System in 1913. Central Banking permitted the centralization and absorption of gold into government vaults, greatly enlarging the national base for credit expansion: it also insured uniform action by the banks through basing their reserves on deposit accounts at the Central Bank instead of on gold.[1]
Government vaults.
The government assured Federal Reserve control over the banks by (1) granting to the Federal Reserve System (FRS) a monopoly over note issue; (2) compelling all the existing “national banks” to join the Federal Reserve System, and to keep all their legal reserves as deposits at the Federal Reserve; and (3) fixing the minimum reserve ratio of deposits at the Reserve to bank deposits (money owned by the public).[2]
Rothbard never sought to exonerate the banksters. (And, if any other Austro-libertarian ever did, we would like to know his or her name.) On the contrary, for forty years he named their names.[3] But Mr. Ferrara’s studied failure to address the intrinsic evil of their “main device” is consistent with a desire to exonerate the State. He certainly does not betray awareness of the possibility that government personnel have interests distinct from those of the financial movers and shakers who put them in office, that the fallen human interest in “lording it over others” (Matt. 20:25; 1 Pet. 5:3) is not reducible to an interest in money, but rather the root of which the latter is a flower.
Mr. Ferrara does cite Rothbard’s The Case against the Fed, but only for the description of the Fed as a cozy partnership, not for any of the historical facts he adduced in a sketch of the Jekyll Island conspiracy, all of which are developed and sourced in that book. (Whom does Mr. Ferrara cite for those facts? Nobody.)
As for the operational and structural facts about the Fed that puff up this section, including factoids about the Open Market Committee and another rehearsal of fractional reserve banking covered in the last sketch, these materials bear no obvious relationship to his polemical aim. Only the last paragraph seems to do that, but there is nothing new there:
With the entire money supply and the availability of money and credit in the U.S. economy under the control of a private banking cartel that has made government its partner, and which illegally buys up failing mega-firms to save their principals and shareholders from ruin, the term “free” market is little more than a place-holder for what Austrians wish existed. (32)
May we presume that Mr. Ferrara also wishes to see a totally unhampered market? If he does, then it seems there is only one road to travel, a road he will not take. For if one disapproves of the cozy bizgov partnership, and if the wealthy inevitably seek to control the State (and usually succeed), without which they cannot enforce their cartel and its attendant frauds, then the only logical alternative to abolishing the wealthy is abolishing the State.
What is confusing about that last paragraph, however, is that it follows the one in which we were told that the same “free” market of Austrian pipedreams was saved by Fed (by its creation of dummy corporations with their infamous “credit default swaps” on which most of Mr. Ferrara’s tale of the 2008 meltdown hangs—the focus of a later chapter). Now, what is real cannot be any longer wished for, and what is unreal cannot be saved, yet scare quotes around “free” appear in both places.
That’s not propaganda. That’s just audience-disrespecting carelessness.

[1] Rothbard, America’s Great Depression, Fifth Edition, Auburn, Al: Ludwig von Mises Institute, 2000, 25. Emphasis added.
[2] Op. cit., 26. Emphasis added.
[3] Besides The Case against the Fed, Auburn, AL: Ludwig von Mises Institute, 1994, see his earlier Wall Street, Banks, and American Foreign Policy, Auburn, AL: Ludwig von Mises Institute, 1984