The Justice Department has announced it is investigating the banking crisis. It will undoubtedly charge that banking officials are responsible for the crisis. One thing is for sure: It will not indict the Federal Reserve System, which is the root cause of the crisis. In fact, in its search for scapegoats, it will not even acknowledge the Fed’s role in the crisis. That’s because the Fed plays a sacrosanct role in America’s welfare-warfare state, and every federal official knows that.
Of course, this is not a new phenomenon. Back in the 1930s, the last thing government officials were going to do is admit that the Federal Reserve was the root cause of the 1929 stock-market crash that led to the Great Depression. Instead, they told the American people that the crisis was all because of the “failure of America’s free-enterprise system.”
Ever since the Fed was established in 1913, it has engaged in monetary debauchery. Decade after decade, it has printed ever-increasing quantities of paper money to enable federal officials to engage in ever- increasing expenditures for their welfare state and their warfare state.
Most of the time, it has been periods of “easy money,” where the Fed was expanding or inflating the money supply. But periodically prices would start to soar in a major way, which was simply reflecting the devaluation of the money arising from the Fed’s easy-money policies. In response, the Fed would panic and begin raising interest rates, with the aim of tamping down the price increases that its easy-money policy had brought about.
Those were the economic recessions. As soon as the recession was over, the Fed would start the cycle over again with its easy-money policy, especially as expenditures on the welfare-warfare state were soaring (e.g., Social Security, Medicare, Afghanistan, and Iraq).
During the past 10 years, the Fed has engaged in one of its longest periods of easy money. Fed officials called it “quantitative easing.” This period was capped by the Fed’s extremely easy-money (i.e., inflationary) policy during the Covid “emergency.”
That easy money flowed into the banks in the form of deposits. Banks make their money by lending out those deposits. But there wasn’t enough loan demand. Thus, the banks invested the deposits in long-term federal bonds.
Now, what do federal officials and the mainstream press tell us about government bonds? Haven’t they told us for decades that they are the safest and most secure investment? Haven’t they always emphasized how “liquid” they are?
But then what happened after bankers invested their deposits in those safe and secure bonds?
As prices soared in the economy in response to the Fed’s extreme easy- money policy, the Fed panicked once again. To “tamp down” the soaring prices that its easy money policy had produced, it began raising interest rates extremely high in an extremely rapid manner.
That caused those “safe and secure” bonds to drop enormously in value. That’s because a bond that is paying, say, 1 percent is not going to be as valuable as a bond paying, say, 5 percent. The 1 percent bond is going to go down in value.
Meanwhile, the Fed’s extremely rapid and extremely high-interest rate policy was causing a double effect: (1) It was putting big financial strains on the tech industry, which was causing tech companies to begin withdrawing money from the banks to help cover losses; and (2) it was causing depositors to withdraw their money from the banks in order to take advantage of higher interest-earning investments.
To pay off all those depositors, the two banks that have failed (so far) had to liquidate those safe and secure long-term bonds at an enormous loss. When depositors learned that, the bank run was on.
Our ancestors brought into existence the finest monetary system in history. No paper money and no Federal Reserve. It was a gold-coin, silver-coin monetary system. Everyone knew that federal bills, notes, and bonds were promises to pay money, not money itself.
That monetary system was a major factor in the greatest period of economic prosperity in history, especially from the end of the Civil War to the early 1900s. Unfortunately, in 1913, the Federal Reserve was established and, even worse, in the 1930s America’s paper-money system was called into existence. It has been a monetary disaster for the American people ever since.
Reprinted with permission from The Future of Freedom Foundation.