On December 23, 1913, one hundred years ago yesterday, Woodrow Wilson signed into law the Federal Reserve Act, which had been passed in the House on September 18th the same year by a vote of 287 - 85 and which had been passed in the Senate on December 18th by a vote of 54 - 34.
The creation of a central bank in the US meant that the supply of money could now be controlled by a central planning body, in contrast to the previous basically laissez-faire systems (the US had experimented with several different systems with varying levels of government interference during its history prior to 1913), in which money and credit were not directly under the control of the government and banks could issue their own notes, and during some periods could issue their own scrip in exchange for deposits.
The contrast between central banking and free banking is admirably contrasted in Breaking the Banks, by Richard M. Salsman, published in 1990 and available from the American Institute for Economic Research. He characterizes central banking as follows:
[. . .] we describe central banking as any and all forms of government intervention in the banking system, specifically a legal tender monopoly on the issue of bank notes, a lender of last resort, mandatory deposit insurance, and the regulation and/or ownership of banks. 16.The ramifications of the creation of the Federal Reserve have been profound. One of the most important negative aspects of the central banking system has been steady erosion of the purchasing power of money, which over time has had a catastrophic effect on the people's ability to trust their money as a store of value. The long-term impact of this erosion of purchasing power has been far greater than most people recognize, as we discuss in several previous posts, most notably in "Stand still, little lambs, to be shorn!" which itself is the title of a study published periodically by the AIER.
Perhaps not coincidentally, 2013 is also the one hundredth anniversary of the establishment of a federal income tax in the United States, via the ratification of the 16th Amendment to the Constitution in February of that year. After the Constitution was changed to allow an income tax, Congress got to work writing income tax law, which was enacted in October of that year.
Both the income tax and the erosion of the purchasing power of the money in the US have together caused tremendous harm to the individual's ability to keep his or her own property and to increase it through productive labor. It is very important for investors to understand the history and impact of both the income tax and inflation / loss of purchasing power on their money and ultimately their wealth.
Further, the creation of the income tax and the establishment of the central bank led directly to the ability of the federal government to grow tremendously in size and scope since 1913. While a thorough critique of the performance of the Federal Reserve since its founding is beyond the scope of this writing, there can be no doubt that the ramifications of the existence of such an entity has been significant in its impact on the US and global economy. While it can can be argued by reasonable people (certainly Milton Friedman was one) that the benefits of central banking outweigh the negatives, it is our view that the concentration of such power into the hands of a few must be handled very carefully and well articulated "rules of the road" must be followed in order to limit such power.
Regardless, here at Taylor Frigon Capital Management, we have always believed that individual men and women, as well as the country at large, have gotten by in spite of what we believe to be often questionable actions by the bankers at the Fed. See for example the previous post entitled, "We get by in spite," published December 23, 2009.
And on that positive and hopeful note, we wish all our readers a very Happy Christmas and a Prosperous 2014!