"We don't have a free market in money. We have a self-interested cartel."

[MikeWB]

The story you are about to read is true. The names have not been changed to protect the innocent. But first, a little background material is called for.

The Federal Reserve System was granted a monopoly over monetary policy on December 23, 1913, when the Senate voted to pass the House's bill, which had been passed on December 22. President Wilson signed the bill into law that evening.

Ever since that fateful day, economists have done their best to get their opinions on monetary policy accepted by the FED. The only exception to this generalization is the Austrian School of economics. Their members, who are few in number and are generally without influence, do not believe that a government-licensed monopoly is capable of setting monetary policy without distorting the free flow of capital, especially the most crucial form of capital: information. So, they do not attempt to influence staff economists at the FED. They know it is a waste of time.

RIVAL SCHOOLS OF OPINION

There are several views of how monetary policy should be conducted. The most famous view is that of Milton Friedman. He argued for decades that the gold standard is a waste of gold, since governments must store gold in vaults. This valuable commodity could be used for productive purposes.

He wanted every nation's central bank to produce money at all times at a constant rate. He never decided on a rate. He suggested a range: 3% to 5% per annum. This view was the conservative opinion when I was in graduate school.

Keynesian economists argue for monetary policy to accompany fiscal policy. It must be subservient to fiscal policy. The central bank should partially finance government deficits in times of economic recession, when governments are supposed to run massive deficits. The central bank should buy government debt with newly created money. Its staff economists should decide which rate of inflation is the best at any given time.

This is also pretty much the view of supply-side economists, who argue that government deficits don't matter. They recommend reduced marginal income tax rates and corporate tax rates, but they almost never argue in public during a recession that the government should also cut spending to match reduced taxation. They also do not argue that the central bank is unwise to expand money in a recession. As long as marginal tax rates are cut, they don't care much about monetary policy. A few of them call for a strange kind of gold standard, one which doesn't issue money that allows everyone to demand payment in gold by the Federal government at a price fixed by law. Why, I don't know. It is a pseudo-gold standard.

These groups agree on one thing: there should never be a central bank policy of monetary contraction. This means that the central bank should never sell government debt without purchasing an offsetting asset of some kind.

This is the monetary ratchet. The money supply never falls. Whenever it rises, due to central bank policy, this increase becomes permanent.

Austrian School economists are in fundamental opposition to all three majority schools of opinion. They believe that money should be private, that contracts promising to pay in a monetary unit of account should be enforced, that no bank should be given a monopoly by the government, and that the public should decide what constitutes money through their dealings, not through legislative fiat. The civil government should get out of money production altogether.

To illustrate the conflict between the Austrian School and the Chicago School, Mark Skousen designed a test. I was present when he conducted this test