Who Needs the Fed?

Project 2025 promotes "free" banking, which is to say, no pesky regulations or backstopping from the Federal Reserve. What could go wrong?

Policy wonks can't help themselves- they need to write down their plans so that all the world can see how brilliant they are, and how real they could be, if only others recognized their brilliance. In that way, the project 2025 plans from the Heritage Foundation have been a gold mine, at least for Democrats. And since the Republican Party couldn't be bothered to write down a platform, other than "anything Trump wants", this project serves as the functional platform of the current Republican campaign, written as it was by scores of officials from the first Trump administration, plus many others itching to be appointed to a second. And it is crazy- more like a project 1825 than anything we would want to look forward to.

One of its less publicized planks is its approach to banking. It heaps criticism on the Federal Reserve, and recommends, as the most effective solution, its abolition and a return to "free banking". Which means a world where no regulator controls the banks, and no federal reserve backs it up against panics and crises. And just to complete the return to barbarism, it recommends a return to the gold standard as well.

"In free banking, neither interest rates nor the supply of money is controlled by the government. The Federal Reserve is effectively abolished, and the Department of the Treasury largely limits itself to handling the government’s money. Regions of the U.S. actually had a similar system, known as the “Suffolk System,” from 1824 until the 1850s, and it minimized both inflation and economic disruption while allowing lending to flourish." - From Chapter 4

Needless to say, US history is littered with banking panics, runs, and depressions, usually due to the unregulated nature of this "free" banking and to monetary gold backing. It is hard to express just how absurd and damaging it would be to return to such a world. The Federal Reserve was conjured up after a long history of the establishment of the first national bank, then its destruction by Andrew Jackson, a century of economic instability with particularly damaging panics in 1893 and 1907. By 1913, the US finally had had enough, and set up an updated national bank in the form of the Federal Reserve, to regulate and backstop the banking system. 

Illustration from 1873, portraying "Panic" on Wall Street.

Unfortunately, until the advent of Keynesian economics, it didn't really know what it was doing, and was particularly ineffective during the Great Depression, making things worse instead of better. Even now, it amounts to a cabal of bankers who are more interested in jacking up interest rates than in national prosperity. MMT economists tend to think that interest rates should be kept low, and the functions of the Federal Reserve folded into the Treasury Department, with greater political oversight. The use of interest rates- which are such a blunt tool of economic policy- could then be de-emphasized, in favor of more dynamic fiscal policy to manage inflation and monetary conditions. It is worth noting that over the last eighty years, the Fed has routinely over-shot its mark in raising interest rates, ending up with recessions, and rapid, belated retreats to lower rates. It is only with the current cycle that it has achieved, at least so far, the dream of a soft landing, taming inflation while avoiding recession.

Recessions (gray) have regularly followed interest raising campaigns by the Fed, and not always intentionally.

But note that the word "depression" is no longer in our lexicon. For all its faults, the Fed has kept the economy on a much more even keel than was possible under the wild-west free banking era, when monetary conditions were hostage to whatever Yosemite Sam dug up in the Yukon, or how wildly bankers over-extended their issuance of notes. Banks built impressive buildings to foster the illusion of stability in an environment where stability was impossible, lacking the infinite backstop that the Federal Reserve can now bring to bear during a crisis. Both individual depositors and the population as a whole benefit. It is a classic example of the people of the US coming together to create an institution that makes our lives better, so that we can worry about other things than the next banking panic. 

This economic craziness is just one small example of the fevered imaginations of the right wing in current US politics, which seems to have crawled out from the former fringes of Lyndon Larouche and the Birchers to take over an entire half of our political system. And this is fundamentally thanks to the air given them by an appalling right wing media that cares nothing for truth or civility, rather making its money from button pushing, whining grievance, and reflexive anti-state propaganda. And people complain about social media! Just how long ostensibly reasonable and decent (even Christian(!)) people will wallow in this environment is anyone's guess, but our common, rational, and beneficial institutions will in the mean time be in constant danger.

• Luddites of today.
• We need to win this war.
• Profile in courage.

Correction- The Republican convention did actually come up with a platform.