Who needs the Fed?

In a recent Washington Times piece Richard Rahn makes a convincing argument for the disbandment of the Federal Reserve. Initially this sounds outlandish because of its “great results.” But upon further review your opinion may change. The Fed’s responsibility is setting the Fed funds rate in order to maintain value of the currency. But from 1985-2005 the dollar lost one-third of its value. This shows that the Federal Reserve has been unable to maintain continuity. Before the establishment of the Federal Reserve in 1913 there was less inflation this meant a more stable value for the dollar.

If you look at the incentives the Federal Reserve has motivation to encourage inflation. First, since it issues a number of bonds, it needs to pay back less in the real value of money. The government also has a graduated tax system. A way to collect more money is by moving people into higher tax brackets without increasing their real wages. So with inflation the government wins, and you lose.

Dr. Rahn states, “Given the new technologies, it is now possible for economists to construct baskets of commodities and even services that could back money that would likely be far superior to the monopoly money government imposes on us.

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