These days, most people assume that a central bank—in the United States that is the Federal Reserve Bank (Fed)—is something that a country has to have. However, the declining purchasing power of our paper money makes more people realize that there is something very wrong with our monetary system, which is controlled by the Fed. Moreover, before the Fed was created in 1914, the United States prospered without experiencing prolonged recessions and depressions. Turns out that a central bank is not something that a country needs, but it is something that financially irresponsible governments and corrupt businesses desire.
The problems caused by government printed paper money were known long before the Fed was created. In the 1690s, the Massachusetts government provided one of the earliest examples of the painful consequences of government-printed paper money. Building on this and later experiences, in “Dissertations on government, the affairs of the bank, and paper money” (1786), Thomas Paine summarized the whole subject of paper money as “Money is Money and Paper is Paper—All the invention of man cannot make them otherwise.”
In his letter to Jabez Bowen (January 9, 1787), George Washington described the consequences of paper money: “Paper money has had the effect in your State that it ever will have, to ruin commerce—oppress the honest, and open a door to every species of fraud and injustice.” Similarly, Thomas Jefferson in his letter to John Adams (March 21, 1819) explained these consequences as “to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers.”
Jefferson recognized the importance of good education in avoiding these problems. In the same letter to John Adams, Jefferson warned that “the evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause & consequences.” The early private education system of the United States (publishing of books and newspapers, schools, homeschooling) was able to spread this knowledge, and the United States was free from central banks and government paper money for almost 100 years, until 1914.
The events of the second half of the 19th century and later events confirmed Jefferson’s claims about the importance of instruction. The destruction of the private monetary system and the creation of the Fed were preceded by the destruction of American education. During the second half of the 19th century, the United States gradually adopted the Prussian academic system. Our bureaucrats and politicians favored the Prussian system through financing and regulations.
Many Americans are familiar with the deterioration of education in the United States. However, the destruction of education is not the only problem that the Prussian academic system created. In a number of ways, the United States became more similar to Prussia than to a country that respects individual freedom and relies on voluntary interactions between people.
The nationalization of the monetary system (creation of the Fed) was an essential step, and thus one of the first steps, in transferring power from people to government. The Fed allowed government spending at levels that were not possible before. Promising handouts to people helped politicians win elections as long as people did not understand where the money for those handouts were coming from. The Prussian academic system was very successful in ensuring this lack of understanding among most people.
To summarize, we have the Fed because some people like to take advantage of others and because most people are deceived by our Prussian academic system. Unfortunately, economics was among the sciences that were the most distorted by the Prussian system. We imported many economists from Europe where the Prussian academic system was adopted earlier.
Not surprisingly, around the time the Fed was created, it was a common professed belief among these economists that the best economic system was the system fully run by government bureaucrats (socialism). The first full implementation of this system started in 1917 with the creation of the Union of Soviet Socialist Republics (USSR). The economic failures of the USSR and similar experiments provided good evidence of the incompetence and/or maliciousness of these economists.
We should pay attention to what Jefferson said about the importance of instruction in getting rid of paper money and the problems it causes. To solve our financial problems, first, we need to get rid of the Prussian academic system that provides ideological indoctrination instead of education.
At the time the United States was created, many governments used religion to control people. This was forbidden in the United States. However, in a way, religion and science are the same—they provide explanations about how the world works. When governments control people’s understanding, religion and science are transformed into tools for deception, so the most corrupt can take advantage of others. We already have the separation between church and state. We need to add the separation between science and state. This would go a long way in fixing our monetary problems and getting rid of socialist institutions like the Fed.
