Meaningless as melting clocks

By Eileen M. Debold
July 14, 2003



Kudos to Gerard Baker for painting a picture of Federal Reserve machinations that, like Salvador Dali's art, completely discredit the world of reality ("Greenspan enters his surrealist period", July 10).

Dali's surreal world, where hard objects become inexplicably limp, describes not only the Greenspan Fed, but also the Volcker Fed and the Arthur Burns Fed. These chairmen have all engaged in what Dali would call "the usual paralyzing tricks of eye-fooling" since the day the US jettisoned the gold standard.

Central bankers, says Mr. Baker, insist that deflation is a theoretical impossibility in a world of fiat money because if the economy needs inflation "the central bank can just turn on the taps and produce some".  Not true.  Like Dali's melting clocks, that idea has lost all meaning, as it is a throwback to a gold-standard era.  That world was vaporized in 1971.

Today, loans create deposits, and the Fed's role is to provide the reserves demanded by the banking system.  In a fiat money world, a central bank simply administers an overnight rate of interest by substituting one form of money for another (bank reserves for government debt or vice versa.) Inflation, deflation and the value of the currency are a function of fiscal, not monetary policy. 

This has been the case for more than 30 years, yet central bankers remain in a time warp, still insisting that they have some control over money and the economy.  Mr. Baker might have questioned whether taxpayers' money ought to be spent on unelected central bankers whose ideas are as soft as overripe cheese.

Eileen M. Debold
Piscataway, NJ  08854


posted July 14, 2003