THE FEDERAL RESERVE AND OUR MANIPULATED DOLLAR, by Martin A. Larson, Old Greenwich, Conn.: Devin-Adair Co., 1975, 289 pp., $4.95.
Imagine that while scanning the shelves of a library or bookstore, your eye is caught by a new book on a subject that has always fascinated you. Intrigued, you turn eagerly to the introduction—and find the author claiming that the book's subject is one that "the finite mind simply cannot comprehend."
Of course, this tends to provoke a number of reactions. My first was to thumb through the rest of the book, expecting to find only blank pages. After all, I reasoned, if the author could be taken at his word, then he would surely have packed away his pen and excused himself as soon as he finished that phrase. Surprisingly, this was not the case. The text continued for more than 250 pages.
Now my curiosity was really piqued. Could it be? Visions of Moses's tablets raced through my mind. Eagerly I eyed the front cover: Martin A. Larson, author. A pseudonym, perhaps? Unlikely.
With heavy heart, I concluded that Dr. Larson was merely indulging in a bit of hyperbole. It must be quite flattering to see oneself as having written a treatise on a subject of inexpressible complexity.
The book—The Federal Reserve and Our Manipulated Dollar—is in two parts. The first allegedly chronicles the historical background, inception, growth, and present influence of the Federal Reserve System and of monetary policy on the American economy. The second, of equal length, presents summaries of some previously published arguments by several economists and social pundits on the desirability (or lack thereof) of a gold standard. Because the first section is unquestionably the heart of the book, I will direct my comments exclusively to it.
Let me first summarize Larson's basic position, borrowing the same tone of voice that permeates the book. The Federal Reserve System, he informs us, was and remains a creature of the international financiers, a clandestine group of evil, treasonous, and parasitical manipulators whose stranglehold on the American economy has been used to bilk the common people of billions of dollars.
All the classic elements of an undiluted and simplistic conspiracy theory of history (or a pulp novel) are here: the bloated capitalists (mainly European central bankers and Wall Street investment bankers); U.S. presidents who are unthinking pawns in the money-crazed machinations of the financiers; the infamous but unidentified Bilderbergers, who "meet annually in profound secrecy to determine the destiny of the western world;" and so on, ad infinitum.
I do not present this cast of characters in jest, but rather to illustrate that the author's claim to have written a "complete, critical but objective" history of the Federal Reserve System is ludicrous. (If conspiracy theory-histories of the Fed are your cup of tea, however, Mullins on the Federal Reserve gives a most entertaining account of the nefarious deeds of the Fed's founders. The library at your Federal Reserve District Bank will undoubtedly have a copy.)
But Larson's book is more than a "history." It also attempts to explain how the Fed and the commercial banking system operate. Unfortunately, the author's treatment of monetary policy and bank operations demonstrates little more than gross ignorance of the subject.
For example, one of the key elements of commercial banking is portfolio management: the way in which banks adjust their assets and liabilities to improve their returns, reduce risk, etc. Banks' most important assets are loans and government securities, holdings of which are influenced by these assets' yields, loan demands by businesses and households, available reserves, etc.
Several times in the book Larson claims that member banks (i.e., commercial banks that are members of the Federal Reserve System) "obtain government securities for nothing." Because these securities pay interest, the banks have thus found a fool-proof method of earning enormous profits. As Larson notes, with typical understatement, "No wonder, then, that banks can construct vast towers that pierce the very sky."
Consider this oft-repeated claim for a moment. Even if you know absolutely nothing about banking, does it make sense? To "buy" anything for no cost implies that the "seller" is giving that thing away for nothing. Since the government initially sells securities—that is, borrows money—to finance deficits, what would be the value of selling securities to banks if the government received nothing in return for them? Would private sector nonbank owners of government securities trade these securities to banks in return for nothing? The answer is obvious.
But Larson is really claiming that, through some sort of bookkeeping manipulations, member banks somehow magically create the money to buy government securities whenever the need arises. This would presumably permit member banks to pay for the securities without really paying for them.
Yet this also is nonsense. If it were not, banks would presumably do nothing but "buy" millions of dollars of securities every day, for nothing, then sell them to nonbank buyers at their market price, repurchase them for nothing, sell them, etc. Potential bank profits would be limited only by the number of hours in the day, and ultimately almost everyone would switch into the banking business in order to clean up at everyone else's expense. The prospect is amusing, perhaps even a great plot for a humorous science fiction short story. But for it to be offered as an example of actual bank operations since the inception of the Federal Reserve System is not so amusing.
The book makes several other claims that are nearly as ill-conceived. We are informed, for example, that the Federal Reserve System "sets interest rates for the entire economy," has virtually complete control over these rates, etc. Of course, there is probably no economist who does not recognize that the Fed can influence interest rates through monetary policy and certain of its regulatory powers. But the claim that the Fed has next to complete control over interest rates is at best an enormously misleading oversimplification. It ignores almost all of the basic elements of interest rate determination: the supply and demand for funds by corporations, households, private financial institutions, all levels of government, and foreign investors; the duration of the loans; their riskiness; the international character of the financial markets; and so on.
In short, the book's economic analyses are almost bad enough to make the historical sections look scholarly by comparison.
Finally, the book contains a number of little tidbits, presented without supporting evidence, that will be invaluable for a game of trivia at the next dinner party you attend. (Don't expect to be invited back.) Did you know that "it was widely rumored that" FDR blew his head off with a shotgun in Warm Springs and that it was "a fitting end for a tyrant gone mad with egomania"? Or that the only reason LBJ won by a landslide in 1964 was that he was a crook who stole the election? Or that the Fed must be awful because Paul Warburg helped to establish it, and "it has been stated on good authority" (never specified, of course) that Paul's brother helped Lenin cross Germany to Russia "in a sealed train in 1918"? (This is particularly noteworthy in that Lenin is known to have taken his famous train ride in 1917.)
Suffice it to say that if someone were to read this book on the assumption that its scholarship and objectivity were representative of all gold-standard advocates, he would inevitably conclude that the pro-gold position (of which Larson fancies himself a spokesman) is pure hogwash.
Perhaps the publisher, Devin-Adair, is secretly controlled by those bloated international financiers?
David H. Rogers is an economist with B.F. Goodrich in Akron, Ohio.
This article originally appeared in print under the headline "The Federal Reserve and Our Manipulated Dollar".
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