Is the Federal Reserve a Philosopher King?

FedA lively and informed discussion was held at the American Enterprise Institute on March 20, 2014 on the question: Is the Federal Reserve a philosopher king or servant of the treasury? Alex Pollock, a frequent contributor to Law and Liberty and participant in the AEI discussion, offers here in condensed form the arguments and the instructive history presented.

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Alexander Hamilton’s Legacy in Banking and Finance

We come now to the final and perhaps most important part of McCraw’s Founders and Finance: the practical effects of Hamilton’s political economy. Here is where Hamilton’s ultimate legacy is often said to be. The precedent of the idea of a national bank or ultimate regulatory authority over money became, at this point in time, inextricably part of American politics. This is not to say that the idea of national banking was inextricable institutionally. Andrew Jackson ended the second Bank of the United States, and the idea of the Independent Treasury held sway until the National Bank Acts of the Civil War. But Hamilton had established the first political precedent of national involvement in money and finance. That history and its supposed success would be continually asserted to pave the way, at least in part, for the Federal Reserve System in the early twentieth century.

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Milton Friedman’s Work: Free Men and Free Markets

A Practice to Justify a Theory of Freedom: Friedman’s Engagement with a Collectivist World

Milton Friedman’s Capitalism and Freedom is a modern classic. Along with F.A. Hayek’s The Road to Serfdom, Friedman’s 1962 book introduced many readers to classical liberal or libertarian ideas. Friedman stated his philosophy of freedom, and filled in the details with many examples and applications. He not only taught the reader the meaning of freedom, but how to apply the freedom philosophy to real-world issues.

For its time, it was a radical book. At the end of the second chapter, he identified 14 activities that could not be justified by classical liberal principles. These included all manner of price, wage and rent controls. But they also included social security, occupational licensure and national parks. It is a gutsy modern-day libertarian who would take on the national parks.

Included on the list of 14 indefensible activities was also peacetime conscription. In 1962, compulsory military service had reflexive and unthinking support. Friedman’s personal campaign against the practice helped lead to its abolition. Martin Anderson helped persuade Richard Nixon on the issue. For those who think the work of academics has no practical impact, Friedman’s work on conscription stands in refutation.

It is no exaggeration to say that two-and-one-half billion people today are enjoying a degree of freedom and prosperity that might not have happened, at least not when it did, but for the work of Milton Friedman and like-minded free-market economists. I am talking here of the opening up of the Chinese and Indian economies (and others in what used to be called the Third World). In the very first chapter, Friedman makes the case for the importance, indeed the primacy, of economic freedom over political freedom.

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