How Central Banks Destroy Wealth

Reflecting on George F. Smith's recent article, "The Worst Market Intervention of All Time," I am compelled to delve deeper into the profound consequences of central banking on our economy and society.

Smith begins by illustrating the devastating hyperinflation in post-World War I Germany. He references Ludwig von Mises's observation that a Berlin resident who would have celebrated inheriting 1,000 marks in 1914 found 1,000,000,000 marks insignificant by 1923. This stark example underscores how the abandonment of the gold standard in favor of fiat currency can lead to catastrophic devaluation.

In the United States, the establishment of the Federal Reserve in 1913 marked a pivotal shift in monetary policy. As Smith notes, the Fed facilitated funding for World War I, contributing to the massive loss of life and setting the stage for future economic turmoil. The Fed's role in the 1920s economic bubble, the subsequent Crash, and the Great Depression cannot be overlooked. The transition to a fiat currency under FDR's administration initiated an era of persistent inflation.

One of Smith's most compelling arguments is the Fed's ability to conduct "invisible thievery." Unlike the overt nature of income tax, the Fed's manipulation of the money supply erodes purchasing power subtly over time. Smith points out that the dollar has declined to about three percent of its 1914 value, meaning what one could buy for three cents back then requires a full dollar today.

Smith also highlights the Fed's deceptive stance on inflation. By redefining inflation to mean rising prices rather than an increase in the money supply, the Fed deflects responsibility onto external factors. This misdirection obscures the true source of diminishing purchasing power.

Reflecting on the period from 1870 to 1900, Smith notes that the dollar experienced a cumulative price change of -35.88%, meaning a dollar could buy more in 1900 than in 1870. This deflationary period coincided with significant industrial growth, suggesting that a stable or appreciating currency can coexist with economic expansion.