d o w n ! In August, the Fed reversed its expansionist policy by selling Treasury bonds in the open market and raising
interest rates. The money supply began to contract.
It was the fined bubble.
SIXTH REASON TO ABOLISH THE FED
One of the myths about the Federal Reserve is that it is needed to stabilize the economy. Yet, it has achieved just the opposite.
Destabilization is dramatically clear in the years prior to the Crash, but the same cause-and-effect continues to this day. As long as men are given the power to tinker with the money supply, they will strive to circumvent the natural laws of supply and demand. No matter how high their intentions or pure their motives, they will cause disruptions in the natural flow. When these disruptions are perceived, they will try to compensate by causing opposite disruptions. But, long before they act, there will already be new forces at work which they cannot, in all their wisdom, perceive until they are already manifest. It is the height of egotistical folly for 'experts' to think they can outsmart or do better than the combined, interactive decisions of hundreds of millions of people all acting in response to their own best judgment. Thus, the Fed is doomed to failure by its nature and its mission. That is the sixth reason it should be abolished: It destabilizes the economy.
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T U L I P O M A NT A
Easy credit was not the only problem in this period. Equally important was the effect that had on the behavior patterns of the populace. Responding to herd instinct and a belief in the possibility of something-for-nothing, men were driven to the most bizarre form of investment speculation.
This was not the first time such hysteria had seized a population. One of the most graphic examples occurred in Holland between the years 1634 and 1636. It came to pass that a new, rare flower, called the tulip, was discovered in the gardens of some of the more wealthy inhabitants of Constantinople, now known as Istanbul. When the root bulbs of these exotic blossoms were brought into Holland, they rapidly became a status symbol among the wealthy—much as race horses or rare breeds of dogs are today in our own society—and those with surplus funds found that an investment in tulips brought them significant social recognition.
The price of tulip bulbs climbed steadily until they became, not merely symbols of status, but speculative investments as well. At one point, prices doubled every few days, and speculators were seen everywhere amassing great fortunes with no input of either labor or service. Many otherwise prudent people found themselves infected by the hysteria. They borrowed against their homes and invested their life savings to get in on the anticipated windfall. This pushed up prices even further and tended to create the fulfillment of its own prophecy. Contracts for the future delivery of tulip bulbs—a form of today's commodity market—became a dominant feature of Holland's stock market.
Tulip bulbs eventually became more precious than gemstones.
As new varieties were developed, the market became more complex, requiring experts to certify their origin and their grade. Prices soared, and the herd went insane. One bulb of the species called Admiral Liefken was valued at 4,400 florins; a Semper Augustus, worth 5,500 florins, was purchased for a new carriage, two gray horses, and a complete set of harnesses. It was recorded that, at one sale, a single Viceroy brought two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four casks of butter, one-thousand pounds of cheese, a bed and mattress, a suit of clothes, and a silver drinking cup.
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THE CREATURE FROM JEKYLL ISLAND
Then, one day without warning, reality returned from her
two-year vacation. By that time, everyone knew deep in their hearts that the spiralling prices bore no honest relationship to the value of the tulips and that, sooner or later, someone was going to get hurt.
But they continued to speculate for fear of being too quick in their timing and losing out on profits yet to come. Everyone was confident they would sell out precisely at the top of the market. In any herd, however, there are always a few who will take the lead and, by 1636, all it took was one or two prominent merchants to sell out their stock. Overnight, there were no buyers whatsoever, at any price. The tulip market vanished, and speculators by the thousands saw their dreams of easy wealth—and, in many cases, their life savings also—disappear with it. Tulipomania, as it was called at the time, had come to an end.1
Or did it? As we have seen, the Federal Reserve can create large amounts of money simply by going into the open market and buying debt contracts. But, once it is in the mainstream of the economy, commercial banks can multiply that money by up to a factor of nine, and that is where the real inflationary action is. To protect that privilege is one of the reasons the banks formed this cartel in the first place. Nevertheless, the public still has the final say. If no one wants to borrow their money, the game is over.
That possibility is more theoretical than real. Although men may be hesitant to go into debt for legitimate business ventures in times of economic uncertainty, they can be lured by easy credit to take a long shot. Dreams of instant wealth are powerful motivaters.
Gaming casinos, poker parlors, race tracks, lottery windows, and other forms of tulipomania are convincing evidence that the lust for gambling is embedded in genetic code. The public has always been interested in free corn.
TULIPS IN THE STOCK MARKET
During the final phase of America's credit expansion of the 1920s, the rise in prices on the stock market was entirely speculative. Buyers did not care if their stocks were overpriced compared to the dividends they paid. Commonly traded issues were selling for 20 to 50 times their earnings; some traded at 100. Speculators acquired stock merely to hold for a while and then sell at a profit. It 1. See Charles Mackay, LL.D.,
THE GREAT DUCK DINNER
