One of my primary opponents has appropriately highlighted a key philosophical difference between the two of us in this campaign: the role and appropriateness of our nation's third central bank, the Federal Reserve.

I have consistently written and spoken about the Federal Reserve's monopoly over our system of money and credit, and the corporatism and assaults on individual economic freedom that result. Our welfare and bailout nation would be impossible to fund without the Federal Reserve, and its ability to "monetize" (literally create new money out of nothing) and purchase unsustainable government debt that threatens our children's future.

For Americans who believe in the virtues of a constitutional federal government that lives within its means, the Federal Reserve should be appreciated as the most powerful enabler of unchecked government growth.

For Americans who decry our government's takeover by monied special interests, the Federal Reserve should be appreciated as  the most powerful special interest in determining who gets access to money and credit, and at what cost.

For Americans who object to trillion-dollar Wall Street bailouts, the Federal Reserve should be appreciated as the enabler of corporate welfare that rewards failure, and showers benefits on those deemed "too big to fail" at the expense of the evaporating middle class whose jobs and savings are destroyed by inflation and economic volatility.

Given these transpartisan objections, it is clear that the Federal Reserve has an image problem, and needs all the help it can get.

My opponent posted his defense of the Fed on his Web site, which aligns remarkably well with the Federal Reserve's own Kids Page.

There is an active discussion in the comments following this blog post, and I wanted to take a moment to reproduce one response that best articulates the truth about the Federal Reserve, in contrast to the misinformation and economic pseudoscience spread by the mainstream media. The following is a guest post authored by Kristina Love:

Banking originated as a way for people to store their money (gold) conveniently and also earn interest by allowing the bank to lend the gold to borrowers, who paid back the loans with interest to the bank, which the bank then shared with depositors. “Fractional Reserve banking” began when banks realized they could maximize their own profits by lending out a large amount of “vouchers” (paper money) that was disproportionate to the amount of actual money (gold reserves) that savers had deposited with them. This created brand-new “money” which was usable for the exchange of goods and services, yet was not earned as real money is - through labor and value.

The increase in the money supply makes each unit of money worth just a little less, essentially stealing the value from the money of those who worked and produced things of value in order to earn it. At first, there is no visible effect - but over time, as the valueless money circulates, market signals catch up to the new size of the money supply, and prices rise in response, indicating a devaluation of the currency. By this process, called inflation, everyone becomes poorer except for those few at the top, who benefit. Fractional reserve banking, then, is dishonest in the same way that counterfeiting is, because it is actually the same process.

When it first emerged, this was universally recognized as being criminal. When too many depositors tried to withdraw their funds at once, and the bank could not redeem (honor) the paper for gold, it became obvious that the bank had stolen the money.

The Federal Reserve System and the FDIC were instituted, so the story goes, to insure that if banks were caught without enough reserves when too many depositors made withdrawals at once, the bank would be provided with a cash infusion so that people could still get their money out. This was hailed as a great thing, because the people didn’t want to lose their life savings.

However, this solution circumvented any correction of banks for dishonestly creating money out of thin air (that had not been earned or fairly exchanged) by lending previously non-existent dollars to borrowers. The value of the money was still being stolen…but now there was no drastic, dramatic revealing moment when the whole scheme was exposed, as used to occur whenever there was a “run” on a bank. Instead, the practice was institutionalized. The negative effects of fractional reserve banking were relatively slow and gradual, with no immediate and obvious signs to point back to the banks that perpetrated the inflation/economic downturn.

When the negative consequences did become severe, the cause-and-effect relationship had been obscured enough that the central bank was not fingered as the culprit. By instituting a central bank, the powerful bankers, corporate interests, and corrupt elements of government had found a way to continue creating unearned money, out of thin air, and spending it. (In saying this, I have no desire to malign the rich for being rich or to perpetuate “class envy” or “class warfare.” Disparity of wealth is indeed healthy and part and parcel of a capitalist economy. It is when the wealth is ill-gotten gains - obtained through theft, however clever and subtle - that I object, as should everyone.)

Now, of course, our currency is not connected to gold or any stable commodity, it is just paper cash and digits inside of computers. What I am describing to you is the process by which this came about - in order to inflate money indefinitely, paper money had to represent less and less and less real gold, until finally, the only way to continue government spending and expansion was to do away with the gold standard altogether.

When the Federal Reserve “bails out” a bank (or other institution), it doesn’t provide it with already circulating money that has been earned and saved by hard-working people. It instead mimics the “fractional reserve” policy of smaller banks, except in this case the “fraction” is zero percent. In essence, it “lends” money that never existed before and was not earned. It even “sells” these debts as though they were assets, sometimes in the form of U.S. Treasuries or “commercial paper.” That is what is meant when it is said that the Fed “creates debt-based money.” (So I hope you will not mind if I assert that your statement that “The Fed does not create debt-based money” is rather ill-considered, being that it is flat wrong.)

While the Federal Reserve doesn’t go around explaining this process and informing the American public about it, it admits it freely and is not ashamed of it. In this sense, it is no “conspiracy theory” at all. By lasting for so long and becoming inextricably enmeshed with government power, the Fed has attained a sort of “legitimacy” by the tacit consent of a poorly informed and apathetic majority, along with the most strenuous support of virtually all of our most powerful government officials, who would find themselves unable to increase the size and scope of government without the seemingly unending supply of newly-generated dollars provided by the Federal Reserve System and the practice of fractional reserve banking in general. The electorate would reject the insane level of government overspending we see today if they had to pay for it via an openly levied tax. Instead, through inflation, a hidden, very subtle and insidious tax is imposed on the people.

Though Americans’ standard of living has arguably increased immeasurably over the past century, this is in spite of, rather than due to, the intervention of the Federal Reserve. In fact, the actual buying power of the dollar has diminished by 97% since the Fed’s inception in 1913. Innovation, entrepreneurship, advances in technology, and the remaining (though dwindling) freedom of our enterprising capitalist economy is what has allowed our standard of living to keep pace in spite of our devalued currency, along with the “good faith” of other nations from whom we borrow extensively. It also shouldn’t be overlooked that much of our wealth standard of living is illusory - based on inaccurate, distorted market signals and tons of easy credit.

The Federal Reserve, in combination with terrible government economic policy (each of which could not exist without the other), has actually caused not only the current economic downturn, but all of the other depressions and recessions in our recent history, including the Great Depression. It is the “boom” period of expanding credit and unsustainable growth, that actually causes the “bust.” It is Fed-controlled interest rates set artificially low that causes moral hazard and malinvestment, disrupting natural market signals and misleading people into taking risks that are actually unmanageable, resulting in “bubbles” that burst. When the effects of these policies become economically painful, that pain is erroneously used as a rationale to expand the very policies which caused the problem in the first place.

The Fed does do whatever it can to postpone the natural consequences of artificial economic expansion. The problem is that over the long-term, this is absolutely impossible — and the longer the contraction is put off, the more devastating and longer-lasting its effects when it finally hits.

If you are interested in learning more, I encourage you to look up the Austrian school of economic thought and its theory of the business cycle. Ludwig von Mises, F.A. Hayek, Murray Rothbard, and Henry Hazlitt are just a few of the most eminent thinkers on the subject.

One more comment. You said: “When it comes to interest rates and money supply, we don’t want elected officials, susceptible to persuasion by powerful forces and focused on re-election, to control such important factors for an economy.” When you say this, you are creating a logical fallacy by presupposing that there are only two (false) choices available: either the Fed controls the economy, or Congress controls the economy. However, it’s the centralized control of the economy that is the problem, not who is at the helm. The dangerous concentration of power, the susceptibility to “persuasion by powerful forces,” corporatism and corrupt collusion to which you are alluding is an accurate description of the very system we have right now.

Kristina's assessment of the Federal Reserve's role in our economic turbulence is correct, and well supported by history and human behavior.

So if the Federal Reserve is a problem, what is the solution?

In short, economic freedom. Federal Reserve Notes are one option for a debt-backed currency useful in commerce and payment of taxes, but they should not be the only option. 

Monopoly is a distinctly un-American concept, and antithetical to maintaining a free and open market.

We should embrace monetary freedom, and start by removing capital gains and sales taxes on gold and silver. By giving Federal Reserve Notes some healthy competition from other assets, we will free up additional capital to drive our local economies, without being entirely dependent on new debt required to create additional Federal Reserve Notes.

Keep in mind that our nation's recent experiment with legal tender laws and debt-backed money does not have a long or successful track record. Historically, there have been many other options. In North Carolina, for example, we once used tobacco leaves as money. The key concepts we must embrace are choice and competition, not an artificial monopoly for the benefit of a few.

Finally, it is also important to note the long history of politicians defending our central bank. For example, Daniel Webster was well-known as a paid defender of our second central bank:

The Bank's most vocal supporter in Congress was Daniel Webster. Even though Webster had staunchly opposed the bank's original charter, he discovered the merits of the Bank when he found himself on its payroll. At the peak of the renewal controversy, in which Webster was playing a leading role, he wrote to Biddle,

I believe my retainer has not been renewed or refreshed as usual. If it be wished that my relation to the Bank should be continued, it may be well to send me the usual retainers.

When assessing the motivations of those who seek power, always follow the money.