In what is surely the lamest attacks on the gold standard, Federal Reserve David Andolfatto tries to justify the central bank by pointing to a problem that is actually encouraged by the Federal Reserve. The video suggests correctly that critics oppose inflation and higher prices, but then does not address that issue at all or admit its guilt. Instead, the case for the Fed is based on the volatility of the demand for money and the resulting bank panics and bank runs that could hurt the overall economy. The Fed addresses this problem by serving as a lender of last resort. The FDIC also provides “confidence.” However, what Andolfatto reveals is that the fractional reserve banking system is at the heart of economic instability. Fractional reserve banking is a form of banking where banks lend out some or all of their customers’ deposits that are legally available on demand, i.e. not time deposits or bonds. If a bank is considered unsafe, or if economic conditions change, depositors might demand their deposits back and this could result in a bank run or system wide bank panic.
The truth is that the Fed has produced neither price stability nor economic stability. The last 40+ years have been both inflationary and subject to wide swings in the business cycle. Fractional reserve banking was encouraged in the early years of the Republic by state governments that permitted the suspension of redemption of demand deposits into gold. It was institutionalized by the Banking Acts of the 1860s and was further institutionalized and cartelized by the Federal Reserve Act of 1913.
HT: FL and EPJ
