David R. Henderson  

Steve Horwitz on the Conspiracy Behind the Federal Reserve

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Like other legislation of that era, the Fed was a government intervention supported both by ideologically-motivated and well-meaning reformers and by the industry being regulated. Rather than being this as some sort of unique conspiracy to take control of the US monetary system, it was a story very similar to those found in the history of everything from railroad regulation, to meatpacking regulation, to the regulation of monopolies and trusts as historians from Gabriel Kolko onward have documented. Unique historical factors in the monetary system affected the particular form the Fed took, but its broad history places it squarely in the tradition of the Progressive Era. If the Fed is the product of some nefarious conspiracy, so is a whole bunch of other legislation passed around that time.
This is from Steven Horwitz, "The Real History of the Fed: Why It Didn't Take a Miracle (Or a Conspiracy!) to Pass."

I had to read the piece, and especially this paragraph, a few times. Start with the title: "The Real History of the Fed: Why It Didn't Take a Miracle (Or a Conspiracy!) to Pass." I don't want to pick on the title too much because I know, from having written a few hundred articles for other publications, that one rarely gets to pick one's own title.

But on the assumption that Steve picked it, let me proceed. How is it a "real history" to leave out an important part of the history: namely, the highly secretive meeting, in November 1910 on Jekyll Island, of a handful of politicians and financiers who schemed to come up with reforms that would, only a few years later, become the basis for the Federal Reserve. That sounds like a conspiracy to me.

Here's what author Gregory DL Morris writes:

The Jekyll Island collaborators knew that public reports of their meeting would scupper their plans. The idea of senior officials from the Treasury, Congress, major banks and brokerages (along with one foreign national) slipping off to design a new world order has struck generations of Americans as distasteful at best and undemocratic at worst--and would have been similarly received at the time. So the meeting of the minds was planned under the ruse of a gentlemen's duck-hunting expedition.

Moreover, how does Steve know that it didn't take a conspiracy to create the Federal Reserve? Maybe it didn't, but maybe it did. Steve points correctly to a number of factors that helped set the stage for the Fed's birth. But were they, in themselves, enough? He doesn't establish that.

Finally, notice the last sentence of the paragraph quote above:

If the Fed is the product of some nefarious conspiracy, so is a whole bunch of other legislation passed around that time.

This caught Robert P. Murphy's attention too. Steve seems to say this as a slam-dunk, the idea being that well, of course, we know that that "whole bunch of other legislation" was (were?) not the products of conspiracies. But do we know that? I don't.

For more of my thoughts on conspiracies, see here.

For evidence that an historical piece of legislation was, in part, the result of a conspiracy, see Alex Tabarrok, "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers," Quarterly Review of Austrian Economics, Vol. 1, No. 1, 1998.


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COMMENTS (13 to date)
Daniel Kuehn writes:

I think "conspiracy theory" has a meaning beyond it's literal meaning (which is more what you are remarking on here).

The Constitution was a conspiracy too, following your point. Closed doors, small group of people overturning the existing government, very secretive in the deliberations.

But the Constitution was most likely not the product of Continental rationalist/atheist Illuminati as the first stage of a plan to bring on one world government and the New World Order.

The latter we typically deem "conspiracy theories", although it's quite true that "conspiracy" and "theory" both have less salacious uses as well.

Steve Horwitz writes:

Unfortunately, I swamped at the moment, but let me just say that I did not pick the title. And if I were to rewrite this, I would have emphasized the point that he Fed is not unique. I also would have gone to greater pains to clarify that "conspiracy theories" normally suggest that the conspirators have an almost total control over the consequences of their actions, i.e., that the Fed was the ideal way to deliver power into their hands and for them to "control" the relevant economic outcomes. I don't believe that for a second.

What public choice shows us is that political institutions are often the unintended outcomes of political exchange, and that the economic outcomes those institutions produce are the unintended consequences of their interaction with self-interested market actors. This, I think, describes the Fed and its consequences far better than believing that a group of people set it up intentionally to benefit themselves and give themselves near total-control of money and the macroeconomy.

Yes, the meetings were secretive. Yes, a small group of people designed the institution. But that's true of almost every piece of legislation. If everything is a conspiracy theory, nothing is.

Sancho Panza writes:

@Daniel Kuehn So, what is the point of your comment? That men created both the Constitution and the Fed. Res. Act? Or that, due to that fact, they are both wonderful documents above reproach?
or that they are just documents?
or that they were the result of conspiracies and theories (of governance and banking), but that they were not the result of conspiracy theories?

Honestly, I'm gathering by the tone of your comment that you feel that those who believe that the Federal Reserve is a bad social institution which benefits (the descendents of) those who created it, their favorites, and the government at the expense of the net-inflation-tax payers are wrong/crazy/not-serious...

But you offer nothing. What is your point?

@Steve Horwitz "Yes, the meetings were secretive. Yes, a small group of people designed the institution. But that's true of almost every piece of legislation. If everything is a conspiracy theory, nothing is."
Is the Fed bad for society? Yes.
Does it siphon wealth and create instability as a side-effect? Yes.
Was it planned in secret because it would benefit the planners at the expense of the general public? Yes.
Did the bankers who helped plan it PUBLICLY ARGUE AGAINST IT, CLAIMING THAT IT WOULD HURT THEM, WHILE PRIVATELY KNOWING IT WOULD BENEFIT THEM, BECAUSE THEY AGREED THAT IF THEY ADVOCATED FOR IT THE PUBLIC WOULD BE SUSPICIOUS? YES.

I mean, what IS your definition of a conspiracy. I think if you spelled it out it would save the rest of us a lot of time.
If you believe that the definition of conspiracy is a red fruit, sometimes classified as a vegetable for tax purposes, and often put onto sandwiches... I'm sorry, but that is a tomato, and that is why you can't seem to find one in the creation of the Fed.

David R. Henderson writes:

Question for Daniel Kuehn and Steve Horwitz:
Does either of you think that the terrorist attacks on 9/11 were the result of a conspiracy among the 19 terrorists and various other actors?
I’m not trying to trap you. I’m simply trying to get clear what each of you thinks a conspiracy is.

Daniel Kuehn writes:

Sorry Sancho Panzo - I didn't realize I was being unclear. My only point is that the term "conspiracy theory" implies more than the presence of a conspiracy.

A conspiracy orchestrated the killing of Lincoln. That explanation of Lincoln's death, though, is not considered a "conspiracy theory". It's just history - it's what happened.

It is alleged by some that a conspiracy orchestrated the killing of Kennedy. That IS a conspiracy theory because it is an elaborate fringe viewpoint without hard evidence or general agreement.

David seems to be focusing on a more literal question of whether there was a conspiracy theory, which I don't think is what Steve was getting at in mentioning "cranks" and "conspiracy theorists".

Daniel Kuehn writes:

David -
I tend to think of conspiracies as "threats among us" and related to organized efforts to break the law. So I would tend to think the 19 terrorists were just enemies and they had a plan to attack us that they didn't tell us about. But I wouldn't make too much of that distinction - I think the word is probably elastic enough for me to agree with you.

But it is not a "conspiracy theory" to say they planned to attack us.

It is a conspiracy theory to say that our own government did it.

David R. Henderson writes:

@Daniel Kuehn,
Again, not to trap you, but just to get clarity: it sounds, from your responses to Sancho Panza and me, as if your definition of “conspiracy theory” is one that immediately excludes the truth of the claim. So, in your mind, if one holds a “conspiracy theory”about something, the theory is wrong. If there was in fact a conspiracy, then the view that there was is not a “conspiracy theory.” Am I reading you right?

Daniel Kuehn writes:

David -

I don't think that. Some conspiracy theories may be right. Actually, I think of all the conspiracy theories out there the idea that someone in the government killed Kennedy could very well have happened. I'm not going to come out and say I think that did happen because I just don't know - but it's possible.

Roswell I think has a small outside chance of being a government cover-up of something spectacular too. I think there is a small outside chance we were visited by aliens in ancient times - not because I think we needed them to build big monuments or something but because it would explain a lot of myths and if the universe has life in it it's plausible they would explore and make contact.

These are low possibilities to be sure, but those three are ones that I think could potentially be true. Oh, and maybe there's a big primate in the mountains that we haven't officially discovered yet (i.e. Bigfoot). Who knows. It's not outside the realm of possibility. Small secluded populations in remote areas could very well go undocumented. Probably not, but what warrant do I have to dismiss it outright?

I feel a little silly admitting that I honestly think these four are plausible (though not probable), so take it as I intend it - good faith evidence that I am not saying that they have to be wrong.

Other conspiracy theories are... less plausible. Faked moon-landing, 9-11 truthers, chemtrails, Illuminati new world order stuff, and some of the goofier more elaborate alien stuff. I don't give this stuff the time of day. Not even because I think it's incomprehensible in all of these cases (it's not like faking a moon landing or a government organizing a false flag is an off the wall idea in the abstract), I just don't see how there's any chance of it having happened.

"Conspiracy theory" is a much more amorphous term than "conspiracy", in part I think because it's descriptive of a cultural phenomenon (or perhaps I should say "sub-cultural phenomenon") whereas "conspiracy" alone is a pretty straightforward noun.

Daniel Kuehn writes:

Area 51 is a great example of something that was long dismissed as a conspiracy theory but is 100% real.

Actually some people that aren't well informed STILL think it's a conspiracy theory.

Daniel Kuehn writes:

And my point is that now it's not quite right to say that Area 51 is a "conspiracy theory". Is it a conspiracy? Sure. Secretive men behind closed doors ran a secret base with secret projects. It was a conspiracy.

But we have declassified documents, pictures, testimony, etc. now that is acknowledged by all involved - so it is no longer a "conspiracy theory". It's been mainstreamed.

RPLong writes:

So has anyone been able to figure out what the objection to Prof. Henderson's point is?

Either we take the phrase "conspiracy theory" literally, in which case the advent of the Fed was a conspiracy, and a truthful account of it is a conspiracy theory in a literal and objective sense...

Or, we take the phrase "conspiracy theory" to mean "crazy, paranoid hypothesis," in which case we're not making a claim about truth or falsehood, we're just doing what Tyler Cowen calls mood affiliation.

That's the point, right?

Daniel Kuehn writes:

I think you've got it just fine RPLong. Steve and David are talking about different things.

"Crazy, paranoid" is a little too dismissive of these people I think if we're applying it to all of them. I think there are three things that make for a conspiracy theory generally:

1. Tough to verify evidence.
2. Not the mainstream explanation of a phenomenon, and
3. An alternative community where the ideas circulate.

This is why I used the word "culture" above. It's more of a culture than a mood. There are very down to Earth people believe very out-there things. And then of course there are people that are more untethered. Mood does not necessarily unite them. That's just my take.

Sancho Panza writes:

@daniel kuehn
So, do you believe the Fed exists?

Let me get ready to revoke your "serious" card.

@steve horwitz
"What public choice shows us is that political institutions are often the unintended outcomes of political exchange, and that the economic outcomes those institutions produce are the unintended consequences of their interaction with self-interested market actors. This, I think, describes the Fed and its consequences far better than believing that a group of people set it up intentionally to benefit themselves and give themselves near total-control of money and the macroeconomy."

This is almost laughable. What Public Choice shows us is that political actors are individual rational decision-makers who have self-interest just like other humans. So yes, Public Choice very clearly explains why a group might meet in secret to plan a way to use government to enrich themselves and their favorites.

Your "serious" card is in good standing.

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