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INTRODUCTION

If we were to destroy every piece of paper currency in the world, and every bank account entry, we would not have destroyed one shred of real economic wealth.

—Warren T. Brookes, The Economy In Mind, 81

ON AUGUST 13, 2015, and in an op-ed for the Wall Street Journal, the economist Alan Blinder posed the following question: “Will the Fed raise interest rates?”¹ At first glance there is nothing abnormal about his query. A Google search of “Fed” combined with “Interest Rates” leads to 45 million results. Particularly within the economics profession, it’s broadly accepted that the Fed can—and should—actively seek to manipulate the cost of credit.

But imagine if Blinder’s opinion piece had asked a slightly different question: “When will the Central U.S. Hamburger Authority raise the price of Big Macs and Whoppers?” The Journal’s editors would have been inundated with letters from incredulous readers protesting Blinder’s conceit, let alone that of the federal government. The prices of hamburger meat, buns, lettuce, tomatoes, and name offerings like the Big Mac and Whopper are set in local, domestic, and international markets. Reasonable readers would correctly point out that no central authority could ever successfully plan the price of these most American of food items.

Worse, assuming a government decreed submarket price, it’s fair to say that the supply of Big Macs and Whoppers would quickly shrink on their way to disappearance. Rare is the business that can remain in operation if the prices it’s allowed to charge are a lot or even a little below its costs.

To this unlikely scenario, some might reply that money is different, particularly the U.S. dollar. Perhaps there’s an argument for a central authority like the Federal Reserve to set the price of access to dollars, which are issued as legal tender by the federal government. But there isn’t.

It is often forgotten that when the Fed (or any central bank, for that matter) presumes to dictate interest rates, it’s in no way controlling the cost of accessing dollars. If it were, which would presuppose that money were in fact wealth, plentiful credit would be as simple as printing money, and lots of it; the helicopter strategy of wealth creation would be a valid one. Yet we intuitively know that money doesn’t just grow on trees, nor can it be dropped from the sky.

More realistically, when the Fed raises or lowers interest rates, it is attempting to manipulate the cost of everything produced in the actual economy. That it has tried to do this to varying degrees since its creation in 1913 is something that warrants more extensive discussion. It is, quite rightly, all of our concern.

Stated simply, credit is not money. If it were, the “easy credit” that many-who-should-know-better clamor for would once again be as simple as printing lots of money. In fact, credit is always and everywhere the actual resources—tractors, cars, computers, buildings, labor, and individual credibility—created in the real economy. We borrow “money,” but we’re really borrowing resources. Credit equals resource access. We correctly balk at the notion of a central authority trying to divine the proper price of a Big Mac or a Ferrari. Yet, somehow we’ve come to accept that the Fed should have a role in setting the cost of access to everything we produce in what is called “the economy.”

All of this commentary about how central banks can and should tinker with interest rates is a scary assertion from the economics profession, which believes that the cost of accessing capitalist production should be planned by government. Indeed, an “interest rate” is a price like any other. The interest rate is what those who have access to the economy’s resources charge others for the privilege. When people borrow, they’re not borrowing dollars; they’re borrowing the real economic resources that dollars can be exchanged for.

Just as Burger King painstakingly sets the price of a Whopper to maximize its restaurants’ potential to lure in hungry buyers, so is the rate of interest a price meant to bring savers together with borrowers. If this rate is distorted by governmental decree, then the odds of exchange decrease. For credit to be “easy,” the price of credit must reflect both the needs of those who seek to access it and the needs of those who have it. Put more plainly, the price of credit should be set in free markets. Markets are information personified, and as such they are quite capable of setting the rate of interest that most meets the needs of borrowers and savers. Prices set in free markets maximize the potential for transactions, including those between savers and borrowers.

In my first book, Popular Economics: What the Rolling Stones, Downton Abbey and LeBron James Can Teach You about Economics, I argued that when it comes to booming economic growth and immense prosperity, the answers are easy. That argument remains true. Also true is that just as the economics profession presents a major barrier to economic growth, its mysticism renders credit less attainable, by virtue of the credentialed presuming to set prices and intervene in markets in ways that wouldn’t take place if markets were free.

Achieving economic growth and prosperity is as simple as removing the four main governmental barriers to production: excessive taxes, burdensome regulations, tariffs that limit one’s ability to trade freely, and money deprived of its sole purpose as a measure of value. Economists and politicians have too often forgotten this in modern times, much to our detriment.

An economy is just a collection of individuals. As individuals, we must supply a good or service first in order to fulfill our infinite wants. That being the case, prosperity is as easy as reducing—and in some instances abolishing—the four basic barriers governments erect that make it difficult for people to produce, or better yet, supply.

When we define “credit” as the real resources produced by the individuals who constitute the economy, we see that abundant credit, like economics and economic growth, is also a simple concept. The more politicians get out of the way, by shrinking the four barriers to production, the more production there will be; soaring credit on offer is the natural result.

This relationship also tells us that despite what passes for conventional wisdom, neither governments nor central banks can expand the amount of credit available in the economy. Credit is what individuals produce in the real economy when they get up each day and go to work. We are credit, so the singular path to making credit abundant is to free individuals to pursue what animates their individual talents. Easy credit is the clear result of personal and economic freedom.

To further understand why the Fed can’t create credit, readers must consider government spending. Government can spend only what it extracts from the real economy first, and spending without market discipline, as a rule, shrinks the total amount of economic resources available. Readers should view credit in the same way. Since the Fed has no credit to offer other than what it extracts from the real economy first, it can only shrink it insofar as it exerts its power to increase access to it. For the Fed to “ease” credit, it must by definition reduce the amount of credit offered by market-disciplined actors in the economy.

This is why questions like the one Blinder posed, about whether the Fed will raise interest rates, are cause for worry, if not horror. Neither government nor the Fed can create credit or make it easy to attain. Rather, government and the Fed can only, by their very nature, respectively, redistribute ownership of the economy’s resources and distort who will have access to those resources in the first place.

In short, governmental and central bank attempts to manipulate the cost of credit, or make it “easy,” do nothing of the sort. Instead, they shrink the availability of credit in much the same way as government artificially lowering the price of apartments and cars would shrink the supply of both. So if we accept the undeniable truth that abundant credit is the certain result of a free economy, then the path to expanded access to the economy’s resources is a simple one.

In Popular Economics, I laid out the ease of prosperity sans graphs, charts, and indecipherable equations. Economic growth is easy, as the book made plain, and can be readily explained through examples from the world of movies, sports, and famous businesses. For far too long, the economics profession has been on a mission to make what is cheerful quite dreary and opaque.

In Who Needs the Fed?, my goal once again is to simplify the narrative. There is nothing advanced about economics. Growth economics is all about reducing the barriers to production, so I can’t stress enough that the often-incomprehensible notion of credit is equally simple. And it can be explained by the world around us.

Up front, I want to establish that this book is not about the mechanics of bonds, credit default swaps, and other forms of finance. Furthermore, it does not aim to explain the mechanics of banking and the Federal Reserve. There are countless detailed books on those subjects.

Instead, Who Needs the Fed? covers the all-important subject of credit, along with the role of banking and the Fed when it comes to accessing it. There’s quite simply no economic activity without credit, but the meaning of credit has been perverted in modern times by a political and economic class that operates under the delusion that credit is “money” and can be decreed “easy.” The latter is a dangerous falsehood that requires correction. Accessing credit, and I will repeat this idea throughout the book, amounts to accessing resources. Credit and resources are one and the same.

It is important to say up front that the discussion of credit, like that of economics, should in no way be difficult. If readers can comprehend what is before them through sports, entertainment, and famous businesses, they can easily understand credit, banking, and the Federal Reserve. They’ll also ideally conclude that the Fed is not only superfluous on its best day, and largely irrelevant to the credit discussion on average days, but also very much a barrier to prosperity on its worst days.