Of Public Interest

Volume 4, Number 6
March, 2002

Fed-watching has become a significant American pastime. The press notes and speculates about meetings of the Board of Governors. The Chairman’s utterances are dissected on talk shows. Monetary policy has become a common topic of discussion in places throughout the land. References to the Fed and monetary policy have become legion. What has gone almost unmentioned amid these references is the simple recognition that through monetary policy the government takes private property for political purposes without paying the just compensation required by our Fifth Amendment.

The Fifth Amendment allows government to take private property. To be able to do so, however, the state is supposed to satisfy two conditions. One is that the taking is to be for a legitimate public use. The other is that the owner of the taken property will be justly compensated for the property that will be taken.

There is good reason both to allow government to take property and to place severe limits on its ability to do so. A highway may have to traverse land owned by hundreds or thousands of people. In some cases, eminent domain may be an efficient way of assembling the required land. However, if the state could take property without proper compensation, it would surely overuse that power. A requirement of just compensation helps to rein in the state’s appetite.

Recent years have brought a good deal of controversy and litigation over takings. Much taking is for private, not public, purpose, and often compensation is small or nil. A landowner may have a marsh on a portion of his land. Someone who would like to see that land left as a bird sanctuary could always offer to buy the land. Using the state to take the land, however, is generally cheaper for the bird partisans. In most such cases the taking is partial and not complete. Rather than take the land, the state might just restrict what the owner can do with his land. A landowner might plan to build a housing subdivision on 100 acres. The state thwarts this plan, asserting that 60 of those acres must be left as a sanctuary for birds. Recent monetary policy reflects another kind of controversial taking.

Money is as much a form of property as are such things as our land, the furniture in our houses, and the cars in our garages. This is true even though we don’t normally think of money as property, but rather as something with which we can buy property. Yet money is property, though of an abstract and general form. Through our market transactions, we can transform our money into whatever we choose. Our money represents general claims that we can exercise upon society. Regardless of whether we use that money to buy yet more chairs or anything else, our money represents a valuable piece of property.

It is common to think of one of the central functions of government as preserving and protecting our rights of property. To the extent government does this successfully, we become a wealthier people. This notion of preserving and protecting lies behind what are called the police powers of the state. The state provides protection and security, thereby providing a framework within which we can flourish and prosper.

In sharp contrast to preserving and protecting property, monetary policy is a partial taking of private property for political use. Through monetary policy, the Federal Reserve expands the supply of money. The stock of money, for instance, increased about $100 billion during 2001. As a result of monetary policy, the money we hold has become less valuable. Our position is no different from that landowner who has been told that he must leave his land as a refuge for birds. That property likewise has become less valuable.

It is not, moreover, inflation that comprises the taking of property. It is the very creation of new money by the Fed, for it is this creation that degrades the value of the money we already own. In a growing economy, a modest amount of money creation is compatible with relatively steady prices. Without taking property through money creation, prices would decline gently in such an economy. That portion of our property that we hold as money would become more valuable rather than less valuable.

It might be argued that monetary policy, even though a taking of private property, serves a legitimate public purpose, namely the promotion of economic stability. The historical record overwhelmingly gives the lie to this claim. Monetary policy has been a source of instability, not stability. America’s Great Depression is the most dramatic, but by no means the only, illustration of this. Monetary policy does not promote stability. It promotes the growth of government through its takings of private property.

A Publication of:
Public Interest Institute at Iowa Wesleyan College
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Mt. Pleasant, Iowa 52641-1328
Phone: 319-385-3462 Fax: 319-385-3799
E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org