Since the very beginning of ordered government, rulers and their administrators have endeavored to control their economies. The conviction that there is a fair price for a certain good, and that it ought to be imposed by government decree, is a foolishness nearly all rulers are incapable of resisting.
For the past forty centuries (or more), governments from every corner of the world have tried to fix wages and prices. When their plans flop, as they almost always do, officials rarely blame the inherent flaws of their policies. Instead, they point fingers at the greed of businesses and citizens.
To this day, governments and academics can’t shake their obsession with economic planning. With little reprieve, a group of people appear with every generation who think they can centrally manage the whole economy.
They eventually find out the hard way – after a lot of painful, failed experiments – that it simply doesn’t work. But because human nature never changes, the same old ideas are rehashed, perhaps with a shiny new name, and the cycle is repeated.
How else can one explain the election of Zohran Kwame Mamdani, a member of the Democratic Socialists of America, to mayor of New York City?
In America central planners have been smearing their dirty fingerprints all over the economy and your efforts to earn a living for well over 113 years. However, contrary to prior eras, we no longer call it monarchical decree. Rather, we call it monetary policy.
What’s more, the modern central banking system, orchestrated by the Federal Reserve, is the largest price-fixing experiment in human history. And it is running into the exact same brick wall that every Pharaoh, Emperor, and King hit before.
We must look at history to understand how these repeating, disastrous cycles of financial intervention ultimately destroy a nation’s prosperity. Where to begin?
From the Nile to Gresham’s Law
In the ancient world, control of the food supply was the ultimate dominance. The individual or class that controlled the food supply held extreme power over human life.
As far back as the Fifth Dynasty in Egypt (around 2830 B.C.), a monarch named Henku had inscribed on his tomb: “I was lord and overseer of southern grain in this nome.” Under the guise of preventing famine, the Egyptian government increasingly regulated more and more of the granaries.
These regulations multiplied like mushroom spores on decaying woodlands to the point where they finally led to outright ownership. The land became the property of the monarch, and the agricultural class was reduced to renting it back from the state.
Later the Roman Empire, under Diocletian in 301 A.D., faced rampant inflation. Caused by his own debasement of the currency, Diocletian issued his infamous Edict on Maximum Prices. It set fixed prices for over a thousand commodities and prescribed the death penalty for anyone who dared to sell above the state-mandated limit.
The result?
Goods vanished from the market, trade ground to a halt, and the economy collapsed until the edict was ignored out of sheer necessity.
The same story played out in the Middle Ages and the Renaissance with the circulation of gold and silver. When the Spanish discovered massive new silver mines in the New World during the 16th century, the global supply of silver surged. This massive inflow strained the accepted political doctrine that silver had a proper, fixed price relative to gold.
Because governments insisted on fixing the exchange rate between gold and silver rather than letting the market decide, they repeatedly triggered Gresham’s Law: bad money drives out good.
Where the state legally overvalued silver and undervalued gold, citizens hoarded the gold or shipped it abroad, leaving only the depreciated silver in domestic circulation.
Blowing Bubbles
Whether it is grain in ancient Egypt, shoes in Rome, or the ratio of silver to gold in Renaissance Europe, price-fixing always produces the same failures. There are shortages and surpluses that result from breaking the natural balance of supply and demand.
People are then forced into black markets and other workarounds to trade at real market value. Ultimately, the very instability the government supposedly sought to prevent turns to economic chaos.
These days we look back at ancient emperors trying to dictate prices and laugh at their economic folly. All the while, our own President attempts to dictate the price of certain imported goods.
We also accept a system where a small committee in Washington, D.C. – the Federal Open Market Committee (FOMC) – gathers around a mahogany table to dictate the most critical price in the global economy: the price of money.
Interest rates are not just random numbers. They represent the price of money over a certain duration of time. This influences decisions about borrowing money today versus saving it for tomorrow.
In a free market, interest rates are determined by the supply of savings and the demand for loans. If people are saving heavily, there is plenty of capital to lend, and interest rates naturally drop. This signals to businesses that it is a good time to borrow and invest in long-term projects. If savings are low, interest rates rise, signaling that capital is scarce and businesses should tighten their belts.
When the Federal Reserve intervenes to artificially suppress interest rates, it distorts this vital economic signal. It creates an illusion of abundant capital where none actually exists.
This artificial price-fixing creates severe economic distortions. Because borrowing is artificially cheap, businesses invest in speculative, long-term projects that are not supported by real consumer savings. These malinvestments produce economic bubbles – whether in tech stocks, real estate, or crypto – that are ultimately doomed to pop when reality asserts itself.
But that’s not all. When the Fed fixes interest rates below the rate of inflation, it effectively steals purchasing power from retirees, savers, and working-class families who rely on conservative savings accounts. At the same time, artificially low rates fuel asset inflation. The wealthy, who own stocks, real estate, and private equity, see their net worth skyrocket. Meanwhile, the average wage earner faces a rising cost of living without the benefit of asset appreciation.
Dead End Street
Just like the planners of the past, when these distortions result in rampant consumer price inflation, government officials blame everything else – supply chains, corporate greed, geopolitical conflicts – rather than looking in the mirror at their own price-fixing policies.
Now, as the economic cycle rotates, all eyes have turned to the incoming Federal Reserve Chair, Kevin Warsh. He’s taking on financial and economic conditions that are far more perilous than the ones inherited by his predecessors.
Warsh faces an impossible balancing act that exposes the ultimate futility of central economic planning. He is being asked to do two diametrically opposed things at the exact same time.
To regain credibility and stabilize the purchasing power of the dollar, the Fed needs to maintain a restrictive monetary policy and kill inflation. This means keeping interest rates sufficiently high to cool down credit expansion and drain the excess liquidity that has plagued the economy.
At the same time the U.S. national debt is spiraling past unsustainable milestones. There’s a staggering $10 trillion mountain of short-term government debt that must be rolled over and refinanced in 2026.
Herein lies the trap. If Fed Chair Warsh keeps interest rates high to fight inflation, the U.S. government’s interest expense will skyrocket to catastrophic levels, consuming an ever-larger portion of federal tax revenues and threatening a fiscal crisis. Thus, to prevent a sovereign default or a brutal fiscal reckoning, the political pressure on Warsh to ease monetary policy, lower rates, and buy up government bonds (quantitative easing) will be immense.
But if he bows to that pressure and lowers rates to grease the wheels of government debt rollover, he will take a torch to the already hot embers of inflation.
We are fast approaching the limits of central banking. The price of money cannot be successfully fixed by a committee any more than the price of grain could be fixed by a Pharaoh.
This is the dead-end street of economic planning. You cannot fix the price of credit to bail out a profligate government without destroying the purchasing power of the currency. You cannot manipulate the value of money to satisfy political expedience without triggering the natural laws of economics.
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Sincerely,
MN Gordon
for Economic Prism
