[Excerpted from The Case Against The Fed.]
By far the most secret and least
accountable operation of the federal government is not, as one might expect,
the CIA, DIA, or some other super-secret intelligence agency. The CIA and other
intelligence operations are under control of the Congress. They are
accountable: a Congressional committee supervises these operations, controls
their budgets, and is informed of their covert activities. It is true that the
committee hearings and activities are closed to the public; but at least the
people’s representatives in Congress insure some accountability for these
secret agencies.
It is little known, however, that there
is a federal agency that tops the others in secrecy by a country mile. The
Federal Reserve System is accountable to no one; it has no budget; it is
subject to no audit; and no Congressional committee knows of, or can truly
supervise, its operations. The Federal Reserve, virtually in total control of
the nation’s vital monetary system, is accountable to nobody—and this strange
situation, if acknowledged at all, is invariably trumpeted as a virtue.
Thus, when the first
Democratic president in over a decade was inaugurated in 1993, the maverick and
venerable Democratic chairman of the House Banking Committee, Texan Henry B.
Gonzalez, optimistically introduced some of his favorite projects for opening
up the Fed to public scrutiny. His proposals seemed mild; he did not call for
full-fledged Congressional control of the Fed’s budget. The Gonzalez Bill
required full independent audits of the Fed’s operations; videotaping the
meetings of the Fed’s policy-making committee; and releasing detailed minutes
of the policy meetings within a week, rather than the Fed being allowed, as it
is now, to issue vague summaries of its decisions six weeks later. In addition,
the presidents of the twelve regional Federal Reserve Banks would be chosen by
the president of the United States rather than, as they are now, by the
commercial banks of the respective regions.
It
was to be expected that Fed Chairman Alan Greenspan would strongly resist any
such proposals. After all, it is in the nature of bureaucrats to resist any
encroachment on their unbridled power. Seemingly more surprising was the
rejection of the Gonzalez plan by President Clinton, whose power, after all,
would be enhanced by the measure. The Gonzalez reforms, the President declared,
“run the risk of undermining market confidence in the Fed.”
On
the face of it, this presidential reaction, though traditional among chief
executives, is rather puzzling. After all, doesn’t a democracy depend upon the
right of the people to know what is going on in the government for which they
must vote? Wouldn’t knowledge and full disclosure strengthen the faith of the
American public in their monetary authorities? Why should public knowledge
“undermine market confidence”? Why does “market confidence” depend on assuring
far less public scrutiny than is accorded keepers of military secrets that
might benefit foreign enemies? What is going on here?
The
standard reply of the Fed and its partisans is that any such measures, however
marginal, would encroach on the Fed’s “independence from politics,” which is
invoked as a kind of self-evident absolute. The monetary system is highly
important, it is claimed, and therefore the Fed must enjoy absolute
independence.
“Independent of politics” has
a nice, neat ring to it, and has been a staple of proposals for bureaucratic
intervention and power ever since the Progressive Era. Sweeping the streets;
control of seaports; regulation of industry; providing social security; these
and many other functions of government are held to be “too important” to be
subject to the vagaries of political whims. But it is one thing to say that
private, or market, activities should be free of government control, and
“independent of politics” in that sense. But these are government agencies and operations we are talking
about, and to say that government should
be “independent of politics” conveys very different implications. For
government, unlike private industry on the market, is not accountable either to
stockholders or consumers. Government can only be accountable to the public and
to its representatives in the legislature; and if government becomes
“independent of politics” it can only mean that that sphere of government
becomes an absolute self-perpetuating oligarchy, accountable to no one and
never subject to the public’s ability to change its personnel or to “throw the
rascals out.” If no person or group, whether stockholders or voters, can
displace a ruling elite, then such an elite becomes more suitable for a
dictatorship than for an allegedly democratic country. And yet it is curious
how many self-proclaimed champions of “democracy,” whether domestic or global,
rush to defend the alleged ideal of the total independence of the Federal
Reserve.
Representative
Barney Frank (D., Mass.), a co-sponsor of the Gonzalez Bill, points out that
“if you take the principles that people are talking about nowadays,” such as
“reforming government and opening up government—the Fed violates it more than
any other branch of government.” On what basis, then, should the vaunted
“principle” of an independent Fed be maintained?
It is instructive to examine
who the defenders of this alleged principle may be, and the tactics they are
using. Presumably one political agency the Fed particularly wants to be
independent from is the U.S. Treasury. And yet Frank Newman, President
Clinton’s Under Secretary of the Treasury for Domestic Finance, in rejecting
the Gonzalez reform, states: “The Fed is independent and that’s one of the
underlying concepts.” In addition, a revealing little point is made by
the New York Times, in noting the Fed’s reaction to the Gonzalez
Bill: “The Fed is already working behind the scenes to organize battalions of
bankers to howl about efforts to politicize the central bank” (New York Times, October 12, 1993). True enough. But
why should these “battalions of bankers” be so eager and willing to mobilize in
behalf of the Fed’s absolute control of the monetary and banking system? Why
should bankers be so ready to defend a federal agency which controls and
regulates them, and virtually determines the operations of the banking system?
Shouldn’t private banks want to have some sort of check, some curb, upon their
lord and master? Why should a regulated and controlled industry be so much in
love with the unchecked power of their own federal controller?
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Let
us consider any other private industry. Wouldn’t it be just a tad suspicious
if, say, the insurance industry demanded unchecked power for their state
regulators, or the trucking industry total power for the ICC, or the drug
companies were clamoring for total and secret power to the Food and Drug
Administration? So shouldn’t we be very suspicious of the oddly cozy
relationship between the banks and the Federal Reserve? What’s going on here?
Our task in this volume is to open up the Fed to the scrutiny it is
unfortunately not getting in the public arena.
Absolute power and lack of
accountability by the Fed are generally defended on one ground alone: that any
change would weaken the Federal Reserve’s allegedly inflexible commitment to
wage a seemingly permanent “fight against inflation.” This is the
Johnny-one-note of the Fed’s defense of its unbridled power. The Gonzalez
reforms, Fed officials warn, might be seen by financial markets “as weakening
the Fed’s ability to fight inflation” (New York Times,
October 8, 1993). In subsequent Congressional testimony, Chairman Alan
Greenspan elaborated this point. Politicians, and presumably the public, are
eternally tempted to expand the money supply and thereby aggravate (price)
inflation. Thus to Greenspan:
The
temptation is to step on the monetary accelerator or at least to avoid the
monetary brake until after the next election. Giving in to such temptations is
likely to impart an inflationary bias to the economy and could lead to
instability, recession, and economic stagnation.
The Fed’s lack of
accountability, Greenspan added, is a small price to pay to avoid “putting the
conduct of monetary policy under the close influence of politicians subject to
short-term election cycle pressure” (New York Times,
October 14, 1993).
So
there we have it. The public, in the mythology of the Fed and its supporters,
is a great beast, continually subject to a lust for inflating the money supply
and therefore for subjecting the economy to inflation and its dire
consequences. Those dreaded all-too-frequent inconveniences called “elections”
subject politicians to these temptations, especially in political institutions
such as the House of Representatives who come before the public every two years
and are therefore particularly responsive to the public will. The Federal
Reserve, on the other hand, guided by monetary experts independent of the
public’s lust for inflation, stands ready at all times to promote the long-run
public interest by manning the battlements in an eternal fight against the
Gorgon of inflation. The public, in short, is in desperate need of absolute
control of money by the Federal Reserve to save it from itself and its
short-term lusts and temptations. One monetary economist, who spent much of the
1920s and 1930s setting up Central Banks throughout the Third World, was
commonly referred to as “the money doctor.” In our current therapeutic age,
perhaps Greenspan and his confreres would like to be considered as monetary
“therapists,” kindly but stern taskmasters whom we invest with total power to
save us from ourselves.
But in this administering of
therapy, where do the private bankers fit in? Very neatly, according to Federal
Reserve officials. The Gonzalez proposal to have the president instead of
regional bankers appoint regional Fed presidents would, in the eyes of those
officials, “make it harder for the Fed to clamp down on inflation.” Why?
Because, the “sure way” to “minimize inflation” is “to have private bankers
appoint the regional bank presidents.” And why is this private banker role such
a “sure way”? Because, according to the Fed officials, private bankers “are
among the world’s fiercest inflation hawks” (New York Times,
October 12, 1993).
The
worldview of the Federal Reserve and its advocates is now complete. Not only
are the public and politicians responsive to it eternally subject to the
temptation to inflate; but it is important for the Fed to have a cozy
partnership with private bankers. Private bankers, as “the world’s fiercest
inflation hawks,” can only bolster the Fed’s eternal devotion to battling
against inflation.
There we have the ideology of
the Fed as reflected in its own propaganda, as well as respected Establishment
transmission belts such as the New York Times, and
in pronouncements and textbooks by countless economists. Even those economists
who would like to see more inflation accept and repeat the Fed’s image of its
own role. And yet every aspect of this mythology is the very reverse of the
truth. We cannot think straight about money, banking, or the Federal Reserve
until this fraudulent legend has been exposed and demolished.
There
is, however, one and only one aspect of the common legend that is indeed
correct: that the overwhelmingly dominant cause of the virus of chronic price
inflation is inflation, or expansion, of the supply of money. Just as an
increase in the production or supply of cotton will cause that crop to be
cheaper on the market; so will the creation of more money make its unit of
money, each franc or dollar, cheaper and worth less in purchasing power of
goods on the market.
But let us consider this
agreed-upon fact in the light of the above myth about the Federal Reserve. We
supposedly have the public clamoring for inflation while the Federal Reserve,
flanked by its allies the nation’s bankers, resolutely sets its face against
this short-sighted public clamor. But how is the public supposed to go about
achieving this inflation? How can the public create, i.e., “print,” more money?
It would be difficult to do so, since only one institution in the society is
legally allowed to print money. Anyone who tries to print money is engaged in
the high crime of “counterfeiting,” which the federal government takes very
seriously indeed. Whereas the government may take a benign view of all other
torts and crimes, including mugging, robbery, and murder, and it may worry
about the “deprived youth” of the criminal and treat him tenderly, there
is onegroup of criminals whom no government ever coddles:
the counterfeiters. The counterfeiter is hunted down seriously and efficiently,
and he is salted away for a very long time; for he is committing a crime that
the government takes very seriously: he is interfering with the government’s
revenue: specifically, the monopoly power to print money enjoyed by the Federal
Reserve.
“Money,”
in our economy, is pieces of paper issued by the Federal Reserve, on which are
engraved the following: “This Note is Legal Tender for all Debts, Private, and
Public.” This “Federal Reserve Note,” and nothing else, is money, and all
vendors and creditors must accept these notes, like it or not.
So: if the chronic inflation undergone by Americans, and in almost every
other country, is caused by the continuing creation of new money, and if in each country its governmental “Central
Bank” (in the United States, the Federal Reserve) is the sole monopoly source
and creator of all money, who then is
responsible for the blight of inflation? Who except the very institution that
is solely empowered to create money, that is, the Fed (and the Bank of England,
and the Bank of Italy, and other central banks) itself?
In short: even before examining the problem in detail, we
should already get a glimmer of the truth: that the drumfire of propaganda that
the Fed is manning the ramparts against the menace of inflation brought about
by others is nothing less than a deceptive shell game. The culprit solely
responsible for inflation, the Federal Reserve, is continually engaged in
raising a hue-and-cry about “inflation,” for which virtually everyone else in society seems to be responsible.
What we are seeing is the old ploy by the robber who starts shouting “Stop,
thief!” and runs down the street pointing ahead at others. We begin to see why
it has always been important for the Fed, and for other Central Banks, to
invest themselves with an aura of solemnity and mystery. For, as we shall see
more fully, if the public knew what was going on, if it was able to rip open
the curtain covering the inscrutable Wizard of Oz, it would soon discover that
the Fed, far from being the indispensable solution to the problem of inflation,
is itself the heart and cause of the problem. What we need is not a totally independent,
all-powerful Fed; what we need is no Fed at all.
Murray N. Rothbard (1926–1995) was dean
of the Austrian School, founder of modern libertarianism, and academic vice
president of the Mises
Institute. He was also editor – with Lew Rockwell – of The Rothbard-Rockwell Report, and appointed
Lew as his literary executor. See his books.