End the Fed

by Ron Paul

  Unfortunately but deliberately, a wall was built between the Federal Reserve and Congress. Congress created the system and could end it. Some say that the great evil is that it’s a private bank; therein lies the problem. If that were the only problem, all that would have to be done is to apply the laws against the Fed that apply to all other private corporations. I see the Fed as being much better off than just being private. It’s sanctioned by the government, protected by the government, and has the privilege of total secrecy.

  The Fed’s reports to Congress and hearings are for public consumption. Real information is not available to the public or to Congress, the Financial Services Committee, the Domestic Monetary Policy Subcommittee, or to me as a member of all three. I would never be permitted to attend Federal Open Market Committee meetings, where all the big decisions are made; that’s totally off-limits.

  Their secrecy privilege is protected by law. If the creature can come into being without constitutional authority, it can escape all oversight that other government agencies must submit to. Even the CIA has more responsibility to report to a select few in Congress on its activity, although we can be certain that Congress remains in the dark there as well.

  The Government Accounting Office has the responsibility of auditing all government agencies. Title 31, Chapter 7 of the money and finance section of the code describes its duties and powers to audit all financial institutions, including “the Federal Reserve Board, Federal Reserve Banks, Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency.”

  That sounds pretty inclusive and clear. But there’s a proviso in the law. It goes on to say:

  Audits of the Federal Reserve Board and Federal Reserve Banks may not include: Transactions for or with a foreign Central Bank, government of a foreign country, or non-private international financing organization;

  Deliberations, decisions, or actions on monetary matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

  Transactions made under the direction of the Federal Open Market Committee; or a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.

  So when Bernanke quickly refuses to give us information about the trillions of dollars of credit that he recently passed out in the bailout process because that would be “counterproductive,” he is really saying, “It’s none of your business.”

  He may well be protected by the law, but he is in defiance of the Constitution. The courts, under today’s circumstances, will never rule that the Federal Reserve Board chairman must reveal the information that the Congress or the people seek.

  The cries in Washington for more transparency of the whole mess are getting louder every day. The people are sick and tired of seeing hundreds of billions of dollars, i.e., the TARP funds, given to the Secretary of the Treasury without Congress knowing how the money will be spent.

  For many decades several members of Congress, among them Louis McFadden, Wright Patman, and Henry Gonzales, have demanded the books at the Fed be opened to inspection by the Congress through an audit by the GAO. Though some concessions have been made, such as the release of minutes three weeks after a FOMC meeting and reporting of some accounting statistics, the core of the Federal Reserve’s transactions has remained hidden from congressional scrutiny.

  One thing I have noticed in studying the issue is that the more power the Fed has gained, the greater the secrecy they demand. Even today, no reports come from the Fed about providing a rather simple monetary aggregate like the M3 money supply. This is just a matter of counting the amount of money they print (which can be measured in many different ways). The silly reason the Fed gives for this is that they are saving money—saving money by not counting it? Just maybe they think nobody will notice how much money they are creating by refusing to report it.

  Today, with the Fed dealing secretly with trillions of dollars worth of loans and guarantees and massively increasing their balance sheet, we are told practically nothing about the deals made with other central banks, which countries and currencies are bailed out, or which “friends” in the business and banking community are treated “more fairly” than the rest.

  Transparency is currently a hot issue in Congress because the people have awoken and have sent a message. That’s what the spontaneous tea parties organized around the country are all about. This is not a conservative or liberal issue; it’s not a Republican or Democratic issue. It is pervasive, across the political spectrum.

  I introduced a Federal Reserve audit bill, the Federal Reserve Transparency Act, HR 1207, which Progressive/Socialist (and friend) Senator Bernie Sanders of Vermont introduced in the Senate. I’m convinced that if we had an up-or-down vote on this bill in the House, very few would vote against it. That is a reflection of the concerns the American people hold and how the members of Congress are starting to get the message. Although it may appear that Congress ignores the people, when the people speak loudly and clearly enough, the political animals in Washington respond.

  Ever since the establishment of the Federal Reserve in 1913, there have always been at least a few congressmen fighting to expose the Fed for the mischief it causes. Generally, the argument against a Federal Reserve audit has been that certain elements deserve privacy and also that there is no need for the people to know that much about the Federal Reserve. Before 1978, there was no explicit auditing authority for the GAO to examine the books at the Federal Reserve, and that was used as an excuse for no auditing being done. When a request came to Congress and legislation was finally passed in 1978 giving the GAO authority to audit the Fed, the auditing authority was strictly limited and all the important issues were explicitly excluded from the auditing process.

  The Fed will deny it, but because it wields so much power by controlling the money supply and interest rates, they have every reason in the world to maintain secrecy in all their activities. This has been known from the time of its inception in 1913, which has always led to demands from at least a few members of Congress for accountability.

  Congressman Wright Patman, in 1964, as chairman of the House Banking Committee, had Alfred Hayes, the very powerful president of the Federal Reserve Bank of New York, before his committee. Annoyed with the discussion of transparency, Patman told Hayes: “You can absolutely veto everything the President does. You have the power to veto what the Congress does and the fact is that you have done it. You are going too far.”

  I actually consider this an understatement, because in the past year or so during this bailout process, the Federal Reserve has garnered an unbelievable amount of power, making it much more influential around the world than the Congress or the President has ever been.

  Patman accused the Fed of being too secretive, too independent, and the tool of Wall Street bankers. Though Patman was right in his charges, his solutions did not demand a gold standard. He wanted Congress to assume the powers of money creation and interest rate controls, and his goal was to benefit the poor, small businesspeople, and farmers. Populists then, as they always have and as they do today, want to restore the responsibility for money and credit to Congress. Though a laudable goal, it comes up short of providing a solution to the problems of steady depreciation of the money—only gold can do that.

  Nevertheless, Patman, throughout his career (1929–1976), continued to warn of the dangers of excessive Federal Reserve power and persistently demanded an audit of all its activities. Though I went into the Congress for the first time in April 1976, our paths did not cross; during his last year in Congress his health was poor. But I did know and work closely with Henry Gonzales on various issues, in particular the IMF and other banking issues, between 1979 and 1984. He was the chair of the Banking Committee (1989–1995) and led the populist faction for over thirty years (1961–1999), demanding an audit and a curtailing
of Fed power. A long time before Patman chaired the Banking Committee, Congressman Louis McFadden of Pennsylvania made the same attempts to alert the American people to the danger of excessive power residing in the hands of the few who control the Federal Reserve and the banking system.

  Although the Populists of the past and present have not been hard money advocates, they always shared our conviction that transparency was crucial to any decent reforms. And today, even though many liberal and conservative politicians join the Populists’ push for easy money and low interest rates, we all can join together in demanding that the secrecy of the Fed be ended. Reforms will follow, and then we will make the case for constitutional, sound money.

  I believe the conditions are more conducive today for achieving some real success in getting an audit than at any time since the establishment of the Federal Reserve System in 1913. When that time comes, I hope for some serious evaluation of the results in light of the Constitution.

  CHAPTER 13

  THE ECONOMIC CASE

  One would think that a moral or constitutional argument against the Fed would suffice, but rarely do Congress and the people respond to such arguments. Drumming up fear concerning economic problems usually is the way the people come around to accepting the panaceas promised by the supporters of central banking and fiat money. A lot of deception, if not outright lies, about economics must be presented to get so many people to go along.

  It amazes me how society has advanced technologically since the industrial revolution and through the benefits of great brilliance in physics, chemistry, computers, medicine, electronics, and aerospace. Nations, even with a partial understanding of how free markets work, have benefited tremendously from the abundance created. Yet with all this knowledge, few understand some of the simplest economic truths regarding money. For generations, we have been brainwashed about the necessity of having a central bank to give us a currency that is elastic. We accept a rather bizarre idea with little question. Think about this seriously: if you need money, stretch it; that is, just print more of it.

  It’s as if we still believe that money can be grown on trees, and we don’t stop to realize that if it did grow on trees, it would take on the value of leaves in the fall, to be either mulched or bagged and put in a landfill. That is to say, it would be worthless.

  Why bright people in an advanced society can conclude that wealth can be increased by merely expanding the money supply is bewildering. I suspect that those who are the real promoters of central banking and fiat money are more motivated by power and greed than they are by sound economic theory. Many others are complacent and trusting and have probably not thought the issue through.

  I am convinced that I can get a twelve-year-old to understand the issue of money a lot easier than someone much older. Young people are more open to new ideas; older people are too often fixed in their ways. The total failure of the system we inherited in 1971—confirming the theories of those who believe in sound money and who predicted this outcome—has awakened a whole generation of young people to the issue of money.

  They realize that the mess they are inheriting is huge and easily understand how it is related to fiat money and the Federal Reserve. In spite of the tragic consequences of Fed policy for the past several decades, there’s reason to believe, out of necessity if nothing else, that sound money will be given a serious hearing in the coming years.

  Ludwig von Mises had it right many years ago when he predicted the downfall of all socialist economies, including the Soviet system, for a precise reason. Without a free market pricing system, there’s no way to make proper economic decisions regarding supply and demand of products and services. Free-market choices under socialism aren’t permitted; the government sets the price and plans production. Government bureaucrats can’t know what only markets can determine. Vital in the decision process is the profit-loss mechanism that rewards success and punishes failure. Government ownership of the means of production eliminates the benefits of bad decisions by business managers being punished. Under the socialism and interventionism that we have today, the successful are punished by being forced to bail out the unsuccessful.

  We don’t have socialism of our markets yet. When we do place wage and price controls on our economy, the market economy teeters or collapses, but generally in the past they have been removed and the economy recovers. Where we do have socialism is in money and credit and setting interest rates. This has been especially true since 1971 when the Bretton Woods Agreement ended and the dollar was delinked from gold.

  By manipulating the supply of money and setting interest rates, the Fed has practiced backdoor economic planning. The Fed essentially keeps interest rates lower than they otherwise would be. In a free market, low rates would indicate adequate savings and signal the businessperson that it’s an opportune time to invest in capital projects. But the system the Fed operates discourages savings, and the credit created out of thin air serves as the signal for investors to spend, invest, and borrow excessively, compared to a system where interest rates are set by the market.

  This causes a major problem. A boom results, and overinvestment and excesses are built into the system, creating a bubble. A recession or depression doesn’t come for some extraneous reason; it is a predictable result of the excessive credit and artificially low interest rates orchestrated by the Federal Reserve.

  The longer the good times last, the greater the correction will be. Our current boom, except for a few minor interruptions, has been going on since 1971. It’s my opinion that it stopped in 2000. The Fed was able to create the housing bubble subsequently, but that has turned out to be the last hurrah. Today, we’re witnessing the consequences of this very foolish policy.

  Most economists and politicians insist on defining inflation as a rising price level. Rising prices are a consequence of monetary inflation and are harmful. Mises claimed that this confusion over defining inflation was deliberate and mischievous. If it’s only a price problem, then blame can be placed on profiteers, speculators, labor unions, oil companies, and price gougers. This deflects attention from the real source of the problem, the Federal Reserve and its money machine. It’s because so many are convinced that consumer and producer price increases are caused by these extraneous reasons that wage and price controls are resorted to, while the Fed’s role in the inflation is ignored.

  The silliness of this understanding is that once prices rise at an unwelcome rate, the blame is placed on a robust economy. In a free market, a robust economy causes prices to go down. A healthy cell phone or computer market, even in an age of inflation, will lower prices. Yet the Fed’s solution will be to purposely slow down the economy and decrease demand to lower prices, which works with a lot of pain. This attitude reflects the shortcomings of a fiat monetary system managed by the Fed.

  The Federal Reserve is responsible for the boom-bust cycles. It’s responsible for price inflation, recession, depression, and excessive debt. Although the central bank can get away with mismanagement of the economy for long periods of time, its policies are always destructive. Unchecked, the policies of a central bank lead to financial chaos, an example of which we are now experiencing.

  The fact that the Fed accommodates politicians is a good reason few challenge the Fed’s authority. Spending gets members of Congress reelected by providing the goodies that constituents have become dependent on. There are limits on how much taxation the people will tolerate and how much the government can borrow without forcing up interest rates. The convenience of the Federal Reserve monetizing the debt satisfies a lot of people—until the day comes that we suffer the consequences with an economic downturn and higher prices.

  Higher prices represent a depreciation of the value of the dollar and are a tax on the people. The tax is borne by the middle class and the poor. The early users of the money are the beneficiaries; the government, the banks, and the large corporations.

  This is a deceitful, unfair, and corrupt system. Not only does it transfer w
ealth from the middle class to the rich, it can postpone payments to the next generation just as borrowing does. The bills incurred in the past two to three decades are now coming due. The inordinate amount of debt must now be paid off or liquidated. Loss of the value of stocks or homes is easily understood, but the value placed on these assets represented a gross dislocation of the system as a result of the Federal Reserve’s policy.

  Excessive debt of a country or a people, once it reaches a certain point, is unpayable and must be liquidated. That point is almost impossible to accurately predict, since it will vary from one situation or country to another. One thing certain is that we as a country, and probably the world, have reached that point.

  Individuals and corporations can default and debt is liquidated. When the need arises, liquidation is necessary and beneficial. The market today is demanding this liquidation; the politicians and the Fed are doing everything conceivable to prevent it, but they are only prolonging the agony.

  Governments don’t default in the conventional manner. They default by debasing the currency, reducing the value thereof, through inflation. If the money loses 50 percent of its value, the real debt the government owes is reduced by the same percentage. This is the plan: massive debt and inflation to bail out friends, pretending to prop up the economy and liquidate debt. It never goes as planned. John Maynard Keynes knew that in a correction it is necessary to lower wages. That’s why he supported inflation to force real wages down and do it without confronting labor with the need to lower nominal wages. 1

  Unintended economic consequences that even the central planners did not anticipate result. The worst is economic chaos leading to political chaos that threatens not only the poor and the middle class but the wealthy establishment as well. Wealthy corporate owners in fascist Italy and Germany did not survive the tragic outcome of the 1930s and 1940s.