Fed Up

The political movement to curtail the Federal Reserve goes from fringe to mainstream.

Rep. Ron Paul (R-Texas), the libertarian-leaning congressman and failed 2008 GOP presidential candidate, has been suspicious of the Federal Reserve since before first entering Congress in 1976. In a 1981 article that mentioned the then-obscure legislator, United Press International reported that Paul “has proposed abolishing the Federal Reserve, repealing laws which make the dollar legal tender, and switching to currency issued by banks, 100 percent backed by gold.”

That was the year Paul first proposed a bill to audit America’s central bank. He recruited 44 cosponsors, but the bill never made it out of committee. The congressman introduced another bill to audit the Fed in 1983 and got less than half as many colleagues to sign on.

On another six occasions, Paul introduced bills that would have abolished the Fed entirely. Those acts of legislative defiance accomplished nothing much besides giving the congressman a reputation as an eccentric gold obsessive, hectoring an institution that was seen by almost everyone, critics and supporters alike, as foundational to the functioning of the modern world. Roll Call, a newspaper covering Capitol Hill, chided Paul after he won reelection to Congress in 1996 for his “idee fixe” of “a return to the gold standard,” which it described as a “rallying cry that hasn’t been a real issue since 1971.”

What a difference an economic crisis makes. In 2007 and 2008, as Paul ran for president, the candidate found to his own surprise that his young-skewing crowds reacted to trash talk about the Federal Reserve more than any other element of his small-government, anti-war agenda. So in 2009, with many economists blaming the Federal Reserve at least partly for inflating a housing bubble whose crash continues to inflict the most economic damage seen in the U.S. for a quarter century, Paul started pushing another version of his “audit the Fed” bill, this one numbered H.R. 1207. And as of press time, the bill has attracted a remarkable 282 co-sponsors, more than a majority, giving it a nontrivial shot at passing through the House of Representatives.

H.R. 1207 would lift existing restrictions on what auditors from the Government Accountability Office are allowed to look into when examining the Fed’s books. Specifically, the bill would allow investigators to report on the Fed’s dealings with foreign banks and nations, its “actions on monetary policy matters,” and the operations of its Federal Open Market Committee, the wing whose decisions most directly affect the U.S. money supply. The legislation is cosponsored by every single Republican in the House as well as 105 Democrats. 

For the first time in Paul’s long career of tilting at Alan Greenspan’s windmills, popular sentiment against the Federal Reserve has its chairman, currently Ben Bernanke, running scared. Last summer Bernanke launched an unprecedented public relations campaign, explaining himself in venues from 60 Minutes to town-hall-style meetings broadcast on PBS. In July testimony to the House Committee on Financial Services, Bernanke warned that H.R. 1207 would damage global trust in the Fed’s political independence and “could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.” 

Paul, after shepherding his idea from fringe to mainstream, is almost giddy. “Now the Federal Reserve is less popular than the IRS!” the congressman told a July gathering of Young Americans for Liberty in Washington, D.C. “This issue is never going to go away. Who would have thought a politician could talk about Austrian economics and get applause?”

The Austrian Opposition 

With its power over interest rates and the supply of U.S. dollars, the Federal Reserve System is the most influential economic institution on the planet. That influence comes surrounded by an impenetrable aura of mystery. Hardly anyone, citizen or congressman, completely understands what the Fed does, how it operates, or what the effects of its actions will be.

Here is a highly simplified outline. The Fed is a set of 12 regional banks under the command of a seven-member board of governors appointed by the president and approved by the Senate. Its 12-member Federal Open Market Committee (FOMC)—the board of governors plus five regional bank chiefs—is responsible for adjusting the federal funds interest rate, which is the rate banks charge each other for loans. The FOMC does this through “open market operations,” buying and selling securities to affect the amount of money in the economy and thus the interest rate paid by banks to get more cash.

This process is hard enough to describe, let alone comprehend, and previous Fed chairmen have found it useful to keep their public pronouncements about the central bank’s operations maximally vague and obscure. A classic from Paul Volcker, chairman from 1979 to 1987: “We did what we did, we didn’t do what we didn’t do, and the result was what happened.” Volcker’s successor, Alan Greenspan, who enjoyed the longest stretch of low-inflation prosperity in Fed history (now widely seen as possibly laying the groundwork for the crash), helped reinforce both the central bank’s reputation for effectiveness and the expectation that its actions would remain inscrutable.

But these days the Federal Reserve faces challenges to both its power and its mystery, thanks to both hot public opinion and cold academic analysis. Politicians are demanding a peek behind the curtain, and holdovers from Paul’s 2008 presidential campaign have kick-started an “End the Fed” movement. Even within the central bank’s natural fanbase of economists and financiers, many are complaining about its appetite for regulatory power and its massive expansion of the money supply. During the last year the Fed has nearly doubled the monetary measure over which it has the most direct control, the “monetary base” (defined as circulating currency plus the reserves that commercial banks keep with Federal Reserve banks).

Signs abound that public sentiment is turning against the bank. Meltdown, an anti-Fed tract by the historian Thomas Woods, sat on the New York Times bestseller list for more than a month. Woods, like Paul, embraces the “Austrian” school of economic thought, which sees central banking as a recipe for endless inflation and constantly growing government. Paul has invited him to Capitol Hill to brief a growing unofficial caucus of Republicans attracted to Paul’s hardcore anti-statism. Fed bashing has been a prominent component of Tea Party gatherings nationwide. The largely Paulite movement Campaign for Liberty has organized “contact your congressman” campaigns to get H.R. 1207 on representatives’ radar screens, and the results are pouring in.

“The bill has received as many cosponsors as it has in part because Dr. Paul’s presidential campaign really brought the Fed into the spotlight, opened people’s eyes,” Paul Martin-Foss, a legislative aide for Paul, writes in an email. “There was also a lot of grassroots support, with numerous offices telling me that they had received a lot of mail about the bill and wanted more information.” Colorado Democrat Betsy Markey specifically credits Tea Party pressure for getting her interested in the bill, which she decided to cosponsor. “There’s a lot of anger from both sides of the aisle towards the Fed, not necessarily coming from the same position or working towards the same goals,” Martin-Ross writes. “But everyone wants to be seen as being in favor of transparency.”

Paul recognizes that the growing support for auditing the Fed does not indicate similar enthusiasm for his more radical goal of abolishing the central bank. He has introduced another bill to do just that, and it has yet to attract a single cosponsor. H.R. 1207 supporters, by contrast, “sign on because it doesn’t do” anything like that, Paul says. “It doesn’t direct policy changes. I did that on purpose.”

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  • Suki||

    Now I am aware of the transparency part and that sounds good. I am still not getting abolishing the central bank part. Need to read that in more depth.

    Thank you Brian!

  • ||

    Do you believe in free markets? Then why is something so fundamentally economic (interest rate) not left to the markets? 'nuff sed.

  • ||

    Actually, the interest rates are mostly left to the markets. What the Fed controls is the federal funds rate, which is the rate banks loan to other banks.

    Other than an indirect influence via inflation, your home mortgage rate has nothing to do with the Fed.

  • ||

    As stated, that's a completely incorrect and asinine statement. The discount rate does indeed influence the prime rate which influences mortgage rates.

    At best you can say the Fed doesn't directly influence rates other than the discount rates, but you can hardly credit the fed for keeping mortgage rates low as that great Disney economist PK does then say they don't influence the interest rate.

  • ||

    Another good book is The Creature From Jekyll Island

    It looks like HR1207 is going to be incorporated into the new banking regulations being proposed. If the Fed is going to be made this new "systemic risk regulator", Frank has indicated, along with many other Reps, that that will only happen with a complete audit of the Fed, although this is all still up in the air.

    I believe the co-sponsor count is 307. Rep Alan Grayson (D-FL) was responsible for bringing on over 100 Democrats. However, the Senate version, S604, authored by Bernie Sanders, only has 30 co-sponsors. But that's up from 20, last month.

    I was watching the Banking Committee hearings on HR1207 (I don't have a link, go to C-SPAN and search it), and the biggest opponent was Rep. Mel Watt (D-NC). I did a little fact checking on Mr. Watt. Mr. Watt's constituency is Greensboro, NC. Sound familiar? BoA corporate headquarters is in Greensboro. Then I checked his campaign contributors. In 1998, his top 4 contributors were Labor Unions. Not surprising, for a Democrat. But, in 2008, his top 4 contributors were BoA, Wachovia, American Express, and some Banker's Association (not the ICBA). I thought that was very interesting.

  • Kolohe||

    BoA corporate HQ is in Charlotte not Greensboro.

    (Jefferson Pilot is (or used to be) in Greensboro)

  • ||

    My mistake, his constituency is Charlotte. For some reason I got Greensboro in my head. Wachovia is in Charlotte, also.


  • ||

    My memory isn't what it used to be. It was only a couple months since I checked this guy out, so I went back and double checked:

    1 Bank of America $14,500 $6,500 $8,000
    2 Wachovia Corp $12,500 $2,500 $10,000
    3 American Express $11,000 $1,000 $10,000
    4 American Bankers Assn $10,000 $0 $10,000

    1 AFL-CIO $10,500 $0 $10,500
    2 American Federation of Teachers $10,000 $0 $10,000
    2 American Fedn of St/Cnty/Munic Employees $10,000 $0 $10,000
    2 Assn of Trial Lawyers of America $10,000 $0 $10,000

    Ahhhhh, those dreaded trial lawyers.

  • Thomas||

    Damn right. I don't want the only publicity my city gets on this site to be false accusations of corrupt politicians/banks.

  • ||

    I take it you're from Greensboro? My apologies. It seems I had a Freudian slip. My ex-girlfriend lives in Randleman, NC. She's coming up next month for my class reunion.

  • ||

    You're going to need 290 votes in the House and 67 in the Senate to overcome His Hopiness' veto.

  • ||

    True but even barring that number it will be good to force him to veto to protect his masters.

  • ||

    When we talk about the Fed's "independence", are we talking about the government (POTUS and Congress), or the financial institutions they are supposed to regulate and "oversee"?

    Wasn't it then NY Fed President Tim Geitner that orchestrated the deal between JP Morgan to absorb Bear? Wasn't JP CEO Jamie Dimon on the Board of the NY Fed at the time? Isn't there some sort of "conflict of interest" in there?

  • ||

    He was appointed to a new *14* year term, not a new 4-year term; "Though he was appointed to a new four-year term in August...."

  • ||

    "Greenspan, who enjoyed the longest stretch of low-inflation prosperity in Fed history "

    Brian, Given the number of austrians who will read this article wouldn't it make sense to say "low-CPI growth prosperity" or somewhow make an attempt to point out that asset(house,internet stocks) inflation and fiat monetary growth were very much a part of Greenspan's tenure even thought the Mainstream economist used the slow CPI growth as their happyfeelgood # to ignore the real growing problems of malinvestment?

  • LibAnCap||

    "It certainly was no credit to the anti-Fed movement that Holocaust museum shooter James von Brunn had previously been arrested for attempting a “citizen’s arrest” of the Fed’s governors."

    I never understand why this type of comment needs to be there. The same thing can be said about any political train of thought, in regards to nut-jobs who happen to beleive the same thing.

    I guess anyone that is a vegetarian can be associated with Adolf Hitler and the Holocaust?

  • ||

    The fed will fall when liberals finally realize that keeping low interest rates to fund their big-government spending encourages overconsumption and environmental destruction. Their heads will explode.

  • ||

    George W Bush was a Liberal?

  • Jordan||

    Don't tell me you're surprised by that. Bush was only conservative on abortion and gay rights.

  • ||

    I still don't know what GWB was, and I've given up trying. What's it's come down to in this country, is which industries (or specific companies) does the President, whoever he may be, support, and which social programs will get him the most votes.

    However, it always seems to come down to "it's the economy, stupid". The economy today. "Are you better off today...". That's where the conflict comes in between the President and the Fed.

  • ||

    Bush-meister was not liberal nor conservative. He was nothing. An empty shell of a man steered by special interests.

  • Tsu Dho Nihm||

    I think GWB was an authoritarian. I can't think of a single thing he did (or even proposed) that furthered individual liberty.

  • Some Poster||

    I think that's a little inaccurate. He furthered liberty away from the grasp of citizens, didn't he?

  • ||

    He massively increased spending and regulation and started the bailouts. What was not liberal about Bush except the war?

  • Jim||

    While I enjoy the cognitive dissonance of this as much as the next (libertarian) guy, one of the trademarks of the liberal elite is that they think they are capable of managing the fine lines between 'stimulation' and 'overconsumption', and can achieve bursting economic growth with sustainable environmentalism. So, unfortunately, no such brain splatter will be had over this realization....

  • ray||

    WOW... what a crafty little hitpiece posing as praise!
    well done Brian.. I never credited you with being that subtle. Worthy of a true Hit&Run;

  • ||

    WW 2 vet, Von Brunn, walked into the Washington headquarters of the Federal Reserve System on Dec. 7, 1981, armed with a revolver, a hunting knife and a sawed-off shotgun. Claimed he wanted to take board members hostage to focus media attention on their responsibility for high interest rates and the nation’s economic difficulties. He was convicted in 1983 and served six years in prison for attempted kidnapping, burglary, assault and weapons charges."

    So he was in favor of greater monetary expansion! obviously not a austrian...sounds more like a militant Keynsian...why not smear keynsians as being white supremeicist nuts? or vets? sounds like bias Doherty. I wonder why the Feds let him out of prison so quickly?...was he working for the feds as part of a deal? perhaps he was under their control and this was part of their smear campaign?

  • LibAnCap||

    Doherty spends 4 pages talking about how the business cycle explains the crisis...nothing will be done to end the fed and still manages to slip in the remark about the nut job Holocaust shooter.

    Of course Reason can't fully praise Ron Paul. It is against their true nature. He is not hip enough on the important issues like gay marriage, drug use and porn.

  • ||

    Actually Paul is for decriminalization and pretty string 1A guy.

    The big problem with Paul is abortion, which I share but can overlook considering the overall package.

  • BakedPenguin||

    Yeah ray, it was so craftily done, only a tinfoil hat wearing paranoid nutjob could have found it. Good job, especially pointing out where the "hits" were.

  • ray||

    put on your normal person hat for a minute and read it. skip over the boring econ bits as any memeber of the general public would... focus on the people mentioned and the adjectives used. It doesn't take a masters in marketing to see the image being sold here..

  • BakedPenguin||

    The main takeaway I got from the piece:
    Criticism of the Fed, once a fringe position, is now mainstream. However, it's unlikely any real reform will take place.

    You're either much better at reading subtext than I am, or hypersensitive.

  • ||

    Great research on all the fair and open debates that congress held on the Fed leading up to 1913. I never knew how open and transparent Senator Aldrich was...what a great guy!

  • ||

    It's awesome that so many politicians actually recognize how intelligent Ron Pual is, yet just brush off his ideas.

    Also good article, I want the Federal Reserve out of here and the gold standard back.

  • ||

    That would be the tastiest red meat for the opposition EVER if The Anointed One were to be politically foolish enough to veto Fed transparency. It would become a major theme for attack ads in 2010 and 2012.

  • ||

    Why haven't the Obama daughters taken Swine Flu Vaccine? really why?

  • ||

    Pro-Fed, Anti-Fed; if we don't get our nation's financial house in order, restrain politically profitable government spending, reduce the power of bureaucratic rule-makers unaccountable to the electorate, and get more folks working and fewer on the dole, the Fed will be replaced. Willy-nilly, politically and economically we are heading for a major and potentially violent change in our nation, driven by President Obama's radical agenda of personal power grounded in his cult of personality. Either we restrain the forces of choas being unleased or they will destroy our nation in all ways.

  • John and Dagny Galt||

    Dear Brothers and Sisters, Sons and Daughters of Liberty,

    There are only two types of human beings.

    One type just wants everyone to leave everyone else alone and these humans are students and advocates of the Philosophically Mature Non-Aggression Principle.

    The other type refuses to leave others alone and these humans are the Mobocracy Looter Minions with their hords of bureaucrats, jackboots, and mercenaries that perpetuate the perpetration of the loot and booty gravy-train. Rob-peter-to-buy-paul's-vote bread and circuses of the doomed Amerikan Empire.

    You are either the one...or the other.

    The John Galt Solution of Starving The Monkeys is the only solution. Stop funding and forging your own chains and shackles. What are you leaving for your children and grandchildren and prodigy!?!

    The Mobocracy Looter Minions must be allowed to consume everything around them, then each other, and finally themselves. There is no other way. Ayn Rand wrote about it over fifty years ago and it rings as soundly today as it did then.

    Get your copy of Starving The Monkeys by Tom Baugh today, before the book is banned and the author is hunted down and Vince Fostered!

    John and Dagny Galt
    Atlas Shrugged, Owner's Manual For The Universe!(tm)




  • ||

    What are you leaving for your children and grandchildren and prodigy

    Dude.. that's just embarrassing.

  • ||


  • Fiscal Meth||

    Ike, you're basically right but John Galt(if that is your real name) is super duper right. With a fiat economy, something will probably replace it. That's why the gold standard is so important. Not because it is gold but because gold is rare and durable. It simply can't be inflated by anything short of alchemy. You can only increase its value by producing goods faster than they are consumed (which is good) or decrease it by doing the opposite(which means people are too stupid and lazy to survive which isn't the case as evidenced by our existnce). That is poison for big government. It makes it impossible to feed off of us while claiming to take care of us. and that is why it is quickly squashed. Not because it doesn't work but because it does and that is why some founders of this country threatened not to even sign the constitution unless it banned paper money...Which it did!

  • Jeff||

    I predict that if the Fed is subjected to an honest and complete audit, and the results are made public, it will be exposed for what it is; a pack of corrupt gangsters.

  • Flex Nasty B.I.G.||

    The key to understanding Austrian Business Cycle Theory is to first understand time preferences.

    Basically, the idea is that simply by saving money, you send a market signal indicating your demand for higher-order goods. (those which require lots of capital, years of lead time to develop, etc.)

    Conversely, by *not* saving money you send a signal that you *don't* demand higher-order goods, because you're too busy meeting your immediate needs.

    Here's how it works: when you save money, that increases the supply of money available for lending. That increase in supply results in lower interest rates. At those lower rates, capital-intensive, long-term investment projects now become more viable. Voila - customer demands higher-order goods, customer gets them.

    Again, the opposite holds true as well. When saving rates drop, interest rates go up, which makes those multi-year, multibillion-dollar investment projects a lot less viable.

    At least, that's the way it should work, according to Austrians. It doesn't work that way now because the Fed effectively sets interest rates centrally, instead of allowing them to float naturally according to supply and demand. And, say the Austrians, that sends all sorts of horrendous shock wave effects throughout the economy.

    I don't buy all of ABCT thus far, but time preferences make a tremendous amount of sense to me.

    (someone correct me if I misstated any of that, or if there is a logical fallacy in the theory.)

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  • Mortgage Girl||

    Well sometimes we have to choose the lesser evils I guess.

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  • batteries||

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  • abercrombie milano||

    My only point is that if you take the Bible straight, as I'm sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won't get the full deal by just doing regular skill english reading for those books. In other words, there's more to the books of the Bible than most will ever grasp. I'm not concerned that Mr. Crumb will go to hell or anything crazy like that! It's just that he, like many types of religionists, seems to take it literally, take it straight...the Bible's books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on...the Bible's books were written by people with very different mindsets...

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