The power elite is worried. Evidence for this can be found in a short article “The Fed’s Political Problem” appearing on the website of Foreign Affairs, flagship journal for the Council on Foreign Relations (CFR).
Near the start of this year Ron Paul (R-Texas) introduced H.R. 1207,the Federal Reserve Transparency Act of 2009. The bill was referred tothe House Committee on Financial Services. As of this writing, H.R.1207 has 282 cosponsors.
A Senate equivalent, S.604, the Federal Reserve Sunshine Act of 2009, has been introduced by Bernie Sanders (I-Vt.). It has 23 cosponsors.Both bills have received a tremendous groundswell of grass-rootssupport. Much of the support is coming from ordinary people who havebecome aware of the fact that the Federal Reserve has created trillionsof dollars literally out of nothing during the past calendar year inits effort to micromanage its way out of the worst economic crisissince the Great Depression.
If such a measure were passed by both houses of Congress and signedinto law by President Obama, the resulting bill would allow theGovernment Accounting Office to conduct audits of Federal ReserveSystem monetary policy. The bill proposes to scrutinize the Fed’sdealings not just on domestic monetary policy but on dealings withforeign central banks and foreign governments.
The power elite is worried. Evidence for this can be found in a short article “The Fed’s Political Problem” appearing on the website of Foreign Affairs, flagship journal for the Council on Foreign Relations (CFR). The article’s author, Alan S. Blinder, is a senior-level economics professor at Princeton University who also directs Princeton’s Center for Economic Policy Studies. From 1994 to 1996 he served as vice chairman of the Board of Governors of the Federal Reserve System.
Blinder first argues a thesis he proposed back in 1997,that some areas of government are properly political and others areproperly technocratic. He places monetary policy in the latter, whereit can operate independently of political oversight. The drawback ofRon Paul’s bill is that it would transfer Fed oversight to thepolitical realm and end its independence.
Blinder describes Dr. Paul as “an extreme libertarian and longtimefoe of the Fed. He has, incredibly, persuaded almost two-thirds of theHouse of Representatives to co-sponsor a bill that would jeopardize theFed’s independence.” According to Blinder, the Fed “gets plenty ofcritical evaluations” of its policies and decisions. He maintains thatDr. Paul’s bill “could easily develop into something quite dangerous.”He imagines this scenario:
Sometime in 2010, the Fed, wanting toavoid inflation, will likely begin to abandon the hyper-expansionarymonetary policy it adopted during the recent crisis as a way to staveoff a depression. As it does so, interest rates will start rising evenas unemployment remains high. Predictably, Congress, being more closelyattuned to public opinion, will be unhappy with this situation. Untilnow, the Fed’s independence has ensured that it can afford to ignorepublic opinion and take such necessary but unpopular economic measures.That is precisely why we want an independent monetary policy. But ifthe Paul bill passes, angry members of Congress could ask for a GAOaudit. And, if the report is critical, they could use it to browbeatmembers of the Federal Open Market Committee, the Fed’sinterest-rate-setting body, for killing the country’s economic recovery.
This misses the key argument Ron Paul has been making, which follows those of members of the Austrian school of economics (e.g., Ludwig von Mises).What Blinder euphemistically calls hyper-expansionary monetary policyactually is inflationary, if we understand inflation to be not merelyrising prices but an increase in the amount of fiat currency incirculation. Mainstream economics has long preferred the public to seeinflation almost exclusively in terms of visibly rising prices. Ifprices aren’t rising, economists can maintain that inflation is loweven though the money creation spigot is going full blast — as it hasbeen since the economic crisis began a year ago.
If we understand inflation as an increase in the money supply,however, we see immediately that the Fed, far from being a controllerof inflation, is actually an engine of inflation. Rising prices in thiscase are just one possible effect of monetary inflation. The Fed isresponsible for the long-term decline in purchasing power of ourdollars, which have been backed literally by nothing except legaltender laws and the willingness of the public to accept them since1971, the year President Richard Nixon severed the last ties betweenthe dollar and gold. Fed monetary policy is the reason a hamburgercosts you several dollars when your grandfather could buy one forthirty-five cents. The dollar has lost slightly over 96 percent of itsvalue since the Federal Reserve System was created in 1913. Thenational debt has soared during the period since 1971 from a fewhundred million to its present $11.8 trillion. Millions will be addedto the debt during the brief time it takes to read this article!
The dollar’s value will drop considerably more should it lose its status as the world’s reserve currency. The Chinese are getting very nervous about the money-creation spigot in Washington, D.C. Perhapsthese are the kinds of developments that elites such as Blinder don’twant the public to know about. Clearly the elites are uncomfortablewith the amount of attention the Fed has received — the public beingaware of the trillions having been created literally out of thin airduring the past year. “What will this do to the long-term purchasingpower of my money?” is a perfectly valid question many ordinaryAmericans are asking.
What are the prospects for H.R. 1207 and S. 604? Even if these billspass and a compromise bill reaches President Barack Obama’s desk, it isdifficult to imagine him even considering signing it. The effort tobring more of the Fed’s activities into the light of day may receive anew ally in the Senate late next year, however, as Ron Paul’s son Rand Paulhas announced his candidacy for one of Kentucky’s two slots and raised$815,000 as of this writing. Like father, like son: Rand Paul is alsohighly critical of the lack of transparency that characterizes crucialdecisions made by the Federal Reserve and has vowed,if elected to the Senate, to work to “shed light on this secretiveorganization.” He reminds us of the trillions the Fed has created outof thin air and adds, “The American people have a right to know to whomthis money was given. For all its talk of transparency the currentadministration has done nothing to tear the shroud off the Fed.”