Introduction: Money and Politics

Introduction: Money and Politics

By far the most secret and least accountable operation
of the federal government is not, as one might ex-
pect, the CIA, DIA, or some other super-secret intel-
ligence agency. The CIA and other intelligence operations are
under control of the Congress. They are accountable: a Con-
gressional 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 Con-
gress 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 mone-
tary 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 [p.3]
his favorite projects for opening up the Fed to public scru-
tiny. 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 deci-
sions 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 rejec-
tion 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 tradi-
tional 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? [p. 4]

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 govern-
ment 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 poli-
tics" 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, account-
able 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 dis-
place 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 [p. 5]
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 inde-
pendent 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 Treas-
ury for Domestic Finance, in rejecting the Gonzalez reform,
states: "The Fed is independent and that's one of the under-
lying 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 [p. 6]
industry be so in love with the unchecked power of
their own federal controller?

Let us consider any other private industry. Wouldn't it
be just a tad suspicious if, say, the insurance industry de-
manded unchecked power for their state regulators, or the
trucking industry total power for the ICC, or the drug com-
panies were clamoring for total and secret power to the Food
and Drug Administration? So shouldn't we be very suspi-
cious 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 unfortu-
nately 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 pre-
sumably the public, are eternally tempted to expand the
money supply and thereby aggravate (price) inflation. Thus
to Greenspan:

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 sub-
jecting the economy to inflation and its dire consequences.
Those dreaded all-too-frequent inconveniences called "elec-
tions" 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 there-
fore 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 com-
monly referred to as "the money doctor." In our current
therapeutic age, perhaps Greenspan and his confrères 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 pri-
vate bankers fit in? Very neatly, according to Federal Reserve [p. 8]
officials. The Gonzalez proposal to have the president in-
stead 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 pri-
vate 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 trans-
mission belts such as the New York Times, and in pronounce-
ments 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 demol-
ished.

There is, however, one and only one aspect of the
common legend that is indeed correct: that the overwhelm-
ingly dominant cause of the virus of chronic price inflation
is inflation, or expansion, of the supply of money. Just as an [p. 9]
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 "counterfeit-
ing," 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 one group of crimi-
nals 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 commit-
ting 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." [p. 10]
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 governmen-
tal "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 drum-
fire 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 inscru-
table 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 [p. 11]
we need is not a totally independent, all-powerful Fed; what
we need is no Fed at all.