WEBVTT NOTE Introduction: Money and Politics 1 00:00:00.000 --> 00:00:05.000 The Case Against the Fed by Murray N. Rothbard 2 00:00:05.000 --> 00:00:23.000 The Ludwig von Mises Institute acknowledges with gratitude the generosity of Mr. Doug Casey and the Eugene B. Casey Foundation and the Honorable Ron Paul and CTAF, Inc., who made the publication of this book possible. 3 00:00:23.000 --> 00:00:28.000 Introduction, Money and Politics 4 00:00:28.000 --> 00:00:44.000 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. 5 00:00:44.000 --> 00:00:51.000 The CIA and other intelligence operations are under control of the Congress. They are accountable. 6 00:00:51.000 --> 00:01:00.000 A congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. 7 00:01:00.000 --> 00:01:13.000 It is true that the committee hearings and activities are closed to the public, but at least the people's representatives in Congress ensure some accountability for these secret agencies. 8 00:01:13.000 --> 00:01:23.000 It is little known, however, that there is a federal agency that tops the others in secrecy by a country mile. 9 00:01:23.000 --> 00:01:32.000 The Federal Reserve system is accountable to no one. It has no budget. It is subject to no audit. 10 00:01:32.000 --> 00:01:38.000 And no congressional committee knows of or can truly supervise its operations. 11 00:01:38.000 --> 00:01:46.000 The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody. 12 00:01:46.000 --> 00:01:53.000 And this strange situation, if acknowledged at all, is invariably trumpeted as a virtue. 13 00:01:53.000 --> 00:02:00.000 Thus, when the first democratic president in over a decade was inaugurated in 1993, 14 00:02:00.000 --> 00:02:06.800 23, the maverick and venerable Democratic Chairman of the House Banking Committee, Texan 15 00:02:06.800 --> 00:02:12.920 Henry B. Gonzales, optimistically introduced some of his favorite projects for opening 16 00:02:12.920 --> 00:02:20.080 up the Fed to public scrutiny. His proposals seemed mild. He did not call for full-fledged 17 00:02:20.080 --> 00:02:26.560 congressional control of the Fed's budget. The Gonzales bill required full, independent 18 00:02:26.560 --> 00:02:32.920 audits of the Fed's operations, videotaping the meetings of the Fed's Policymaking Committee 19 00:02:32.920 --> 00:02:38.440 and releasing detailed minutes of the policy meetings within a week rather than the Fed 20 00:02:38.440 --> 00:02:45.960 being allowed, as it is now, to issue vague summaries of its decisions six weeks later. 21 00:02:45.960 --> 00:02:50.840 In addition, the presidents of the twelve regional Federal Reserve Banks would be chosen 22 00:02:50.840 --> 00:02:57.000 by the President of the United States, rather than, as they are now, by the commercial banks 23 00:02:57.000 --> 00:03:03.560 of the respective regions. It was to be expected that Fed Chairman Alan Greenspan would strongly 24 00:03:03.560 --> 00:03:09.600 resist any such proposals. After all, it is in the nature of bureaucrats to resist any 25 00:03:09.600 --> 00:03:16.960 encroachment on their unbridled power. Seemingly more surprising was the rejection of the Gonzales 26 00:03:16.960 --> 00:03:22.960 by President Clinton, whose power, after all, would be enhanced by the measure. 27 00:03:22.960 --> 00:03:31.960 The Gonzales reforms, the President declared, run the risk of undermining market confidence in the Fed. 28 00:03:31.960 --> 00:03:40.960 On the face of it, this presidential reaction, though traditional among chief executives, is rather puzzling. 29 00:03:40.960 --> 00:03:48.960 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? 30 00:03:48.960 --> 00:03:55.960 Wouldn't knowledge and full disclosure strengthen the faith of the American public in their monetary authorities? 31 00:03:55.960 --> 00:04:00.960 Why should public knowledge undermine market confidence? 32 00:04:00.960 --> 00:04:14.960 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? 33 00:04:14.960 --> 00:04:29.960 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. 34 00:04:29.960 --> 00:04:38.960 The monetary system is highly important, it is claimed, and therefore the Fed must enjoy absolute independence. 35 00:04:38.960 --> 00:04:49.960 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. 36 00:04:49.960 --> 00:04:58.760 Vera, sweeping the streets, control of seaports, regulation of industry, providing social security. 37 00:04:58.760 --> 00:05:04.160 These and many other functions of government are held to be too important to be subject 38 00:05:04.160 --> 00:05:07.160 to the vagaries of political whims. 39 00:05:07.160 --> 00:05:12.800 But it is one thing to say that private or market activities should be free of government 40 00:05:12.800 --> 00:05:17.960 control and independent of politics in that sense. 41 00:05:17.960 --> 00:05:24.000 But these are government agencies and operations we are talking about. 42 00:05:24.000 --> 00:05:31.880 And to say that government should be independent of politics conveys very different implications. 43 00:05:31.880 --> 00:05:38.380 For government, unlike private industry on the market, is not accountable either to stockholders 44 00:05:38.380 --> 00:05:40.660 or consumers. 45 00:05:40.660 --> 00:05:46.820 Government can only be accountable to the public and to its representatives in the legislature. 46 00:05:46.820 --> 00:05:53.300 And if government becomes independent of politics, it can only mean that the sphere of government 47 00:05:53.300 --> 00:06:02.300 becomes an absolute, self-perpetuating oligarchy, accountable to no one and never subject to 48 00:06:02.300 --> 00:06:09.400 the public's ability to change its personnel or to throw the rascals out. 49 00:06:09.400 --> 00:06:16.300 If no person or group, whether stockholders or voters, can displace a ruling elite, then 50 00:06:16.300 --> 00:06:22.100 And such an elite becomes more suitable for a dictatorship than for an allegedly democratic 51 00:06:22.100 --> 00:06:23.700 country. 52 00:06:23.700 --> 00:06:29.540 And yet it is curious how many self-proclaimed champions of democracy, whether domestic or 53 00:06:29.540 --> 00:06:38.780 global, rush to defend the alleged ideal of the total independence of the Federal Reserve. 54 00:06:38.780 --> 00:06:45.140 Representative Barney Frank, Democrat, Massachusetts, a co-sponsor of the Gonzales Bill, points 55 00:06:45.140 --> 00:06:58.140 It 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. 56 00:06:58.140 --> 00:07:05.140 On what basis then should the faunted principle of an independent Fed be maintained? 57 00:07:05.140 --> 00:07:14.140 It is instructive to examine who the defenders of this alleged principle may be and the tactics they are using. 58 00:07:14.140 --> 00:07:22.140 Presumably, one political agency the Fed particularly wants to be independent from is the U.S. Treasury. 59 00:07:22.140 --> 00:07:31.140 And yet, Frank Newman, President Clinton's undersecretary of the Treasury for Domestic Finance in rejecting the Gonzalez reform, states, 60 00:07:31.140 --> 00:07:37.140 the Fed is independent and that's one of the underlying concepts. 61 00:07:37.140 --> 00:07:44.140 In addition, a revealing little point is made by the New York Times in noting the Fed's reaction to the Gonzalez bill. 62 00:07:44.140 --> 00:07:54.140 The Fed is already working behind the scenes to organize battalions of bankers to howl about efforts to politicize the central bank. 63 00:07:54.140 --> 00:07:59.140 New York Times, October 12, 1993. 64 00:07:59.140 --> 00:08:12.140 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? 65 00:08:12.140 --> 00:08:23.140 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? 66 00:08:23.140 --> 00:08:29.140 Shouldn't private banks want to have some sort of check, some curb upon their lord and master? 67 00:08:29.140 --> 00:08:40.140 Why should a regulated and controlled industry be so much in love with the unchecked power of their own federal controller? 68 00:08:40.140 --> 00:08:43.140 Let us consider any other private industry. 69 00:08:43.140 --> 00:09:06.140 Wouldn't it be just a tad suspicious if, say, the insurance industry demanded unchecked power for the 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? 70 00:09:06.140 --> 00:09:16.140 So, shouldn't we be very suspicious of the oddly cozy relationship between the banks and the Federal Reserve? 71 00:09:16.140 --> 00:09:18.140 What's going on here? 72 00:09:18.140 --> 00:09:27.140 Our task in this volume is to open up the Fed to the scrutiny it is unfortunately not getting in the public arena. 73 00:09:27.140 --> 00:09:35.140 Absolute power and lack of accountability by the Fed are generally defended on one ground alone. 74 00:09:35.140 --> 00:09:41.860 alone, that any change would weaken the Federal Reserve's allegedly inflexible commitment 75 00:09:41.860 --> 00:09:47.580 to wage a seemingly permanent fight against inflation. 76 00:09:47.580 --> 00:09:54.060 This is the Johnny One Note of the Fed's defense of its unbridled power. 77 00:09:54.060 --> 00:10:01.060 The Gonzales reforms, Fed officials warn, might be seen by financial markets as weakening 78 00:10:01.060 --> 00:10:10.220 The Fed's Ability to Fight Inflation, New York Times, October 8, 1993. 79 00:10:10.220 --> 00:10:17.220 In subsequent Congressional testimony, Chairman Alan Greenspan elaborated this point, politicians 80 00:10:17.220 --> 00:10:25.940 and presumably the public are eternally tempted to expand the money supply and thereby aggravate 81 00:10:25.940 --> 00:10:27.940 and Price Inflation. 82 00:10:27.940 --> 00:10:33.940 Thus, to Greenspan, the temptation is to step on the monetary accelerator 83 00:10:33.940 --> 00:10:38.940 or at least to avoid the monetary break until after the next election. 84 00:10:38.940 --> 00:10:45.940 Giving in to such temptations is likely to impart an inflationary bias to the economy 85 00:10:45.940 --> 00:10:51.940 and could lead to instability, recession and economic stagnation. 86 00:10:51.940 --> 00:11:06.940 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. 87 00:11:06.940 --> 00:11:11.940 New York Times, October 14, 1993 88 00:11:11.940 --> 00:11:29.940 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. 89 00:11:29.940 --> 00:11:50.940 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. 90 00:11:50.940 --> 00:12:12.940 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 internal fight against the gorgon of inflation. 91 00:12:12.940 --> 00:12:26.940 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 lust and temptations. 92 00:12:26.940 --> 00:12:39.940 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. 93 00:12:39.940 --> 00:12:45.700 In our current therapeutic age, perhaps Greenspan and his confreres would like to be considered 94 00:12:45.700 --> 00:12:53.140 as monetary therapists, kindly but stern task masters whom we invest with total power to 95 00:12:53.140 --> 00:12:56.300 save us from ourselves. 96 00:12:56.300 --> 00:13:02.180 But in this administering of therapy, where do the private bankers fit in? 97 00:13:02.180 --> 00:13:07.340 Very neatly, according to Federal Reserve officials, the Gonzales proposal to have the 98 00:13:07.340 --> 00:13:12.820 The President, instead of regional bankers, appoint regional Fed presidents, would, in 99 00:13:12.820 --> 00:13:20.820 the eyes of those officials, make it harder for the Fed to clamp down on inflation. Why? 100 00:13:20.820 --> 00:13:27.540 Because the sure way to minimize inflation is to have private bankers appoint the regional 101 00:13:27.540 --> 00:13:35.500 bank presidents. And why is this private banker role such a sure way? Because, according to 102 00:13:35.500 --> 00:13:52.260 The world view of the Federal Reserve and its advocates is now complete. 103 00:13:52.260 --> 00:13:58.780 Not only are the public and politicians responsive to it eternally subject to the temptation 104 00:13:58.780 --> 00:14:06.940 to Inflate, but it is important for the Fed to have a cozy partnership with private bankers. 105 00:14:06.940 --> 00:14:13.900 Private bankers, as the world's fiercest inflation hawks, can only bolster the Fed's eternal 106 00:14:13.900 --> 00:14:18.620 devotion to battling against inflation. 107 00:14:18.620 --> 00:14:25.860 There we have the ideology of the Fed as reflected in its own propaganda, as well as respected 108 00:14:25.860 --> 00:14:31.700 Establishment Transmission Belt such as the New York Times and in pronouncements and textbooks 109 00:14:31.700 --> 00:14:38.780 by countless economists, even those economists who would like to see more inflation accept 110 00:14:38.780 --> 00:14:43.140 and repeat the Fed's image of its own role. 111 00:14:43.140 --> 00:14:48.660 And yet every aspect of this mythology is the very reverse of the truth. 112 00:14:48.660 --> 00:14:54.380 We cannot think straight about money, banking or the Federal Reserve until this fraudulent 113 00:14:54.380 --> 00:15:02.340 legend has been exposed and demolished. There is, however, one and only one aspect of the 114 00:15:02.340 --> 00:15:09.980 common legend that is indeed correct, that the overwhelmingly dominant cause of the virus 115 00:15:09.980 --> 00:15:18.740 of chronic price inflation is inflation or expansion of the supply of money. Just as 116 00:15:18.740 --> 00:15:24.160 an increase in the production or supply of cotton will cause that crop to be cheaper 117 00:15:24.160 --> 00:15:25.660 on the Market. 118 00:15:25.660 --> 00:15:32.560 So will the creation of more money make its unit of money, each franc or dollar, cheaper 119 00:15:32.560 --> 00:15:37.740 and worth less in purchasing power of goods on the market. 120 00:15:37.740 --> 00:15:43.420 But let us consider this agreed upon fact in the light of the above myth about the Federal 121 00:15:43.420 --> 00:15:44.680 Reserve. 122 00:15:44.680 --> 00:15:49.880 We supposedly have the public clamoring for inflation, while the Federal Reserve flanked 123 00:15:49.880 --> 00:15:57.880 by its allies, the nation's bankers, resolutely sets its face against this short-sighted public clamor. 124 00:15:57.880 --> 00:16:02.880 But how is the public supposed to go about achieving this inflation? 125 00:16:02.880 --> 00:16:08.880 How can the public create, that is, print, more money? 126 00:16:08.880 --> 00:16:16.880 It would be difficult to do so since only one institution in the society is legally allowed to print money. 127 00:16:16.880 --> 00:16:22.520 Anyone who tries to print money is engaged in the high crime of counterfeiting, which 128 00:16:22.520 --> 00:16:26.640 the Federal Government takes very seriously indeed. 129 00:16:26.640 --> 00:16:33.040 Whereas the Government may take a benign view of all other torts and crimes, including mugging, 130 00:16:33.040 --> 00:16:38.360 robbery and murder, and it may worry about the deprived youth of the criminal and treat 131 00:16:38.360 --> 00:16:45.360 him tenderly, there is one group of criminals whom no Government ever coddles, the counterfeiters. 132 00:16:45.360 --> 00:17:00.360 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. 133 00:17:00.360 --> 00:17:11.360 He is interfering with the government's revenue, specifically the monopoly power to print money enjoyed by the Federal Reserve. 134 00:17:11.360 --> 00:17:18.360 Money in our economy is pieces of paper issued by the Federal Reserve on which are engraved 135 00:17:18.360 --> 00:17:25.360 the following. This note is legal tender for all debts, private and public. This Federal 136 00:17:26.400 --> 00:17:32.640 Reserve note and nothing else is money and all vendors and creditors must accept these 137 00:17:32.640 --> 00:17:39.640 notes like it or not. So, if the chronic inflation undergone by Americans and in almost every 138 00:17:39.640 --> 00:18:01.640 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? 139 00:18:01.640 --> 00:18:16.640 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. 140 00:18:16.640 --> 00:18:23.640 In short, even before examining the problem in detail, we should already get a glimmer of the truth 141 00:18:23.640 --> 00:18:28.920 Truth, that the drumfire of propaganda that the Fed is manning the ramparts against the 142 00:18:28.920 --> 00:18:37.160 menace of inflation brought about by others is nothing less than a deceptive shell game. 143 00:18:37.160 --> 00:18:43.460 The culprit solely responsible for inflation, the Federal Reserve, is continually engaged 144 00:18:43.460 --> 00:18:50.360 in raising a hue and cry about inflation, for which virtually everyone else in society 145 00:18:50.360 --> 00:18:53.000 seems to be responsible. 146 00:18:53.000 --> 00:18:59.200 What we are seeing is the old ploy by the robber who starts shouting, Stop, thief! and 147 00:18:59.200 --> 00:19:03.280 runs down the street pointing ahead at others. 148 00:19:03.280 --> 00:19:09.160 We begin to see why it has always been important for the Fed and for other central banks to 149 00:19:09.160 --> 00:19:14.320 invest themselves with the art of solemnity and mystery. 150 00:19:14.320 --> 00:19:20.560 For as we shall see more fully, if the public knew what was going on, if it was able to 151 00:19:20.560 --> 00:19:27.000 To rip open the curtain covering the inscrutable Wizard of Oz, it would soon discover that 152 00:19:27.000 --> 00:19:34.800 the Fed, far from being the indispensable solution to the problem of inflation, is itself 153 00:19:34.800 --> 00:19:38.280 the heart and cause of the problem. 154 00:19:38.280 --> 00:19:44.200 What we need is not a totally independent, all-powerful Fed. 155 00:19:44.200 --> 00:19:47.320 What we need is no Fed at all.