The Case Against the Fed by Murray N. Rothbard
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.
Introduction, Money and Politics
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.
The CIA and other intelligence operations are under control of the Congress. They are accountable.
A congressional 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 Congress ensure 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 monetary 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,
23, the maverick and venerable Democratic Chairman of the House Banking Committee, Texan
Henry B. Gonzales, optimistically introduced some of his favorite projects for opening
up the Fed to public scrutiny. His proposals seemed mild. He did not call for full-fledged
congressional control of the Fed's budget. The Gonzales bill required full, independent
audits of the Fed's operations, videotaping the meetings of the Fed's Policymaking 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 decisions 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 rejection of the Gonzales
by President Clinton, whose power, after all, would be enhanced by the measure.
The Gonzales reforms, the President declared, run the risk of undermining market confidence in the Fed.
On the face of it, this presidential reaction, though traditional 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?
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.
Vera, sweeping the streets, control of seaports, regulation of industry, providing social security.
These and many other functions of government 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 politics 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 the sphere of government
becomes an absolute, self-perpetuating oligarchy, accountable 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 displace a ruling elite, then
And 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 of democracy, whether domestic or
global, rush to defend the alleged ideal of the total independence of the Federal Reserve.
Representative Barney Frank, Democrat, Massachusetts, a co-sponsor of the Gonzales Bill, points
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.
On what basis then should the faunted principle of an independent 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 undersecretary of the Treasury for Domestic Finance in rejecting the Gonzalez reform, states,
the Fed is independent and that's one of the underlying 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 industry be so much 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 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?
So, shouldn't we be very suspicious 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 unfortunately not getting in the public arena.
Absolute power and lack of accountability by the Fed are generally defended on one ground alone.
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 Gonzales 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 presumably the public are eternally tempted to expand the money supply and thereby aggravate
and Price Inflation.
Thus, to Greenspan, the temptation is to step on the monetary accelerator
or at least to avoid the monetary break until after the next election.
Giving in to such temptations is likely to impart an inflationary bias to the economy
and could lead to instability, recession and economic stagnation.
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 subjecting the economy to inflation and its dire consequences.
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.
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.
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.
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.
In our current therapeutic age, perhaps Greenspan and his confreres would like to be considered
as monetary therapists, kindly but stern task masters whom we invest with total power to
save us from ourselves.
But in this administering of therapy, where do the private bankers fit in?
Very neatly, according to Federal Reserve officials, the Gonzales proposal to have the
The President, instead 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 private banker role such a sure way? Because, according to
The world view 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 Transmission Belt such as the New York Times and in pronouncements 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 demolished. There is, however, one and only one aspect of the
common legend that is indeed correct, that the overwhelmingly dominant cause of the virus
of chronic price inflation is inflation or expansion of the supply of money. Just as
an 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, that is, 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 counterfeiting, 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 criminals 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 committing 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. 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
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?
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
Truth, that the drumfire 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 the art of solemnity and mystery.
For as we shall see more fully, if the public knew what was going on, if it was able to
To rip open the curtain covering the inscrutable 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 we need is not a totally independent, all-powerful Fed.
What we need is no Fed at all.