Economists’ Pro-Fed Petition Discredits Its Signers
By Robert Higgs on Jul 18, 2009 in Economics, Federal Reserve, Money and Banking, Politics, The State, inflation
A passel of bigwig economists has signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” In support of this defense of the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments.
First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.
Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?
Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support Congressman Ron Paul’s bill to audit the Fed.
All in all, the economists’ petition reflects the astonishing political naïvité and historical myopia that now characterize the top echelon of the mainstream economics profession. (I prefer this interpretation to the more conspiratorial one that they are fronting for the Fed in order to reap some form of personal gain. Academic economists are more often obtuse than evil.) Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.
It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.
Bravo. Fantastic exposé on the Federal Reserve system. You or someone for the Independent Institute should write a book on the Federal Reserve—its problems and why it should be abolished. Ron Paul does have a new book out entitled End the Fed, but it would be great if an economist in the 21st century wrote a book against the Federal Reserve (similar to Hayek’s and Rothbard’s pound on the system).
Anthony | Jul 18, 2009 | Reply
Anthony,
In response to your suggestion for a book by Dr. Robert Higgs on the Fed, you may be interested that Dr. Higgs is the author of the following, widely acclaimed book that critically examines U.S. government economic and financial policies since the early 1930s. Indeed, this book is a comprehensive refutation of Keynesian economics, the Federal Reserve, and much more, and has pioneered a new economics scholarship of the folly of statism:
Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity, by Robert Higgs
David Theroux | Jul 18, 2009 | Reply
There’s also Tom Woods’s Meltdown: A Free Market Look at Why the Economy Tanked, which was published this year.
Sukrit | Jul 18, 2009 | Reply
Please someone make sure this gets forwarded to all those idiots that signed that petition.
John | Jul 18, 2009 | Reply
Economic Numbskulls
Friday, July 17, 2009
180+ Economic Numbskulls Say: “The Federal Reserve Is A Good Counterfeiter!”
Other than the 180 or so economists who are Keynesians and other types of ego-driven interventionists and who are lapdogs of the unConstitutional coup, what about all the rest of us economists who say that counterfeiting is unethical, immoral, and a severe corruption of the economy.
Is the mainstream media only propagandizing the weak and fallacious views of these indentured ‘economists’ while the views of those who insist on trustworthiness are ignored?
Bruce Koerber | Jul 18, 2009 | Reply
There is no justification or excuse for the Fed. Abolish it forthwith!
dave | Jul 18, 2009 | Reply
Yes, central banks create inflation, but the choice here is not between no Fed and having a Fed. It’s between a more independent Fed and a less independent Fed. To audit the Fed bill will decrease the independence of the Fed, which will have the effect to further increase the inflation rate.
Opening up the Fed to the scrutiny of Congress will not cause congressmen to believe the Fed should be abolished. As foolish as the people that run the Fed are, Congress and the American people are even more foolish. They will only pressure the Fed to do things which are even dumber than they do now.
Life would be better without a Fed, but if you are stuck with a Fed, leave it to the elites.
Neal W. | Jul 18, 2009 | Reply
There appears to be an element of hubris involved as well. These economists seem to be saying, “well, central planning will not work… unless it is done by us.” The very same economists who would accept a scathing historical criticism of a Soviet five-year plan are perfectly comfortable with the notion that they (many are ex-Fed apparatchiks) can effectively manage interest rates via creative applications of monetary policy.
Dan Hansen | Jul 18, 2009 | Reply
Neal W.-
I think that a true and complete audit of the Fed would absolutely convince congress and the American people to want to end the fed. There are many other ways that our monetary system could be formatted that would not cause the decline of the dollar by 95%. That’s what happens when you “leave it to the elites.”
I also don’t agree that “the American people are foolish.” The couple of mistakes that have been made (trusting our elected officials to actually represent us, and then not paying attention til it was almost too late), are mistakes that hundreds of thousands of people are not willing to make again. Campaign for Liberty, Young Americans for Liberty, the Constitution Party, the Libertarian Party, the national Tea Parties, etc. . . . those of us that are awake have made it our life’s work to wake everyone else up, too. This Audit the Fed bill has so much support from our Congress and Senate, yet where is it in the MSM?
I feel that anything that has to do with big government is a dirty sham. The whole lot of them need to be fired, and replaced by people with honor and respect for our Constitution. I am a huge supporter of Ron Paul and his “can’t be bought” attitude regarding our current administration and our Constitution. His voting record proves his loyalty to the founding fathers.
My list of complaints against the gov’t are too many to name here, but suffice it to say, the monster has been awakened, and we WILL be watching from now on.
Audit the Fed, then End the Fed!!!
Andrea B. | Jul 19, 2009 | Reply
“The price of freedom is eternal vigilance.” —Thomas Jefferson
“When a people gives up its freedoms for security, it deserves neither, and will lose both.” —Benjamin Franklin
“Silence is golden, but when it threatens your freedom, it is yellow.” —Sir Edmund Burke
Andrea B. | Jul 19, 2009 | Reply
RE: John’s comment:
Please EVERYONE make sure this gets forwarded to all those idiots that signed that petition or compose and send them an email using elements of this blog post.
Gary D | Jul 19, 2009 | Reply
The Fed is a wholly corrupt institution, enacted by the bankers to serve the bankers. They are wrecking our economy and giving away our sovereignty, all with their own internationalist agenda in mind and all in total secrecy.
cmh | Jul 19, 2009 | Reply
Dead on Robert Higgs.
Pizza God | Jul 19, 2009 | Reply
I say… AUDIT THE FED. Let the truth be known… if it’s doing a good job… GREAT… (doubtful)
But if it’s as criminal as I and many others believe… then END the FED…
Enough already with hiding behind a bunch of gangsters and manipulators.
Toni Trepanier | Jul 19, 2009 | Reply
Thank you, Dr. Higgs, for always being a voice of sanity. If nothing else, Ron Paul’s bill will raise enough awareness so that more people are aware of the issues at stake.
Matt R. | Jul 19, 2009 | Reply
You are all as crazy as bedbugs.
First, the Gold Standard is NEVER going to happen. If you succeed in undermining the Fed, you will merely succeed in putting monetary policy in the hands of Nancy Pelosi and her cronies. Crazy libs are going to use you to expand their spending power, which will lead to REAL HYPERINFLATION and economic Armaggedon.
Second, the Gold Standard is unworkable. We tried it already, and it made gov’t powerless to fight deflation and the liquidity trap which made the Great Depression. Unfortunately, the Fed is a necessary evil. So is having a non-politicized leader on the front lines to take decisive, politically unpopular action in times of crises.
Jason | Jul 19, 2009 | Reply
In fact, Bernanke is the only grownup in Washington right now, and, without question, the only one with the fortitude to slam on the brakes once the danger of deflation passes and we start seeing inflation.
Jason | Jul 19, 2009 | Reply
The choice is not the Fed vs. the Gold Standard. That is a fraudulent framing of the available options. The only true options before you are Bernanke vs. Pelosi. That is the only thing you need to focus on. Then you will understand why you should be doing somersaults to protect Bernanke’s independence.
Jason | Jul 19, 2009 | Reply
Jason, well constitutionally, only gold and silver are supposed to be money in these United States of America. I agree that a solely gold standard may be difficult to enact but commodity-based money is far superior to the fiat system that currently oppresses the world at the hands of central governments and central banks.
Your ultimatum (Ben v. Nancy) is equally as overly simplistic and “fraudulent.” Central banks and governments hate commodity-backed money because it is uncontrollable by central planners. If the power to coin U.S. currency was returned to the Congress as Article 1, Sec. 8, states, I doubt the people would be hijacked by the Libs and taken advantage of. In the event that happened, Congress(wo)men are up for election every 2 yrs, unlike anyone at the Fed.
Lastly, you have a propagandized understanding of the Great Depression. It was loose monetary policy during the 20’s that lead to a bubble in the stock market. During the 20’s low interest rates and a policy of expanding the money supply led to stable prices in U.S. dollars despite HUGE gains in productivity. This lead to mal-investment and the correction of the stock market.
tom | Jul 20, 2009 | Reply
Jason, if you think Bernanke has your best interests at heart you must either work for a huge investment bank, or be drinking a ton of Kool-Aid. Please explain to me why we should continue to trust a man who has been wrong in nearly every important prediction he has made over the last 3 years? And really consider how it could be possible that the solution to too much debt and too much credit could possibly be more debt, and more credit. We need to become producers again, and learn how to live within our means. And we need a group controlling monetary policy that is not robbing the people (and other countries) through inflation. Here are just a few of Bernanke’s gems:
Mark | Jul 20, 2009 | Reply
Jason, really, fight deflation? That’s one of the old Keynes’s boogiemen and Keynes has been 100% discredited, none of his theories are valid, not a one of them.
A perfect example today is computer hardware. The $4,000, 35-pound computers from 1980 are now $600 laptops today that are millions of times more powerful. A $1 calculator today is more powerful than a $8,000 computer from 1970. This is deflation. Has the computer industry collapsed on itself? No, it’s turned into THE major force driving human history and is stronger than ever.
“Deflation” is only a bad word for the established wealthy elite. Deflation is a natural trend in a free-market economy using a sound money system.
In a system that isn’t manipulated, an increase in competition, improvements in technology, better workers, all of these cause deflation. Why? We can produce more with less.
It all comes down to prices. Prices are nothing more than the preference the market has for that good. Supply and demand. Deflation is either the increase in supply or the decrease in demand. The only way to keep prices up is to restrict supply or increase demand. The Fed works to increase demand without impacting supply with free money. This method ruins entrepreneurship because we simply cannot determine how much of last year’s inflation on a particular good or service was due to more paper currency being arbitrarily added to the system and how much is due to legitimate demand increase.
It could even go backwards, like housing, where most of the printed, monopoly-Fed money went. Prices increased dramatically but real demand fell. Builders could only work on price to determine market preference, but there wasn’t a market, just a whole lot of Fed paper, and the housing system collapsed.
Yes, deflation is bad, so bad, we should continue to inflate because it could never lead to a housing bubble and collapse…whoops.
JMurray | Jul 20, 2009 | Reply
Jason: It made gov’t powerless to fight deflation…”? Are you kidding me? So you still want economic central planning?
O.K., look, Milton Friedman was a wonderful guy but you don’t have to take everything he said seriously. Anyway, you misunderstand what Friedman was trying to say.
DD | Jul 20, 2009 | Reply
Pro-Fed’ers always bring up the names of Pelosi & Frank. The fact is, these two people are some of the most pro-Fed representatives in Washington.
“Independence of the Fed” is the biggest load of BS, I have seen in my lifetime.
S Andrews | Jul 20, 2009 | Reply
Jason, you assume too much, my friend. First, you assume that Pelosi will still be in power in a few years when this all comes to pass, and with the economy doomed to recession because of the actions of the “elites”, we can be critical of that viewpoint. Second, you assume that the only choices are the gold standard vs. the fiat dollar/Federal Reserve System. I would argue the best option would be a mixed-bag commodity standard with a governing board that would choose the commodities to buy to back the new dollar. This would still give us some wiggle room to avoid the problems with the gold standard, while severely restricting the ability of that group to do things like inject liquidity and prop up bad behaviour like the current Fed has done. You did succeed in making me laugh however in your statement about Bernanke being the only grown up in Washington. If you have that much respect for the man who couldn’t say no to Bush or Obama who called for lowered interest rates in the face of huge market pressure to bring them back up, then you are a terrible judge of character, my friend. Your argument is almost comical, the only choices before us are not Pelosi or Bernanke, but even if they were, what is the difference between slowly bleeding to death, or quickly bleeding to death? We need to stop the bleeding, not argue about which type of bleeding is better.
Josh | Jul 20, 2009 | Reply
I see that the Fed’s P.R. efforts have been ramped up after having hired a former Enron lobbyist (now complete with con-artist frontmen, Internet trolls, and Turing Tests apparently programmed to torment those who wish to engage in rational discourse about the subject of Fed secrecy). However, the cat is out of the bag about the arcane operations of our benevolent, big-government money-transmogrifiers, and no amount of proliferation and promotion of the “independent” meme (and the associated intellectual dishonesty required to espouse such a view, as Professor Higgs has highlighted above) will put the cat back into the Fed’s gunnysack.
An independent central bank is not authorized according to the Supreme Law of the Land (see: U.S. Constitution). But this fact isn’t even a speed bump for those who preach the “independence” of the Fed (like the current President of the kleptocracy, for example). In their surmise, the Constitution is just a blank piece of paper anyway.
While I do not agree with their ideology, I don’t have a problem with those who openly profess the supposed good tidings of communism. It’s a “free country”, as the saying goes (that is—we still have some degree of political free speech left in this country). But I do take issue with those who pretend that the economic central planning of the Really Smart Bankers at the Fed is any kind of necessary instrument of a capitalist system or a of functioning constitutional republic.
I wouldn’t object to the “independence” of the quasi-private “Federal Reserve” banking cartel if their debt-based fiat currency was not foisted upon the people of this country through the coercion of government (i.e., the Fed’s monopoly control over the issuance of currency and credit imposed by the legal tender laws). But after all, the central bank is a tenet of any statist/collectivist ideology.
The “independence” of the Fed is just a transparent euphemism for Fed secrecy and arbitrary power over the people.
JKap | Jul 20, 2009 | Reply
Jason, I love claims like “the Gold Standard is unworkable. We tried it already.” That might as well have been your only comment as you completely discredited yourself.
It seems capitalism isn’t politically popular right now. Guess we should choose between fascism and socialism, eh?
bob | Jul 20, 2009 | Reply
Dr. Higgs,
In your penultimate paragraph you note that central planning is inferior tp free-market exchange. I agree with that, and I also agree that the Fed runs a centrally-planned currency. But it does not have a monopoly on currency. People are free to use any currency they want: Euros, gold, oil, wampum. True, some payments must legally be made in dollars, but most currencies can be converted to and from dollars for relatively small transaction fees.
So what’s the big problem with the Fed running a centrally-planned currency given the thriving marketplace for others?
Federalist | Jul 21, 2009 | Reply
Question: What would happen if we abolished the Fed and every other nation kept their central bank intact? If we allow our interest rates to fluctuate “naturally” and other currencies could be manipulated then couldn’t that effectively leave our exports vulnerable and our assets snatched up by foreign borrowers, possibly other unintended consequences that were not addressed in this article.
NoSingleOne | Jul 21, 2009 | Reply
Jason: “If you succeed in undermining the Fed, you will merely succeed in putting monetary policy in the hands of Nancy Pelosi and her cronies.”
Interesting, then, that she and her cronies are the ones preventing HR1207 from coming to the House floor.
Dave | Jul 21, 2009 | Reply
Federalist says…”So what’s the big problem with the Fed running a centrally-planned currency given the thriving marketplace for others?”
All those currencies you mentioned are also centrally planned, except a few like gold, oil, etc. But transacting in gold and oil are taxed with Sales Taxes, capital gains taxes, collectible taxes, etc., where as centrally planned money has no tax on itself.
In other words, if you were to buy widgets using gold for instance, you will not only pay sales taxes on widgets, but sales tax on gold when you acquire it. On top of it, if gold gains in value in terms of dollars (let’s say mostly attributable to the loss of purchasing power of the centrally planned currency—a.k.a inflation), then you are required to pay taxes, since gold is considered a collectible.
S Andrews | Jul 21, 2009 | Reply
Audit the Fed Now! The Fed chairman’s testimony to Congress is no indication of democracy or people’s will. Most of it is—”we know better,” “how dare you question us” kind of arrogant mumbo-jumbo. This won’t it cut anymore. Let us give strong support to Ron Paul’s bill to audit the Fed.
Kris | Jul 21, 2009 | Reply
The bailouts and prior to that the all is well statements are (were) intended to continue the debt based system which the monetary elites use to enjoy their lifestyle. That millions of others also benefit from the debt based fiat system of gradual inflation helps these few thousands to hide in plain site.
In 1961 my parents bought a 4000 sq foot lakeside house on 2 acres for 36k. I have bought an 1100 sq foot house on a city lot for 126k. Prior to our glorious Federal Reserve Bank my property would have sold for less than 100 dollars, my parents for less than 500. Of course this would have been real money not nonredeemable Federal Reserve Notes, but one wouldn’t need a 30-year mortgage supporting the lifestyle of monetary elites either. Typical earnings back then were 5 to 6 thousand a year for middle class. Houses were bought and sold for cash. No mortgages—but you now have a mortgage because Bernake et al. (Bernake like Al Capone is a “pleasant” front man) want you to work for them. Pump up the debt, pump up the debt!!
Thankfully preparation by the wise can still be made tax free—buy silver and gold with those nonredeemable Federal Reserve Notes—you will pay a numismatic premium (unless you want slicks, ingot, or bars) but consider it a wise hedge.
Jericho | Jul 22, 2009 | Reply
S. Andrews – there is no tax on money—buying gold or silver coin is tax-free.
Jericho | Jul 22, 2009 | Reply
The John Galt Solution is the only solution. Stop funding and forging the chains and shackles that bind you! The Mobocracy Looter Minions must be allowed to consume everything around them, then each other, and finally themselves.
Run Producers Run!
Looters are EVERYWHERE!
Sincerely,
John and Dagny Galt
Atlas Shrugged, Owner’s Manual for the Universe!(tm)
John and Dagny Galt | Jul 22, 2009 | Reply
Fact is (sadly) they literally have us by the b****. They can cause inflation at the drop of a hat, and threaten to do so if we demand an end to them secretly giving trillions of dollars to their own personal overseas bank accounts. They will totally ruin the dollar in spite, if we force them to stop secretly changing the bank account balances of their friends.
stininky | Jul 22, 2009 | Reply
We simply tell them to go to hell. Declare all foreign dollars worthless. Make our goods here instead of there. If they won’t play nice. And if that doesn’t work, we send the army to kill them all.
stininky | Jul 22, 2009 | Reply
S. Andrews: Excellent points. Americans who want to avoid using the dollar as their currency will still get stuck with an “inflation tax” based on dollar inflation (or, as the IRS calls it, a “capital gains” tax).
As for sales tax on currency exchanges: Since that’s imposed at the state level there are practical, if not always absolutely legal, ways to avoid it.
Federalist | Jul 22, 2009 | Reply
That was great explanation on Deflation, Jmurray.
Just wanted to thank you for your time and effort in explaining the issue. Please post again in future.
murryfan | Jul 22, 2009 | Reply
Jason, if it’s “deflation” you’re worried about, then a genuine gold standard is best even according to you. The supply of gold ain’t going anywhere.
Moreover, you’re saying a printing press creates prosperity, and the lack of a printing press exacerbated the Depression? Any more cliches you’d care to unbosom, or is that it?
We had just as much “deflation” from 1839-43, but instead of a collapse in consumption and investment we got substantial rises.
Tom | Jul 23, 2009 | Reply
Jason,
The “danger of deflation”—ooh, we can’t have “deflation” now! No, no! Why, the consensus tells us that deflation is bad! QED.
The American Economic Review published an article a few years ago that found no link whatsoever between deflation and depression. Did you happen to catch that one?
Also useful is Hulsmann’s little book, available for free online, called Deflation and Liberty.
Tom | Jul 23, 2009 | Reply
The main function of the Fed is to bail out the financial sector when it gets into trouble. This is unpopular (for good reason!) The companies that the Fed “regulates” naturally adore the Fed and will fight tooth and nail to preserve (and add to, if possible) the Fed’s power.
Monetary policy has nothing to do with it. Everyone in the mainstream is pro-inflation anyway. Only a few fringe economists want stable money.
Max | Jul 24, 2009 | Reply
Jason needs to reminded of the old adage, “Tis better to keep one’s mouth shut and be thought an idiot than to open it and dispel all doubt.”
Howard Embee | Jul 26, 2009 | Reply
If one is looking for a history, criticism, and an alternative to central banking and the Fed, please check out: Monetary Policy in the United States (Univ. of Chi. Press, 1993), and a recent article in The Independent Review (Winter 2007), “Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy.” The author of both is the undersigned. Bob Higgs has it right as well. I would emphasize that observers re-check the facts about “inflation” in the 1920s. There was no inflation from 1922 to 1929. Second point: The Fed did not just stand by arms akimbo and watch the Contraction develop. The Fed deliberately caused the contraction by its anti-speculation mania.
Keep up the great work, Bob.
Richard Timberlake | Jul 26, 2009 | Reply
Join 5,500+ outraged Americans and sign, comment and promote the Abolish the Federal Reserve Petition to show your displeasure at the real estate and financial meltdown caused to a large degree by easy money policies of Greenspan and the Fed.
Ron | Jul 27, 2009 | Reply