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Fed Critics Go Mainstream

by John Rubino on December 3, 2010 · 22 comments

It’s suddenly fashionable in the mainstream media not just to criticize the Federal Reserve but to question its reason for existing. Watch Bloomberg’s clearly sympathetic take on the ascendancy of Congressman Ron Paul, whose most recent book is End the Fed:

And here’s an excerpt from a Wall Street Journal editorial by Cato Institute senior fellow Gerald O’Driscoll:

Why Do We Have a Central Bank?

Ordinary citizens will increasingly ask that question if the Fed keeps acting as an unelected fiscal authority.

Why do nations have central banks? Countries have developed without one, and sophisticated financial systems have evolved in their absence. Some countries with a central bank have suffered for having one. Zimbabwe comes to mind.

The Federal Reserve System was created by an act of Congress only in 1913. It then presided over a great wartime inflation followed by a major depression in 1920-21. The 1920s were an era of prosperity, due as much to Treasury Secretary Andrew Mellon’s wise fiscal policies as anything the Fed did. The Fed’s performance in the Great Depression was disastrous, a judgment shared by its current chairman, Ben Bernanke.

The Canadian banking system weathered the Great Depression without a central bank. Instead of the thousands of small, undiversified banks that the United States had, Canada had a small number of banks (with many branches across the country) that were able withstand localized downturns. Even in the Great Depression, banking failures in the U.S. were concentrated in specific regions. Canada’s central bank, the Bank of Canada, was created in 1935 in part because of pressure from the rest of the world. Canada had survived without it quite well.

In short, central banking has been neither necessary nor sufficient for the development of a modern economy and financial system. A number of reform proposals for the Fed are being crafted, but there is no agreement on why the institution exists.

Policy makers are debating the wisdom of the Fed’s dual mandate of providing price stability and full employment. Rep. Mike Pence (R., Ind.) has introduced a bill to amend the Federal Reserve Act to end the dual mandate and give the Fed one goal: maintaining price stability (H.R. 6406). The dual mandate is seen by many as giving the Fed an impossible assignment of simultaneously optimizing two variables with one policy tool. It is also not clear that a central bank is capable of maintaining full employment.

Yet maintaining stable prices was not part of the Fed’s original mandate and, aside from some economists, few thought it the Fed’s job. The gold standard provided for stable prices over time, and the Fed’s job was to maintain that standard (which does not require a central bank).

Some thoughts:

  • The story that began in 1913 — when some international banks convinced Congress to create the Federal Reserve and put them in charge of it — has begun a new chapter. As the damage done by bankers and politicians creating currency for their own profit becomes apparent to a broader cross-section of the population, the sheep are figuring out who’s been shearing them. They’re becoming receptive to arguments against central bank-managed fiat currency and in favor of sounder, gold-backed forms of money.
  • That Ron Paul has become a respected household name — while serving in the least respected congress of all time — is both a sign of how much the public mood has changed and a tribute to a man who wouldn’t quit. His committee hearings will be epic.
  • For now the debate will focus on how to amend the Fed’s operating rules. Maybe, the banks and politicians will argue, we should drop the “full employment” mandate and just have the Fed concentrate on price stability. This will be a diversion because it won’t change the hands on the monetary levers.
  • The next chapter will come when the debt we’re now building up finally bites. Then Gerald O’Driscoll’s question — why do we have a central bank? — will move from the fringe to the center of the debate.
  • Chris

    When new sophisticated instruments are introduced into the financial industry, it always appear to be very stable and effective. Just look at what CDOs did to the mortgage industry. It was good at the beginning but when trouble starts, the system break down very quickly. It is the same with the bonds, manipulation of the commodities market, etc. At some point when trouble starts, it will simply break down. So be very careful and watch out for the big financial stuff like derivatives, etc. Some professors should do a compresive study.

  • http://ilovetoronto.org/ Heather

    As far as the Fed’s dual mandate is concerned there has been an intense debate on whether an unemployment-inflation trade-off exists. Some economists say that the Phillips curve represents a short-run trade-off but its application in the long run is impossible since the economy makes adjustments based on expectations. The dual mandate of the Fed must be understood in the context of Keynesian views that focus more on unemployment than on inflation. I take the view that there is not much chance that monetary policy will change since the current Fed leaders believe that active government macroeconomic policies to fight unemployment and stimulate the economy are inevitable.

  • http://na Rick Eriksen

    The sooner the People of this country wake up to the fact the Federal Reserve is a con job and has been since its inception in 1913 (the same years as the income tax amendment did or did not pass), the people of this country will begin to realize that they have been scammed out of their dreams and hopes…

    Imagine if the United States had done what it was mandated to do via the constitution which is to print and distribute money at say even 2 or 3 percent since the creation of the Fed..What a country this would be…if all the money that has been paid to the Fed in interest for money created out of nothing had been paid into the government instead of a few bankers just how great would this country be to live in…Well assuming no businessmen or other vultures showed up to steal that interest…

    We would have everything we were supposed to have…decent and inexpensive education, health care, great infrastructure, high speed rail no doubt, energy not dependant on fossil fuels…we would be an advanced culture at every level…but no we have some sad sack greedy bankers that took all of that away from us…and they continue to screw us daily with stupid and inane policies that do not work or will ever work…

    Right now there is no doubt that we will fail as a country as the result of the Fed and its failed policies as well as our elected officials over the years…so let’s just let it all go, dump the Fed arrest all of the bankers that had anything to do with any of this and start over again so that the next generations can have a better life..Because if we do not..Then start thinking 1984 for the grand kids…

    • A Virginia Farmer

      At Rick:

      ‘Imagine if the United States had done what it was mandated to do via the constitution which is to print and distribute money at say even 2 or 3 percent since the creation of the Fed..’

      While I agree with the overall sentiment of your post, I’d like to set the record straight regarding the US Constitution: nowhere does the Constitution authorize Congress (or anyone for that matter) to print ‘money’ (at any percentage). Article 1, Section 8 of the Constitution states that ‘Congress shall have the power to… COIN money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.’ The clear intent of this Section was that money was to be based on coin, which, at the time of the ratification of the Constitution, was either a certain weight of silver or gold. That is a historical fact. Furthermore, the debates of the Founding Fathers clearly indicated their disdain for fiat money (the failure of the Continental being fresh on their minds).

      Taking this one step further, Article 1, Section 10 of the Constitution states that ‘No State shall… emit bills of credit; make any thing but gold and silver coin a tender in payment of debts…’ Clearly the founders intended that either silver or gold be the basis of our medium of exchange for goods and services.

      Bankers hate the honest money system of our Founders because they cannot create ‘money’ out of thin air and charge you and I interest for borrowing it (fractional reserve banking). Furthermore, politicians hate the constitutional honest money system because they would have a much more difficult time spending more money than they take in without raising taxes (deficit spending). With a fiat currency, they can pay current debts in the future with less valuable ‘money’ – otherwise known as the back-door tax called inflation.

      Does Congress have the Constitutional authority to issue gold/silver backed paper? Yes, as long as you could exchange your paper with the stated weight of silver or gold coin upon demand. (Which is how our money system was structured until FDR’s administration.) Furthermore, the issuance of this commodity backed paper should be performed by our Treasury Department, not the unaccountable private bankers of the Federal Reserve System.

      Is this type of money system the most efficient for a modern society? Perhaps not. But it is the best system available to protect your personal finances (and liberties) from those who would take what little you do have.

      • Dave

        The fractional reserve banking system is the problem not fiat money. Even under a gold standard you will experience the same problems if you allow fractional reserve banking. It has happened before.

        The only way to have a solid banking system is to have 100% reserve for demand deposits.

        • MarkV

          Yes, but hold 100% reserve of what, exactly? It’s meaningless without something that can’t be conjured up out of nothing at the behest of the bankers and politicians.

    • John

      Now try to get people understand this problem, it’s almost
      impossible. They don’t care and they can’t read.

  • Grekko

    Although I pray for Ron Paul to be chairman of the committee, I do not believe that the powers that be will allow it to happen. The man is just too darn honest. The powers that be would rather see this country ruined than admit that our monetary system is just a ponzi scheme for bankers to line their pockets. Max Keiser (Google him) is promoting an ambishous plan to bankrupt JP Morgan. Everybody buy 1 ounce of silver, the price skyrockets, then JP Morgan gets a margin call and goes bust on all their short positions. They’ve been in collusion with the gov and Fed to keep the price of silver down. JP Morgan was one of the creators of the Fed. Does it not delight a person to think of their demise? I invest in silver whenever I can afford to buy some. Right now there is a shortage. I know because it usually take 1 week for delivery. Mine hasn’t even shipped after 1.5 weeks. Buy silver. Cut off the head of the snake!

  • Paul

    In regards to the actual question appearing at the top of the above piece, it is not something I believe you need to be either a Professor or an Economist to answer.

    Q – “Why do we have a central bank?”

    A – Greed & Control.

    While it’s arguable that without the Fed, the US would never have built up such a powerful Military Industrial complex, you can still comfortably ponder that one begats the other, at the advantage of the few.

    Once the Fed was instigated it was ‘Game on’ for the bankers that created it. Along with their Industrial friends. I’m in danger of sounding like a ‘Tin foil hat wearer’ here, but it’s no coincidence that (and aside from all the boom & bust) major wars have littered American history for the 100 years since the Fed’s creation. All funded by a Government, funded in turn by the Fed (At interest %). Indeed, one wonders exactly how many American Fathers, Sons & Brothers have died on the battlefields of Europe, Korea, Vietnam, Iraq, Afghanistan etc…just to give the Government more reason to spend more money on the Military (Not to mention all the civilians killed).

    I’m not a religious man, but I can appreciate the wisdom of Jesus when he overturned the tables of the Money Lenders…

    They are, convincingly, Evil.

    No doubt most people that read the articles on this website are more than aware of the following quote, but I include it here as it sums up my answer to the above question with eloquent, chilling, one line simplicity.

    “Give me control of a nation’s money and I care not who makes it’s laws” — Mayer Amschel Bauer Rothschild

  • TheLawThatNeverWas

    Few are aware of an exhaustive amount of research carried out by a man named Bill Benson, who continues to publish his two-volume book, The Law That Never Was, which very clearly presents factual evidence that shows that the Sixteenth Amendment (and The Federal Reserve Act) was never even legally ratified. I urge each of you to read it.
    I spoke to Mr. Benson on the phone recently and he stated that when he completed the manuscript, the US government approached him about buying the manuscript for whatever price Benson named. He courageously declined and began the journey of publishing. They’ve made his life a living Hell ever since. This should tell you something.
    That we live under the rule of the most disappointing Congress we’ve ever had is obvious. They feed at the Fed trough and it will be very difficult to make progress with regard to ending the Fed or even reigning them in (this made evident by John Boehner’s efforts to block Dr. Paul from getting Monetary Policy Subcommittee Chair), unless public outcry becomes so great that we cannot be ignored. Reading Benson’s book will surely provoke the reader into taking action and contacting their Senator and Congressman. The Federal Reserve, the most successful scam ever pulled on human society, may bow have their days numbered, as people awaken from the psy-op and realize the Fed is nothing more than a den of thieves, making us all little more than robot zombie debt slaves, unaware that we have the power to end this scam overnight.

    The time to put an end to this ridiculous, apathetic ignorance is right now. End the Fed. End it forever. Then, watch as the American people flourish.

  • Bruce C.

    I’m a little surprised that the Journal’s editorial writer says, “A number of reform proposals for the Fed are being crafted, but there is no agreement on why the institution exists.”

    Huh? Maybe not today with today’s politicians and economists but the reason for the Fed’s creation is plain history. I’m not an expert on the subject, but it was basically J P Morgan’s idea to establish a permanent institution to protect the banking system (hence the descriptions “the banks’ bank”, and “the lender of last resort”.) It was Morgan himself, along with a few other industrialists, who rescued a few financial institutions during the late 1800’s using their own personal money. Evidently their efforts basically worked and they got their money back – probably with interest as well – but they recognized that there may not be sufficiently wealthy nor willing individuals in the future, especially if the economy is very large. Therefore, the Federal Reserve Bank was created in 1913 and mandated to regulate what seemed to have gone wrong in the previous bank failures. (Key concept: central planning never works. Fiat money requires that, so fiat money ultimately doesn’t work either because it requires ever increasing amounts of credit.)

    And, by the way, “the Fed” is actually the third central bank the US has had. The second one (the 2nd Bank of the United States) was dismantled largely through the efforts of President Andrew Jackson himself. He explained all about the evils of fiat currency and fractional lending in his 1837 Farewell Address (Read all about it!: See JR’s Jan. 9, 2010 piece in the archives of this very Website.)

    But, the bottom line is this: The US and most Western economies are up the proverbial creek without a paddle. There is simply way to much debt – a debt bubble – that will inevitably, and sooner than later, collapse. Everything that’s being done is to delay the inevitable, in the hope that if “pretend and extend” can last long enough the global economy can somehow, someway deal with the debt properly/orderly. So the Fed buys Treasuries to control medium-term interest rates, because if Treasury rates rise anytime soon it’s game over. But that adds about $900 billion per month to the US and global debt level. One can argue that debt destruction elsewhere in the global economy is happening even faster but the whole system is highly unstable. (Wait until the ECB announces another 750 billion euros in potential credit to bailout Italy (after Ireland, Greece, Belgium, and Spain go under).)

    I could go on, but basically we’re in a mega-debt bubble that will collapse sooner if the politics and economics-as-usual don’t continue. So, be careful what you wish for.

  • Kdw

    Ron Paul For President 2012! Save the Republic, Restore our Constitution, END THE FED!!!

  • Brad Thrasher

    As a liberal in the tradition of Jefferson, Jackson & Kennedy I take this opportunity to extend a warm welcome to my fellow Americans from the right who are beginning what we’ve been talking about for two centuries.

    Better late than never 😉

  • Brad Thrasher

    Kidding aside I do wonder if the Federal Reserve isn’t the so-called “bad bank” Washington policy makers discussed creating in the early stage of the current FUBAR.

    I would speculate that the reason we didn’t recreate a Resolution Trust Corp ll is because policy makers were overwhelmed by the sheer size of the fraud. We knew that mortgages were more than a pesky “50 billion dollar problem” as Bernnake had assured us in August of 2007.

    What really caught them unawares was the digital run on our banks in September of ’08, the collapse of Lehman and the realization that AIG had engaged in the most massive insurance fraud in history.

    At that point, as we say in ice hockey and barn fires, “it was Katie bar the door” pull out all the stops, do whatever it takes. We’ll sort it out later. May the sight of Henry Paulson on his knees before Nancy Pelosi begging she grant his back of the envelope trillion dollar legislation, upon threat of martial law be our generation’s “Dewey Wins” moment.

    I forget when exactly but Bernanke was commenting on opening the Discount Window and buying all the bad paper. He was asked, “Why didn’t you do that sooner?”

    “We didn’t know we could. We didn’t know we had that authority.” he responded.

    After all this. After trillions of dollars of dollars in bad debt is sanitized, along comes a pencil necked geek OBGYN from Texas thinking he’s going to audit the Fed? He wants to know where the money went? The people who have covered teh largest financial fraud in history are just going to fess up and tell us how the money was spent?

    I can understand how that notion might meet with some resistance.

    As Bruce C. points out above, this is our third central bank. However, I would add that we have and have had but one Treasury. This is the treasury that survived the creation of our nation, a civil war, 3 central banks, 4 assassinated presidents, WW ll when we thought we might be speaking Japanese, German or both, re-built Europe and Japan, won the Cold War, seeded the exploration of space and financed technological advances that weren’t even dreamed of 50 years ago.

    I suspect we do lose this Fed. The remaining question is how and by what means. By forced insolvency in the way George Soros exposed the Bang of England. Or by transparency of the kind a Ron Paul or someone like him would bring about.

    The Treasury will survive intact. When push comes to shove our constitutionally mandated activities go on. It’s the alphabet soup of delegated authorized agencies, like the Federal Reserve that close up shop.

    I suspect this Fed will prove to be that bad bank.

  • Bruce C.

    I’d just like to say a few more things about “ending the Fed”.

    First of all, the desire to end the Fed is based upon the belief that the Fed is the source, or the main source, of all our macro-economic financial problems. Although the Fed has been instrumental in the devaluation of the dollar and the distortion of free market economics through mandated interest rates, it is not the fundamental problem. The fundamental problem is that of fiat money itself. The use of fiat money is what allows oligarchs and politicians to personally profit from a complicit or ignorant electorate through inflation and mercantilism (the use of government to create and protect markets for a chosen group, also known as “crony capitalism”.) So, ending the Fed is not entirely the answer.

    In any case, I suspect the Fed, along with a whole lot of other banks and financial institutions, is going to implode on its own regardless of any political efforts to audit or censure it. What is going on now is so scary and dire and for several different reasons. For one thing, there is still denial (or ignorance – choose your poison) about the state of affairs and what to do about it, by all concerned. Was it just me, or was Bernanke’s lips literally trembling when he spoke during the 60 Minutes interview? I actually pity the guy sometimes because (unless he really is one of the alleged diabolical “elites” trying to concentrate all of the wealth and power in the world and usher in a new world order so he can finally retire and…anyway) he must be under amazing pressure. Think about him as a “social being” who may well receive more vitriol than perhaps a person can withstand if he’s wrong, and he very well may be. In fact, I think he is wrong, spectacularly so. Regardless of whether or not he was saying what he really means, what he said on 60 Minutes (which matters in terms of mass psychology and behavior) was almost pathetic. He said the Fed is buying Treasuries to lower interest rates so that businesses and individuals will start borrowing and hiring. Then he says he’ll continue to buy them until inflation increases. Mind you, he never verbally makes a distinction between monetary inflation (the increase in outstanding currency and credit) and price inflation, though he means price inflation. But not only that, he means price inflation as measured by the core-CPI. So even as food and energy prices go up the core-CPI continues to hover around 1%. So we’re being told that the Fed will increase the National debt – and your cost of living – until core CPI is around 2%, or until the unemployment rate drops to around 5% in 5 years or so (hopefully, though “that’s not certain”.) Why does the Fed want to create inflation? To help the banks. (Remember, THAT is the purpose of the Fed.) The targeted inflation rate is expected to provide sufficient motivation for “you” to stop paying off debt or hoarding your cash and give it to a financial institution in return for a rate of interest somewhat above zero. It is to avoid, or escape from, the dreaded “liquidity trap”, and to give money to the banks so they can fund their mortgage foreclosures (just kidding, sort of).

    I think Thrash is right that the Fed is stealthily becoming a “toxic bank” that all manner of financial cretins wanted in ‘08. It’s like a self-created Catch-22 financial black hole because the Fed will never be able to stop buying Treasuries now, especially if and when other countries and investors stop buying them. If they stop now then interest rates will rise and incur lethal unrealized capital losses on its books, even as buying more ever deepens that dilemma. If instead they try to sell them then they take realized losses. (It’s enough to make a plutocrat really mad!)

    Thrash may also be one of the early criers for the US Treasury ultimately prevailing once again. Imagine that the majority of the world’s Treasury bonds end up with the Fed. You think there might be any US taxpayers in favor of defaulting on them in that case? Any US politicians besides Ron Paul?

  • Brad Thrasher

    Very true Bruce C. While the Fed controls monetary policy it’s our elected officials who control fiscal policy. One does enable the other in the fiat currency model as you point out.

    Our rebellion was against British mercantilism and the Crown’s protection of the East India Trading Company that resulted in our Tea Party in Boston harbor. I appreciate the fact that you get it Bruce. I wish more on the right and left did too.

    I’m also not much for conspiracy theories. Well intentioned people of good will can be wrong. It’s part of what makes us human.

  • Muthu


  • Brad Thrasher


    If you haven’t started it already, I highly recommend “Will 2012 be as Critical 1860?” linked in the Best of the Web below the money and currency charts. It’s a day at the beach or near the hot stove with a hip flask of jack depending on your weather, kind of read.

    I don’t know that they’re right but the Burning Platform does make a compelling argument. Comparative history is a tried and true storyteller’s device.

    This one is a New Age meets Fire & Brimstone. Pick your poison.

    Among the reasons I find this article so compelling today is that after the tax compromise, I believe Obama has assured himself a one term presidency.

    This President will either defeated in the primaries like as LBJ or softened up by the primary process like Gerald Ford was in ’76 and Carter was in 1980. Either way he’s done like dinner.

    Obama’s only shot is if the Tea Party Republicans break off. Frankly, the country-club Republicans have always done a great job manipulating the true believer crowd.

    All the best,

  • zack

    A recent Bloomberg poll shows that 60% of Americans want the Fed reined in, while a smaller subset (16%) want it abolished entirely. Credit Ron Paul for exposing the corruption and fraud being conducted by the Fed.

    We help Americans find jobs and prosperity in Asia. Visit http://www.pathtoasia.com/jobs/ for details.

  • Thomas

    “There is simply way to much debt – a debt bubble – that will inevitably, and sooner than later, collapse.”

    And who made that debt bubble? The Fed, all alone.

    For their fellow bankers, of course, but that’s another thing. For profit, of course. More loans, more profit and if you don’t have money to loan, Fed helps by removing “legal obstacles” like they like to tell themselves. Other point of view to the same thing is “breaking the law” .

  • Thomas (from EU)

    “I’m also not much for conspiracy theories. Well intentioned people of good will can be wrong. It’s part of what makes us human.”

    I’ll believe that when people being wrong are _losing money_. Their own, a lot. There’s a price to pay for errors. Literally.

    You see, just “being wrong” just don’t cut it when those “being wrong” makes millions for themselves, personally. “I made a huge mistake and got filthy rich” is something just don’t happen, in reality, in large scale.

  • http://www.streetofwalls.com Jesse

    Obama announced this AM a new refi plan for non-agency mortgages, what this do to all the conforming stuff?

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