Gary North – June 20, 2014
One of the problems that anyone who is critical of the Federal Reserve System faces is the fact that he is regarded as someone without any expertise in the area of money and banking.
In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which are privately owned. The Board of Governors at the time the article was written had 220 full-time economists on its staff. The author did attempt to find out how many economists are on the payroll of the 12 regional banks, but he could not. These are major institutions. Each of them publishes its own monthly magazine.
In terms of the number of people with PhD degrees in economics who specialize in money and banking nationally, there may be as many as 1500, but it could be as few as 1000. Anyway, that was the case in 2009. So, we’re talking about a situation in which perhaps as many as a third of all the specialists in the field are employed by some branch of the Federal Reserve. But this is only the tip of the iceberg. The Federal Reserve has part-time contracts that it doles out to economists in the field. It sets aside almost half a billion every year to pay economists. That is an enormous amount of money to flow in the direction of a single profession.
The article concluded that the Federal Reserve has basically bought control of the field. Almost nobody challenges the Federal Reserve in any serious way.
Here’s a situation in which the agency that controls monetary policy for the United States has an unlimited amount of money to buy support, compliance, or least silence within that segment of professionally trained economists that specializes in money and banking. The Federal Reserve gets to keep all the money that it wants for operations. It has to turn back over to the Treasury Department any money that is not used for operations, but it does not answer to Congress or the Treasury with respect to how it spends its money. This means that the Federal Reserve has essentially unlimited funds available to buy off those critics who might challenge Federal Reserve policy.
The Federal Reserve System is a cartel. It operates for the benefit a relatively small number of banks, probably fewer than two dozen, which constitute at least 80% of all bank deposits in the United States. Really, the Federal Reserve is dealing with about a dozen of these enormous banks. It does not answer to close to 7,000 small banks. They have no clout. They have so few deposits, compared to the giants, that whether they survive or not is basically irrelevant to the Federal Reserve System.
The organization is truly untouchable today. It has never been audited by an agency not employed by it. It is not going to be audited. Nobody knows how much gold is in it. Nobody knows what liabilities or claims against this gold there are. In other words, the central agency that controls the central economic institution in modern society, meaning commercial banking, is beyond control of the vast majority of those banks, and it is beyond the control of Congress. No President ever challenges the Federal Reserve System.
Under these circumstances, what possible effect does criticism from outside the Federal Reserve have? We know how much effect it has. None. If Congress, which is supposedly in charge, does not have the votes to get an audit by the Federal Reserve by the Government Accountability Office, then the Federal Reserve is truly independent of the government. It may go along with a particular presidential administration, but it does not have to.
I do not think there is any other institution in the United States that has this degree of autonomy from government. It proclaims itself as independent of government. It is lauded in the textbooks because it is independent of the government. I am aware of no other institution in the United States whose main claim to fame is that the federal government has no control over it. In textbooks written by leftist authors who want to see control, or least severe regulation, over every aspect of the capitalist economy, they all give a free ride to the Federal Reserve System. In this one case, they pull back from their ideological position, and they claim that the great advantage of the Federal Reserve is its independence from politics. This is completely contradictory to the party line of the American Left, yet there are almost no deviants from this party line.
It is an arcane system. Almost nobody understands how it works. Nobody is supposed understand how it works. Those inside the system who publish their unreadable articles in the regional Federal Reserve magazines never get to the heart of the system. You don’t even get a clear explanation of what constitutes excess reserves. You don’t get an explanation of how it is that, since late 2008, the excess reserves had climbed almost 3 trillion dollars, when those reserves were virtually nonexistent prior to 2008. There is no open discussion of this. It is the central fact of monetary policy today, yet it is not openly discussed. This kind of silence is not random. It is imposed.
If the central institution of an economy is the monetary system, and this institution is controlled by a government-created cartel, and this cartel is independent of the government, then what possible opportunity does the general public have to reclaim freedom for monetary affairs? The answer is obvious: none.
When you consider the fact that the Federal Reserve System is the central bank among the central banks of the world, at least for the present, you begin to understand how a tiny handful of people, who are in charge of an institution that is beyond political control, and whose ownership is concealed with respect to the 12 regional banks, is in control of the economy. This is central planning. We should call it what it is. I know of no socialist government in the West that has ever had the same degree of power over the entire economy that the Federal Reserve System has in the United States. I’m not speaking here of the Soviet Union or Communist China. The Federal Reserve was never in a position of being able to have people arrested in the middle of the night, carried away, and executed. But if you’re talking about central planning over the central institution of the economy, this is true central planning. It is licensed by the federal government, but it is not controlled by the federal government.
In other words, Western economies are centrally planned economies. They are not called this, but this is what they are. They are simply not centrally planned by the government. They are centrally planned by a cartel that represents about a dozen banks. The economics textbooks do not discuss this aspect of the economy.
There are a few critics of the system on the Right and the Left, and there is the old populist movement that has been critical of central banking from the beginning. I would put this movement on the Left politically, but I think it is on the Right socially. It is represented these days by Ellen Brown. That anybody with this little economic knowledge as Ellen Brown possesses could become the major spokesman for the populist movement is indicative of just how bad the situation is in the general population. She has no influence. I have replied to her here.
Going up against the Federal Reserve today is about as politically suicidal as anyone could imagine. The FED is truly untouchable.
The people in the FED think they know what they’re doing. But here is an organization that, from 1914 to 2008, accumulated $800 billion of Treasury debt. It did this through two world wars. It did this in the Great Depression. And then, in a period of five years, added $3.2 trillion to its portfolio. This is not the response of a group of professionals who understand what they are doing. This is not the response of a group of technicians who have a systematic plan to direct the economy. This is the Keystone Cops. Yet these people really are in charge of monetary policy, which means they really are in charge of the amplitude of the business cycle. They cannot suppress it permanently, but they can make it much, much worse. They can hold off disaster, but they cannot avoid disaster. We saw that in 2008 in 2009. There is going to be another similar event, except it will be of greater magnitude.
Then the question will be this: who will represent the critics of the Federal Reserve? There will be millions of critics at that point. The Federal Reserve can run, but it cannot hide. It will be left holding the bag. It will be blamed for the cycle. It will not escape criticism next time. The problem is, it is not clear which critics of the Federal Reserve will gain the ear of the public, and it is not clear whether Congress will actually listen to the voters. Central banking is at the heart of the modern economy, and it is a central planning agency that is attempting to control the lives of several billion people worldwide. This can be done for a while, but it cannot be done indefinitely.
We do not know what is to replace central banks, but we do know this: failure on the magnitude of what is coming cannot be hidden. Next time, or perhaps a time after, the public will understand that the Federal Reserve is the cause of the problem, and that it must be abolished. Milton Friedman finally came to that conclusion, after having defended the legitimacy of central banking throughout almost all of his career. He finally gave up. Http://bit.ly/FriedmanFed.
People get upset about the Federal Reserve. It doesn’t do any good to get upset. You can’t change the system under the present circumstances. But, at some point, central planning will do what central planning always does, namely, crash the economy. At that time, there will be numerous opportunities for critics of the Federal Reserve to take on the bureaucrats, despite all those PhD’s in economics that are on the staff. They will be left holding the bag. They will be left with the blame for the crisis, which they truly will have created. We will see at that time what the public really wants.
My fear is that the public will accept the fact that Congress can intervene to take over the Federal Reserve. That would be a true catastrophe. We will see whether people really believe in the free market. It is the job of those of us who are critics of central planning, and also critics of monetary inflation, to make the best possible case we can.
The Austrian school will have the best shot at it, because the Austrian School has been most consistent and the opposition to central banking. This goes back to Ludwig von Mises’s book, The Theory of Money and Credit, which was published in 1912, in which he attacked the whole idea of central banking. But during the interim, there is going to be much pain. There will be a lot of people unemployed who will not understand why they are unemployed. There will be losses in the equity markets that are staggering, which will dwarf what took place in 2008-2009. The Federal Reserve seems untouchable today, and it is untouchable today. But that kind of power always leads to market failure. It is our job to make certain that, the next time it happens, the Federal Reserve System does not get a free ride.
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