Why You Should Support Auditing The Fed

The Fed is tasked with the dual goals of price stability and restraining inflation. Folks like myself would suggest it hasn’t done a very good job of either, but that’s not crucial to the question of whether we should be able to determine how they’re attempting to fulfill their mission.

Particularly irksome when we’re talking about an audit is the fact that they’ve just admitted to engaging in gold swaps, influencing the gold price, in opposition to past denials and with the assertion that they should be able to continue hiding the specifics:

The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. that it has gold swap arrangements with foreign banks that it does not want the public to know about.

The disclosure, GATA says, contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

The Fed’s disclosure came this week in a letter to GATA’s Washington-area lawyer, William J. Olson of Vienna, Virginia (http://www.lawandfreedom.com/), denying GATA’s administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund’s treatise on gold swaps here: http://www.imf.org/external/bopage/pdf/99-10.pdf.)

Gold has been flirting with the $1000/oz level for several weeks (topping it a few times). Those in the gold market have long believed that central banks are suppressing the price to keep fears of inflation from hitting the roof.

How much longer do we have to allow the fed to lie to us, and then when we catch them red-handed, assert that they know well enough that we have to let them hide details on top of their lies?

I say we audit the fed. Then End The Fed.

  • EZstar

    What do we replace the Fed with? Supposing I agree that there’s some shady things going down there, how do we conduct monetary policy without it? Do you really trust congress not to take control of that? The Fed is bad, but we are effed if the democrats and republicans get to manipulate the business cycle.

    If you say go to the gold standard, thats a better response, but then what do we do about deflation?

  • John222

    EZstar, Just curious as to what you mean by deflation. Are you referring to a decrease in prices due to the increase in the value of currency, or a decrease in the availability of credit and/or currency supply?

    I can’t think of any reason why anyone would argue against an audit of the Fed, but ending the Fed would encounter fierce resistance from many quarters.

  • EZstar

    yeah, I kind of like the idea of auditing the Fed, though I really don’t trust congress not to make it worse or try to take control. Hopefully they prove me wrong.

    By deflation I guess I mean the second one (a decrease in money supply), but I’m not really sure I see a difference between that and increased real currency value. Since deflation makes holding money dramatically more attractive, it usually results in an increased real currency value (money behaves the same as any other good).

  • http://thelibertypapers.org/ Brad Warbiany


    I’d go to free banking.

  • EZstar

    Brad, free banking has always seemed interesting to me. I can see it having similar problems (in the real world, not necessarily in idealized models) as the US had in its free banking era, when “The banks were short-lived compared to today’s commercial banks, with an average lifespan of five years. About half of the banks failed, a third of which went out of busienss because they couldn’t redeem their notes.” According to wikipedia. Arguably this could be a good thing; no banks are too big to fail, capitalism works because high risks result in both high rewards AND high costs for failure. But people also get hurt when banks fail. Losing your savings is not a fun thing. It may be good for our economy overall, but it’d be political suicide.

    Unfortunately, free banking doesn’t allow us to combat deflation. It says so right in the article (“A modern proposal for free banking that doesn’t radically alter the monetary base regime is one that freezes the monetary base”). Since increasing the money supply, ie increasing inflation, is what central banks use to counteract deflation, a free banking system would basically hamstring them. I don’t understand free banking well enough to say for sure, but I think that characteristic is necessary for it to work.

  • John222

    EZstar, you should read the link Brad provided. It describes how early US banks weren’t really a good example of “free banking”. I especially like the part about greater guarantees for note holders, ie: note holders don’t face losses until bank owners have lost their equity and personal property.

    I don’t see how deflation as you have described it would be a problem. Nor do I see inflation as necessary. I’m no expert on banking, but it has never made sense to me how anyone can loan out more money than they actually have. In a free banking system credit may not be as easily available, but I’m not sure that would be a bad thing.

  • EZstar

    No I recognize that (although the article’s coverage of it was interesting), that’s what I meant by in the real world, just that “free” banking often has gotten political strings attached to it along the line somewhere. I still think free banking is a cool idea, I’m just not sure it would be implementable.

    But the problems with deflation are pretty universally agreed on by economists (not completely universally though). There are some benefits to very short periods of deflation, but long run deflation is very bad for the economy. It increases the real value of debts (any debts you have get bigger, more people default), and encourages people to hold money and wait for it to gain in value. That knocks the bottom out of demand in most of the country, businesses produce less, GDP falls, deflation continues further. You can imagine why they call it a deflationary spiral.

  • john222

    I can see how deflation could become a problem in the long term, and I’m no economist, but I think it would take a long time for deflation to offset the inflation that has occurred since we left the gold standard.

    While the real value of a debt may increase, so has the value of the currency it is being paid with. I may be wrong, but I see that as “breaking even” in a sense.

    As far as encouraging people to save money, I see that as a good thing. Now, people are encouraged to spend money as fast as they can before it loses more value. That’s part of the problem with the current system, not enough real savings.

    I don’t doubt that changing to a free banking system would be somewhat painful, but like growing pains, it will pass and an equilibrium would eventually be reached. It will be better to change voluntarily than wait for the entire system to collapse, dragging much of the global economy with it.

  • EZstar

    I think you’re misunderstanding. By real debts I mean inflation adjusted, so taking into account deflation. Say you want to buy a some eggs, and I loan you $10 to buy 10 eggs. If there’s deflation, each egg now costs less than $1 but you still owe me 10. So you now owe me more in real terms, meaning in terms of actual goods the money can buy. Good for me, bad for you, especially if you’re poor already. This is often made more confusing than it need be by the media and some economists, so it’s pretty reasonable to get a little confused on it.

    But you’re also missing the problem with saving too much. It may be true that we could save more, but if people save too much the economy grinds to a halt. When the dollars in your wallet are gaining value all the time, you have a very strong incentive to hold on to them. Unlike in normal times, savings are usually kept in cash instead of invested, which hampers growth in the long term.

    I do think its possible that economics is wrong about some or all of this, macroeconomics as a science is only 80 years old after all. But I don’t think the worlds biggest economy should enact dramatic experiments that are contrary to accepted economic wisdom. I want somebody to do it, and I love the libertarian fantasy of found a country somewhere (in space? at sea?) to try these things out. I just feel like too many people’s well being is at stake to do that kind of economic experimentation in the US

  • john222

    I tend not to think in terms of borrowing, but rather in earning. To change your scenario a bit, you hire me to do some work and agree to pay $100. From the time the agreement was made, to completion of work, to payment, what is now my $100 will buy more than when the agreement was made. The way I see it, deflation would tend to discourage borrowing in general. I see this as a good thing.

    Can there be such a thing as saving too much? With people being more inclined to save rather than spend it seems that interest rates on loans and investments would also increase. Why would I want to loan anyone money if I can earn 10% (or whatever) by keeping it in my pocket.

    As far as economic theories, thanks to a link from tarran some time ago, I have been making my way through the archives and articles over at mises.org so I’m not sure what you mean by “accepted economic wisdom”. Accepted by whom? Our politicians? the media? Fiat money has been shown to fail time and again, so continuing it’s use and manipulation is wise? The well being of so many is precisely the argument to make for ending the FED, not continuing it.

  • Justin Bowen

    I don’t see how

    Isn’t that little bit somewhat similar to the famous last words of more than a few people? I’m not necessarily disagreeing with you, but I do think that everyone should pause when they hear that.

  • john222

    I agree with you Justin, and I usually try to avoid such phrases. Another good one is “I don’t think…”. In this case it was an invitation to provide more information.

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