The Mises Institute monthly, free with membership
Volume 14, Number 11
It's a myth that the Federal Reserve is independent of
politics. It's a lie so brazen, in fact, that it's fit only for
Fed press releases. Every administration, to take just one
example, tries to get the Fed chairman to time monetary policy so
as to insure its reelection.
Fed chairmen will play along, provided that's consistent with
the interests of the largest bankers, but not always with
success. As economist Roger Garrison pointed out at the Mises
Institute's conference on "The Case Against the Fed," presidents
know they must seek the Fed's favor. And Clinton has sought it
with a passion, meeting Alan Greenspan every Tuesday morning for
breakfast. Not all presidents are as savvy, however.
Three presidents in the post-war period did not play the Fed
game properly. Carter's loose-money policies came too soon before
the election, and ignited a fierce inflation. Bush's came too
late, failing to boom the economy in time for the election. Ford
didn't know he was supposed to badger the Fed for lower interest
rates, and so didn't do anything. All three cases have this in
common: the incumbent lost.
Rarely has the Fed's timing been better than in this election
season. Early in Clinton's term, Greenspan allowed Clinton to
take credit for the economic recovery of late 1992. Then
Greenspan rested on his laurels, and played a few reckless
monetary games--such as engineering the bailout of Mexico, and
the bailout of the bailout of Mexico--and even allowed the
economy to slump in 1994.
This year, Greenspan has been Clinton's most valuable friend.
On the eve of Greenspan's reappointment in January 1996, Clinton
urged him to lower interest rates. Greenspan complied, got
reappointed, and kept them low for ten months. The result was a
flurry of "good" economic news in the three months prior to the
election. I use quote marks because it's not real, but only a
printing-press recovery, and cannot be sustained.
Greenspan complied over the protests of eight of the twelve
regional Fed banks, which are not necessarily staffed and managed
by Democrats. In late September, it appears, these people became
alarmed that Greenspan had become such a willing tool of the
Clinton administration. They protested, and demanded an increase
in rates to quell a developing inflation threat.
Someone from the Fed regional banks leaked the fact of their
protest to the press, the most serious leak in anyone's memory.
Greenspan not only called in the FBI to investigate it, and
threatened the source with prosecution, he defied the protest by
refusing to raise rates in the next meeting of the open market
committee. The New York Times praised Greenspan for
asserting his independence from the regional banks. But what
about independence from government?
Truly hilarious are the various excuses given for Greenspan's
behavior. Turning the point on its head, National Public Radio
said it showed that Greenspan was refusing to intervene in the
elections. The Times, famous for its reactionary
attachment to Keynesian theory, said Greenspan was convinced that
growth was not strong enough to start inflation.
These excuses merely cover the fact that Clinton owes his
reelection to the central bank, which was probably in the cards
as far back as 1992. At Clinton's first state of the union
address, Greenspan took a seat between Hillary Clinton and Tipper
Gore, and they chatted like old friends. He was signaling to
those in the know that he was a team player.
It's mind-boggling. The Fed chairman is the most powerful
manipulator of American political life, far more powerful than
voters or even the financial benefactors of the two parties. It
is he who directs the short-term state of the economy at election
time, and thereby what issues are discussed, how the president is
perceived by voters, and therefore who is going to rule us for
the next four years.
What Greenspan has done this year is an awesome political
accomplishment. He caused the same people who tell pollsters of
their hatred of government to vote for a man who tried to finish
socializing medicine, who raised their taxes, who stepped up
regulation of the economy, and who expanded the domestic spy
The Fed s actions are a frightening exercise of power, totally
inconsistent with the free market and a republican form of
government. The whims of the king of the central bank carry more
weight than the letter of the U.S. Constitution. The Fed chairman
is only formally accountable to Congress. What's more, he is
unaccountable to the voters and even to the heads of his own
When the Democrats complain, it's because he's not inflating
enough (the Fed loves posing as an inflation fighter), while
Republicans avoid talking about the issue at all. And, sadly, the
conservative movement has nearly dropped the issue. The Mises
Institute is almost alone on this one. We don't mind. But isn't
it time for Republicans and their intellectual backers to
realize, at the least, that silence is not in their political
Steve Forbes is one of the few men in public life to have
addressed the issue. In a series of speeches in the primary
season, he decried the arbitrary power that fiat money gives the
government and, by implication, the central bank. He called on
Congress to institute a gold standard that would make money
sound, add some predictability to monetary policy, and restrain
the growth of government.
Jack Kemp also once advocated a gold standard. But as soon as
he was chosen as the vice presidential candidate, all talk of
that came to an end. Perhaps he has begun to realize that a gold
standard is incompatible with the big-government and loose money
programs ("access to credit") that he also backs.
If, on the other hand, we want to restore economic liberty and
limit government, we need to restrict the Fed's ability to
manipulate politics, bankroll bailouts, water-down the dollar's
value, depress middle-class living standards, and wreck havoc on
That means the dollar must be redefined in terms of gold, just
as it was throughout most of this century and last. With a dollar
as good as gold, there would be no reason for the Fed to exist at
all. This would be the ideal, of course, but any change to
restrain the Fed, put it on a more predictable course, or end its
precious secrecy would be a step in the right direction.
Thank goodness, for example, the Fed underwent a partial audit
earlier this year, which exposed a previously unknown multi-
billion dollar slush fund, a fleet of private jets, and
exorbitant salaries. Because of the negative attention, the Fed
canceled its plans to buy and develop more prime Washington,
D.C., real estate for its overpaid employees.
Of course, Fed corruption is much more significant for the
country than its palatial headquarters and subsidized happy
hours. In its seventy-three years of existence, it has enacted a
social revolution, happily funding every war, every expansion of
state power, every redistributionary scheme, and every central
planning project. Fed inflation has made us poorer and less free,
tossed mothers with young children into the workforce, saddled
the country with an unserviceable debt, public and private, and
made the welfare state possible, creating a permanent and violent
underclass. It is big government's biggest benefactor, and our
If that's not enough to convince conservatives that it's time
to focus on the Fed, consider this: the central bank conspired to
reelect Clinton. For that alone, it deserves to be hung out to
Llewellyn H. Rockwell, Jr. is president and founder of the Mises Institute