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May 2000
Volume 18, Number 5

The Federal Reserve and Political Corruption

by Tom DiLorenzo

LIKE A MAN WHO DOUSES A LARGE pile of rags with gasoline and then warns of a fire hazard, Fed Chairman Alan Greenspan has begun issuing dire warnings of impending inflation after orchestrating several years of explosive monetary growth. To some observers this behavior is just the result of the difficulties inherent in central planning. But the real reason for it was explained by Congressman Ron Paul (R-Tex.): The Fed is a political institution that is used to manipulate the economy for the benefit of White House incumbents at the expense of the rest of society. 

As long as Clinton was fearful of impeachment, Greenspan kept the monetary spigots wide open, even while voicing "concern" about an "irrationally exuberant" economy. With Clinton out of the woods and the presidential race in full swing, Greenspan is attempting to reverse the irreversible economic forces that he set in motion over the past two and a half years. 

Despite the phony proclamations by economists that the Fed is an "independent" institution, it has never been independent of politics. In 1935 Franklin D. Roosevelt "packed" the Fed's board of governors with political hacks just as he would later pack the US Supreme Court. FDR appointed Marriner Eccles as Fed Chairman even though Eccles had no financial background and lacked even a college degree. In reality, the Fed was run by Eccles's political mentor, Treasury Secretary Henry Morganthau, Jr., which is to say, it was run by Roosevelt. The Fed has almost always been run the way Greenspan is running it-to accommodate the president's political preferences. In an April 1978 article in the Journal of Monetary Economics the late Robert Weintraub showed how the Fed fundamentally shifted its monetary policy course in 1953, 1961, 1969, 1974, and 1977-all years in which the presidency changed hands. For example, Eisenhower wanted slower monetary growth; the money supply grew by 1.73 percent during his first administration, the slowest rate in a decade. 

President Kennedy wanted faster money creation; from January 1961 to November 1963 the money supply grew by 2.31 percent. Lyndon Johnson desired even faster monetary growth to finance the Vietnam war; money supply growth more than doubled during his presidential term to 5.0 percent. These widely-varying rates of monetary growth all occurred under the same Fed Chairman, William McChesney Martin. 

Martin's successor, Arthur Burns, was such a staunch supporter of Richard Nixon that he abandoned his professional credibility by endorsing wage and price controls. Even though Burns's staff advised him that the money supply was forecast to grow by 10.5 percent by the third quarter of 1972, he advocated even faster money creation. The growth rate of the money supply in 1972 was the fastest for any one year since the end of World War II and helped assure Nixon's reelection- and the stagflation that followed. 

Gerald Ford wanted slower monetary growth to quell his predecessor's inflation, so Burns complied with a 4.7 percent growth rate. But when Jimmy Carter was elected Burns turned around and gave him what he wanted-an almost doubling of the monetary growth rate. Burns was quite adept at keeping his job by kowtowing to his political masters. This kind of behavior continued throughout the Reagan, Bush, and Clinton administrations. 

Federal Reserve monetary policy is, in essence, a "good cop, bad cop" con game. In addition to generating a political business cycle for the benefit of the men who appoint them to their jobs, Fed chairmen also serve as political scapegoats when things go wrong. As described by economist Edward Kane: "Whenever monetary policies are popular, incumbents can claim that their influence was crucial in their adaptation. On the other hand, when monetary policies prove unpopular, they can blame everything on a stubborn Federal Reserve and claim further that things would have been worse if they `had not pressed Fed officials at every opportunity.'" 

In return for this favor the Fed is allowed to amass a gigantic slush fund by earning interest income from the government securities it purchases through open market operations. Since the Fed earns money by buying securities but loses income by selling them, there is a built-in incentive for inflationary money creation. 

A 1996 General Accounting Office audit revealed that the Fed's $2 billion annual budget was used to employ 25,000 well-paid employees, to operate its own air force of 47 Lear jets and small cargo planes, and to maintain a large fleet of automobiles (including personal cars for 59 Fed bank managers). A full-time curator oversees the Fed's collection of expensive paintings and sculptures. 

The number of Fed employees earning more than $125,000 per year more than doubled (from 35 to 72) from 1993 to 1996, according to the GAO. Even the head janitor, known as the "support services director," was paid $163,800 in salary plus fringe benefits. Millions of dollars are spent on professional memberships, entertainment, and travel. 

The Fed operates for the benefit of its executive branch controllers, the banking industry, and Fed employees themselves, at the expense of the rest of society which suffers from the economic instability it creates. Worse yet, many Americans have been conned into believing that the Fed Chairman operates like the Wizard of Oz, hiding behind dark curtains, pulling levers and pushing buttons to make the economy operate smoothly. So-called "scientific socialism" may have been the most absurd and destructive idea of the twentieth century, but it is nevertheless the guiding ideology of central banking. 

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THOMAS J. DILORENZO, an adjunct scholar of the Mises Institute, teaches economics at Loyola College in Maryland. tdilo@aol.com

 

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