by William Westmiller
I’m not persuaded that the proposals to audit or abolish the Federal Reserve are properly grounded in reality.
The Founders said very little about the specific powers granted Congress, but they clearly did NOT intend an unlimited power to create and manipulate currency: “… The authority of the existing Congress is restrained to the regulation of coin STRUCK by their own authority, or that of the respective States. It must be seen at once that the proposed uniformity in the VALUE of the current coin might be destroyed by subjecting that of foreign coin to the different regulations of the different States,” according to James Madison in Federalist 42.
In other words, the ONLY “money” they were authorized to create were gold and silver coins. Which is why the power to “coin” was included with the establishment of standard weights and measures. The ONLY “regulation” authorized was to ensure that coins were what the claimed to be (e.g., 1.0 troy ounce of .999 pure gold). The accuracy of value representation was the only thing to be “regulated.” Unfortunately, the clear and obvious meaning (at the time) of those sharply limited powers were not made explicit in the Constitution, although they were implied by the Section 10 ban on states coining money, or accepting anything other than gold or silver coins as legal tender.
So, what happened? For more than a century, all U.S. currency was denominated in gold or silver coin, even if it was a printed depository note for a fixed quantity of precious metals. Over time, the *notes themselves* became “dollars”, with the presumption (correct for a long period) of inherent worth.
Then, on the pretext of “expanding commerce”, Congress authorized more notes to be printed than the actual quantity of silver and gold that they claimed to represent. In other words, Congress decided to lie. The notes were no longer “certificates of demand deposit” for actual gold and silver, but were simple contrivances and fabrications. The actual gold and silver reserves were used to pay foreign debt, but the number of claims on those assets (“dollars”) were never reduced to match the actual reserves. In other words, the politicians decided that they could “create monetary value” out of thin air, or at least cheap paper.
That Congress was perpetrating a fraud on everyone who used the “dollar” – on the presumption of some inherent reserve value of hard assets – became evident when the “price” of gold in dollars (which had been roughly 1/35th an ounce) could no longer be sustained. Foreign governments noted the fraud first and started demanding actual gold for their U.S. paper certificates.
When domestic banks started noticing that redemption, they followed suit. In other words, they “called the bluff” of Congress: the notes being printed did NOT actually correspond with the precious metal assets. Their only protection from congressional profligacy was to actually redeem dollar certificates for actual gold and silver. So, the federal government had no choice but to “free float” the “dollar” relative to gold. They abandoned the implied Constitutional restriction, so that they could “create more monetary value” (and spend it) without actual increasing asset deposits. Thus, inflation was born from the political craving to produce “something from nothing.”
When the inflationary consequences of this fraud became evident in the rising price of gold, legislators all agreed that they simply couldn’t control themselves. So, they handed over their imaginary power to create fiat currency to an independent body of bankers, with instructions to do it right: keep inflation low (“sustainable”) without adversely impacting employment (just enough to maintain the illusion of government’s claimed ability to “create jobs”). Thus, the Federal Reserve was founded, with a mandate to use this fabricated federal power to create “money” from nothing … in a “responsible” way. Of course, that was an impossible assignment.
Which (finally) leads to my concern.
IF the Federal Reserve is abolished and Congress “re-claims” the imaginary power to fabricate “money”, how does that solve any problems? Absent a “reconstruction” of the original intent of Article 8, who do you trust more: Ben Bernanke or Barney Frank? A handful of people who have some interest in a stable money supply (required for the maintenance of any common sense in banking), or a handful of politicians who really believe that government CAN create something from nothing? Shouldn’t the point be that NO politician should have ANY control whatever over the money supply? Short of jailing people who perpetrated monetary fraud (most of whom are long dead), what are the chances that Congress (or the Supreme Court) will actually acknowledge that their SOLE power is to coin true money, denominated in precious metals, that are actually held as reserves against paper depository notes?
IF the Federal Reserve is audited, what will that disclose? It certainly won’t reveal the fundamental fraud which average Americans take for granted (that “dollars” ARE “money”), nor will it encourage any kind of dispassionate analysis of “sustainability” or constraint. It will simply insert Congressional “oversight” and superficial “review” of the banker’s best judgment (judgments they shouldn’t be making in the first place). What will voters “demand” of their legislators: more “money” or less “money”?
Audit or abolish the Federal Reserve and you are almost surely guaranteed to have massive runaway inflation in short order. Maybe a “good thing” for the gold bugs who imagine that the “dollar value” of their assets is anything more than illusion (just like the artificial “growth” in GDP), but it will certainly be a very bad thing for every other American.
Rather than attacking the Federal Reserve “bogeyman”, we should work to educate people about the actual limited constitutional powers that Congress should not be allowed to abridge. That may be more difficult than attacking powerful icons or cloistered financial celebrities, but that is the ONLY real solution.
Mr. Westmiller is the past Chairman of the Republican Liberty Caucus.