Fed Independence Is A Myth

John Tamny

The Constitution didn't intend it to be autonomous.

In a recent opinion piece on the Federal Reserve for the Wall Street Journal, authors R. Glenn Hubbard, Hal Scott and John Thornton argued that the "Fed must above all maintain its political independence in conducting monetary policy." What the authors missed is that the Fed has never been non-political or independent, nor was it intended to be autonomous.

The Fed is not an independent body free of political coercion, but rather an institution whose actions have long been dictated by the president and politicians in power. More important, since Congress is empowered through the Constitution "To coin Money, regulate the Value thereof," it's folly for general defenders of central bank independence to presume that this applies to our own Federal Reserve.

On Jan. 31, 1970, Arthur Burns was sworn in by President Richard Nixon as chairman of the Fed. And while the Fed was at least nominally known as an independent entity, Nixon and others were well aware that the Fed's alleged independence was purely symbolic.

As Nixon noted at the time, excitement over Burns' nomination was "a standing vote of appreciation in advance for low interest rates and more money." Nixon made plain that he had "strong views" on the economy, and said about Burns that while "I respect his independence … I hope that independently he will consider that my views are the ones that should be followed."

Fast forward to August of 1971, and Nixon was moving in the direction of severing the dollar's all-important link to gold. Burns strongly defended the existing Bretton Woods monetary order, and as Rice University historian Allen Matusow wrote in his book Nixon's Economy, "Burns shrewdly played on Nixon's fears of political injury if he quit the gold standard." Burns pointed out that Nixon would be condemned for "devaluing the dollar," that "Pravda would hail these developments as a sign of disintegrating capitalism," plus it would be "hated by business and financial people."

But as is well known now, Nixon got his way despite Burns' protests against the U.S. leaving the gold standard. Fed officials surely talk up the central bank's freedom to administer monetary policy as they see fit, but as the Nixon years showed, the Fed is very much an agency coerced by politicians.

Moving on to Paul Volcker's reign as Fed chairman from 1979 to 1987, though it was no secret that he quietly lobbied congressmen and senators against the Reagan tax cuts, the supposedly non-political Fed had publicly endorsed Reagan's tax plan in "general terms" according to economics writer William Greider's book, Secrets of the Temple. Discussing the Fed's alleged independence at the time, Rep. Henry Reuss noted that "If Volcker had that much independence in his system, he would have showed it in the summer of 1981. Instead, he supinely went along with the administration's fiscal policy and he certainly didn't object to the instructions he was given."

Ultimately the Reagan administration very much wanted lower interest rates from the Fed to go with its tax cuts, and to some degree the administration got its wish. In return for a rate reduction from the Volcker Fed, tax increases were then put on the table to blunt some of the impact of the 1981 reductions. Far from acting independently, the Volcker Fed traded rate cuts for tax increases despite its desire to keep rates higher than the administration wanted.

Regarding the Volcker Fed's three-year flirtation with monetarism from 1979 to 1982, this policy's stupendous failure nearly made Reagan a one-term president, and pressure from GOP notables including the late Jack Kemp (who called for Volcker's resignation) surely hastened the Fed's departure from the use of quantity targets. Though the Fed's nominal independence allowed it to be stubborn about a policy that was crushing the U.S. economy, it's fair to say that political considerations factored into its welcome decision to ditch a monetary theory that had proved so wanting.

And when it came time for Reagan to make a decision on Volcker's reappointment in 1984, according to Greider, the Fed chairman agreed that he would eventually step down before his term ended so that Reagan could make his own appointment. Greider was also told by high administration officials that in return for Volcker's reappointment, there was an implicit agreement that "the Fed would provide sufficient growth in the money supply to insure sustained economic growth, without inflation." Greider acknowledged that Volcker "vigorously denied that he had ever discussed the conduct of monetary policy in connection with his reappointment," but as he also noted, "the president's men thought they had an understanding with the Federal Reserve chairman."

When Volcker stepped down as Fed chairman in 1987, Alan Greenspan suggested in The Age of Turbulence, his memoirs, that he reluctantly accepted Reagan's nomination to the top central bank post. But as columnist Robert Novak observed in 2007, Greenspan "aggressively promoted himself for the job." Politics, as they always have, played a role in Greenspan's nomination.

And when Bill Clinton took over the presidency in 1993, Greenspan did not behave as an independent observer of the political scene. Rather, Novak reported that Greenspan's choice to sit in between Tipper Gore and Hillary Clinton during the president's deficit reduction speech offended his "Federal Reserve colleagues" who "viewed taking that seat as undermining the Fed's cherished independence." Rather than attempt to obscure the most political of moves, Greenspan prominently displayed the picture of him sitting with Clinton and Gore in his book.

Greenspan's assertion in Turbulence that "a sound budget will bring long-term rates down" made him very much at home with the "Rubinomics" crowd of the Clinton administration, and sure enough, he says he "had an unusually fruitful and harmonious working relationship" with both Treasury Secretary Robert Rubin and his successor, Lawrence Summers. Impressive company for sure, but a supposedly independent Fed chairman would logically not express opinions about budgetary issues, let alone be tight with political figures in any administration.

And as I wrote in this column two weeks ago, it was no secret that our present Fed chairman, Ben Bernanke, aggressively courted the right for the central bank's top job in 2005. As Reuters columnist James Pethokoukis recently wrote, Bernanke is "now conducting an explicit re-election campaign for another four-year term as Federal Reserve chairman come next January." A truly independent Fed chair would correctly see such blatant politicking as tawdry, and for good or bad, beneath the job itself.

As part of his charm offensive, Bernanke told a town meeting in Kansas City, "I don't think the American people want Congress running monetary policy." In arguing that Congress should vacate its constitutional prerogative when it comes to the coining of money, Bernanke channeled his Fed predecessor, who wrote that if the Fed's discussions were made transparent as some in Congress wanted, "the meetings would become a series of bland, written presentations" in which the advantages of "unfettered debate would be lost."

What all who favor a secretive, independent Fed miss is that not only has history shown the Fed's supposed independence to be mythical, but that the Constitution makes plain that the Fed shouldn't be independent. Even more important, the Fed shouldn't so much be conducting monetary policy as it should be blandly following a price rule whereby the dollar's value is stabilized, preferably in terms of gold. The reality is that we don't need monetary policy, we just need a rule that says the value of the dollar should not be a moving target.

Assuming a price rule was to materialize, there would be no problem in Congress demanding total Federal Reserve oversight, and empowering the Fed to do but one thing: maintain a stable dollar from here to eternity. If so, the Fed would no longer burden the economy with interest-rate machinations and vain attempts at controlling the money supply. The Fed's greatly reduced monetary mandate would likely lead to transparent activity too boring for anyone to watch.

John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.

Independence and Liberty
By Anthony Gregory

Every Fourth of July we celebrate American independence -- but why, and what does it mean?

The political consequence of the American Revolution was the liberation of the thirteen colonies from British rule. The Continental Congress declared "that these United Colonies are, and of Right ought to be, Free and Independent States; that they are absolved from all Allegiance to the British Crown, and that all political Connection between them and the State of Great-Britain, is and ought to be totally dissolved."

It was a major defeat for the world’s greatest empire, Great Britain. But the Americans did not revolt over light and transient causes.

The Americans rebelled for freedom from their motherland because they had believed that their liberties had been seriously undermined by the British government.

The government had levied taxes on them without their consent -- on some items, as high as a couple percent.

The government had searched and seized their property on the basis of unreasonably broad warrants called "Writs of Assistance."

The government was elevating the military above the civil law.

The government was forcing the American people to finance its global empire.

The government was sending forth bureaucrats to regulate and tax the American people.

Do you see a trend here?

The British government had acted despotically and tyrannically, expanding its power further into the lives of the colonists, who had been used to living in a condition of benign neglect for decades. During and after the French-Indian War, the British government became much more interested in the financial dealings of the American people, raised taxes, and compelled the colonists to house and support the troops in their communities.

An important point is that the patriots were not protesting taxes for programs like Social Security or Universal health care -- though we can imagine they would, as such monstrous programs would seem perfectly alien to them -- but rather, they were primarily protesting taxes and impositions that were being carried out in the name of empire, war finance, national security and mercantilism.

Today’s conservatives should keep this in mind. For just as war and empire had led to financial ruin and tyranny for the colonies, they have meant the same for us today.

But it is staggering the degree to which the U.S. government has now replicated and even been more rapacious than the British empire, as far as American liberties are concerned.

In recent years, with the war on terror and the war on drugs, we have seen a steady erosion of civil liberties. The Patriot Act essentially brought back Writs of Assistance. Indefinite detentions and military commissions resemble the Crown’s Star Chambers that had been vanquished long before 1776.

The degree to which economic liberty has been destroyed in this country is beyond description. We have completely lost our way. The tax rates that average Americans suffer are ten times as high as the tax burden under Britain. Even Britain’s targeted excise taxes on tea that sparked the Boston Tea Party were low compared to today’s taxes on alcohol, cigarettes, and other items.

The U.S. government intrudes into our financial lives in every conceivable way. Every industry is regulated by thousands of bureaucrats and millions of pages of federal regulations.

We have a welfare state only slightly less socialistic than that of most other Western democracies. We have the largest budget, the largest government program -- Social Security -- the largest military and the largest prison system on the planet.

And now we are facing a welfare-warfare state crisis that boggles the mind. The Obama administration has continued and built upon the foreign interventionism of Bush, expanding the war in Afghanistan and into Pakistan. On civil liberties, he has solidified most of the worst legal positions and policies of the Bush administration.

Meanwhile, in the economy, Obama is waging another war on the private sector. Every week there is something ranging from ridiculous to downright despotic -- tobacco bans, national healthcare plans, the cap-and-trade powergrab. In the name of the environment, he is shrewdly imposing one of the highest tax increases ever, claiming new broad powers over our lives, shoveling billions to connected industry and creating a phony "market" in carbon emissions that will surely benefit a very few at the expense of all of us. On healthcare, he is poised to force the uninsured to buy health insurance, or else be fined a thousand dollars, and begin the construction of a command-control health care system with its philosophical underpinnings lying somewhere between Mussolini and Karl Marx. This abominable program will be invasive in countless ways, giving politicians and bureaucrats and others a peak into our medical lives while usurping control over some of the most intimate decisions a human being can make.

In terms of the political meaning of the Declaration, we have come a long way. Our current government is far more tyrannical toward the American people than Britain’s was before the Revolution.

Independence from Britain did not guarantee the American states would be free forever, of course. And from the beginning, American politicians began reversing some of the victories of the Revolution. Taxes and tariffs and Constitutional violations got worse. The principle of secession and political self-determination was violently defeated in the Civil War. The entire 20th century presented a nearly undisturbed growth of the leviathan in Washington, DC. The U.S. soon became a world empire, as Britain was.

But there was another victory of the American Revolution, a victory of ideas. As Bernard Bailyn argues in The Ideological Origins of the American Revolution, the Revolution gave birth to a "contagion of liberty." The ideas of freedom began to catch on, not just the principle of political self-determination, but the generally connected ideas of personal, individual liberty. The first anti-slavery societies were formed. People began demanding more religious freedom, and voices began demanding equality for women under the law.

Even in our own time, we can see many reasons for hope. The ideas of liberty have never had more champions, from more walks of life. The economic thinking most needed to combat the status quo has never been more refined with as many articulate defenders. Total war, wartime censorship and conscription are not as popular as they were in earlier eras. The courts are more resistant to executive wartime power grabs than they were in the past. Ron Paul has succeeded in making monetary policy and concerns about the unleashed Federal Reserve serious, mainstream issues, for the first time in nearly a century. States are resisting federal impositions left and right, American tax protests and resentment are growing, Obamanomics is meeting public disapproval, and the president’s betrayal of civil liberties and the cause of peace have turned some of the left against him. And now we have the internet on our side.

And thanks to the long-term consequences of ideals, the traditions we hold dear, there are many freedoms we still have, but they are sometimes easy to take for granted. Freedom from chattel slavery, women’s rights, religious freedom, the freedom of speech, freedom from conscription -- in many of these areas, we are freer than Americans were under Britain, and in all these areas, we are freer than many of our forefathers living in the United States.

If these ideas of liberty can win out, then others can too. And only when the ideas win will we get our freedom.

Independence from out-of-control government might seem like a dream now. But the ideas of liberty can be the most powerful thing on earth. To do your part, declare your own independence from the dominant statist zeitgeist, and spread the message of freedom to people you care about today.

Happy Fourth of July.