No Criticism of Bernanke Is Allowed

Recently by Gary North: Ron Paul’s Questions for Ben Bernanke



Ben Bernanke has an overwhelming majority on the Federal Reserve System’s Open Market Committee (FOMC), which meets every six weeks to set Federal Reserve policy. There is only one dissenter, Thomas Hoenig, who consistently votes against any expansion of the FOMC’s asset purchases, meaning any expansion of the FED’s balance sheet: the monetary base. The vote is consistently 10 to 1.

From mid-November 2009 until late November 2010, the adjusted monetary base remained flat. There were increases in early 2010, but these were reversed by subsequent sales of assets. It was with this as background that Bernanke announced the policy of quantitative easing, meaning the purchase of an additional $600 billion of Treasury assets, mainly mid-maturity bonds.

The threat to the economy, according to Bernanke, is price deflation. Inflation is not a threat, he says. If it ever becomes a threat, he insists, the FOMC will reverse its policy and sell assets, thereby shrinking the monetary base. This will push any overheated economy back into low price inflation, which he says should be 2% per annum – a doubling of prices every 35 years.

There has been mild criticism of the FED from within the conservative camp. The main critics have been Austrian School economists, best represented by Ron Paul. Their hostility to central banking extends back almost a century to Ludwig von Mises’s book, The Theory of Money and Credit (1912). That book criticized central banking as an agency of perpetual price inflation. So they have all turned out to be.

The non-Austrian conservatives have generally been silent. About two dozen critics have gone public about their concerns. On November 15, they released this letter:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.


The list included some economists, plus James Grant of Grant’s Interest Rate Observer, plus a few others. While we should be thankful for whatever opposition we can find in the academic community, this is hardly a rallying cry of protest. The FED is hardly threatened by anything this mild and signed by so few economists.

There are thousands of economists either on the payroll of the Federal Reserve System or else occasional recipients of financial support. From within the community of economists, only the Austrians have been full-time critics.

This indicates that the opposition in the electorate has taken its cues from the Austrian School. Voters who think the FED has gone too far are not readers of academic papers or James Grant’s newsletter. In any case, Grant is probably closer to the Austrian School’s position than the other signers.

The Federal Reserve has become a kind of lightning rod of protest for the Tea Party movement. This indicates a major increase in influence by the Austrians. It is not that their ranks are filling with trained economists. It is that the public has heard Ron Paul’s message and has moved on to the sources of his analysis.


Austrian School economists since the 1930s have offered an analysis of economic depressions that is tied to the practices of central banks: first inflating the money supply, then stabilizing it. This creates the boom-bust cycle. This has been denied by Keynesians from the beginning, but it also has been denied by the monetarists, who accept in theory and practice central banking.

The failure of central bankers prior to 2008 to see the looming recession has left them without excuse, except for this one: “Nobody could have seen it coming.” But a lot of somebodies did see it coming: Austrian School economists and analysts. The defenders refuse to acknowledge this school of opinion, let alone the analytical framework that let them forecast what did take place.

Because millions of voters heard Ron Paul’s ideas in the 2008 Presidential campaign, they were alerted to the operations of the FED. Most of them had not heard of the FED in any detail prior to 2008. This was fortuitous. There was a falling economy at the same time that the only Austrian School member of Congress decided to run for President. Then the money rolled in because of the Internet. This stunned the Beltway incumbents.

This combination of events has launched a new phase of Austrian School economics. This has come as an unwelcome surprise to the traditional Republican Establishment, which includes Chicago School economists in the tradition of Milton Friedman. The neoconservatives are also upset. They had enjoyed a near monopoly of opinion within the conservative activist movement. They are not pleased that far more radical critics of the government and the FED have begun to get a hearing.


David Frum, a neoconservative Canadian journalist and former Bush speechwriter, has lamented this development. He coined part of the phrase, “axis of evil,” but when his wife went public about his role, he got fired by the White House.

Frum rewrites the history of conservative economic thought, as having favored high interest rates.

Thirty years ago, right-of-center economists did not celebrate high interest rates as a safeguard of the currency.

Monetarists and Austrian School economists agreed in theory, then as now: the way to safeguard the currency is to stop inflating the currency. If this leads to high rates – as it did under Volcker, 1979–82 – so be it. If not, then not. The central issue is the rate of money expansion. The Austrians oppose central banking because the system leads to monetary inflation. The monetarists want a rule to govern the FED. But neither side asks for high rates or low rates. They ask for market-determined rates.

Thirty years ago, they measured inflation by the dollar’s ability to buy goods and services – not its value relative to gold or some other commodity.

They still do. Note: the letter from the two dozen critics did not mention gold.

Even today, probably most business economists – most Republican economists! – reject those ideas. I notice that the e21 letter criticizing the Fed was not signed by two distinguished right-of-center academic economists, Greg Mankiw and Robert Barro. I notice that it was not signed by President George W. Bush’s two leading economic advisers, Glenn Hubbard and Larry Lindsey.

So, having set up a stick man, Frum mows them down with ease. To do this, he cited a Harvard economist and a Berkeley economist as if their absence from the list of two dozen critics meant anything other than their Establishment positions.

All in all, in fact, it’s fascinating to tally all the people who were likely asked to sign but who opted against – and who have not yet been heard from in this debate.

But that’s how political triumphs often happen: not always by winning the argument, but by deterring those who reject the argument from speaking out.

First, there is no political triumph, except by the same crew that has won ever since 1913: the advocates of central banking. There is no groundswell of political opposition to the FED. There is some sniping from the hinterlands, added to Ron Paul’s criticisms – going back to 1976 – and Rand Paul’s.

Frum lives in a fantasy world, where hobgoblins from Vienna threaten the cozy arrangement that lines up almost all political factions on the side of the Federal government and the Federal Reserve System. Even a hint of opposition to the Federal Reserve is seen as a tidal wave of opposition.

I wish that Frum’s fantasy were grounded in reality. I wish that the FOMC were facing open opposition from the political Establishment, or even a significant faction within that Establishment. But such is not the case. The Federal Reserve is still in the driver’s seat. The FED will inflate without serious criticism.

Compared to what has gone before, this open rebellion against the FED is significant, but not as a storm. It is more like the coming storm that God described to Elijah in the latter’s darkest moment: a cloud no bigger than a man’s hand. It pointed to a change.

We should think of the opposition to the FED as the stirrings of a counter-movement. It is nowhere near an organized political movement yet.


The visible failures of the FED under Bernanke have led to criticism from outside the Establishment. This criticism is getting a wide hearing, because of Ron Paul and also the Internet. The hearing may be wide, but it is not deep. It is sporadic. People on the fringes of political life are learning of a hidden story in American history: the story of central banking and its debarment of the dollar after 1913.

This story needs to be told. It points to the future. The critics of Bernanke today are going to get a greater hearing when the FED’s interventions cause even more economic pain.

This is a cloud no bigger than a man’s hand. It will produce a political storm after the FED’s policies produce an economic storm.

The neoconservatives, monetarists, supply-siders, and other schools of economic opinion have bet the farm on the Federal Reserve. They will lose this bet.

December 24, 2010

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2010 Gary North