Dallas Fed Prez Attacks Ron Paul

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Those lawmakers who advocate “Ending the Fed” might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house. The Fed does not create government debt; fiscal authorities do. ~ Richard Fisher (Jan. 12, 2011)

When the president of any regional Federal Reserve Bank stands in front of a bunch of Harvard University graduates to tell them about how the economic mess is not really the FED’s fault, you know what’s coming. It came.

It is clear who his target was: Ron Paul. I am not the only person to see this. An article on the Fortune site spotted it. It was written by a standard, gold-hating, unknown journalist employed by Fortune.

His only quibble with Texas, it seems, is with the Fed-bashing focus of one of the Lone Star state’s representatives in Congress, who in Fisher’s view might do well to turn his energies to actually doing something rather than grandstanding about the hugeness of the gold standard.

It ended: “In short, audit this, Ron.”

This journalist is clearly a sniveler. Nevertheless, I will “audit this” on Dr. Paul’s behalf. He does not need me to do this, but I enjoy having a little fun at the expense of a Federal Reserve president. As for the sniveler, who cares?

What galls me about Fisher’s speech is his attempt to cover up his obviously personal attack by the use of misleading rhetoric. There are no “lawmakers” who advocate ending the FED. There is only one, and there has been only one in Congress over the last 35 years. When Fisher refers to “their considerable talents,” he is using the rhetoric of contempt.

Well, two can play that game, and I am better at it that Fisher is.

Let me show you how it’s done.


Richard Fisher is the president of the Dallas FED. He is a disciple of Irving Fisher, the founder of monetarism. In a puff piece on Irving Fisher written by a staff economist for the Dallas FED, and published we know not when (the editor of the in-house journal does not bother with such an irrelevant detail) in Vol. X, No. 1, the author begins with this cheerleading quotation from Richard Fisher.

During the first quarter of the 20th century, Irving Fisher was one of America’s most celebrated economists. But sadly, most Americans today have not heard of him. Even as his reputation among the public faded with the years, his reputation within the economics profession has steadily risen. Fisher (no relation to the undersigned, though I would like to claim access to his gene pool) was a pioneer in many theoretical and technical areas of economics that today are the foundation of central bank policy. One such achievement was the creation of indexes to measure average prices, the bedrock for all current monetary policy. His was a storied and successful career even if, by the time of his death, Fisher’s own finances and reputation as an economic prognosticator lay in ruins. We hope readers will find his life story interesting as they learn more about this pioneer of monetary economics.

Irving Fisher was the biggest fool in the history of American academic economics. This is not to say he was the worst American economist. But he was the most influential economist who ever self-destructed in full public view. He self-destructed because his economic theory was wrong. He made predictions in terms of it – the worst predictions ever made by a prominent American academic economist. They ruined him, both professionally and financially.

In his 1912 book, The Theory of Money and Credit, Ludwig von Mises devoted a lot of space to Fisher’s theory of money, which was statistical and aggregative. Fisher proposed that age-old chimera, the creation of a commodity-standard money. You know: the famous and ever-elusive basket of currencies. It has never been attempted. No politician favors it. No economist has ever shown how it could work: enforcement, choice of commodities, etc. It would have to be a government standard. Mises showed why it could not work in practice and why it did not hold up in theory (pp. 399–406). In short, it was an academic construct that had no contact with political or banking reality. It would not be the last.

Mises pointed out how Fisher proposed a mathematical way to measure value. Fisher might as well have proposed a mathematical way to measure love . . . or contempt. Mises refuted him thoroughly (pp. 42–45).

Fisher was the first major proponent of the quantity theory of money. Mises disposed of the theory (pp. 142–45, and following).

All of this would be a matter of arcane economic debating except for this: Fisher’s theory was picked up by the economics profession. It is the basis of all measurements of prices. He is the founder of the price index. His ideas were adopted by Milton Friedman and, through him, spread to the Chicago School of monetarists.

In the Great Depression, he got his reward. In the fall of 1929, he publicly made the announcement that finished his reputation. The Wikipedia entry summarizes what happened.

“Stock prices have reached what looks like a permanently high plateau.” Irving Fisher stated on October 21 that the market was “only shaking out of the lunatic fringe” and went on to explain why he felt the prices still had not caught up with their real value and should go much higher. On Wednesday, October 23, he announced in a bankers meeting security values in most instances were not inflated. For months after the Crash, he continued to assure investors that a recovery was just around the corner.

He had invented the Rolodex. He lost his fortune in the depression. He had invested his sister-in-law’s fortune. She lost everything. At the time of his retirement in 1935, he was destitute. Yale let him stay in his faculty home rent-free.

He then retroactively invented an explanation of the collapse of prices: debt deflation. He blamed the depression on the repayment of debt. He did not blame fractional reserve banking. He did not blame the contraction of money due to bank failures. This theory was as wrong as his monetary theory had been.

This theory of debt contraction is dominant today. It guides the policies of Bernanke and the rest of the world’s central banks. This is why they are all inflating.

There have been two streams of economic opinion in the modern non-Communist world: Fisher’s monetarism and Keynes’ fiscalism. Their representative economists take pot shots at each other, but they are Siamese twins. Governments run deficits, and central banks finance them. The economists are agreed on this, however: Mises was wrong, the gold coin standard was wrong, and government intervention is the correct policy in monetary affairs. They march arm-in-arm on this point: no society should trust a free market monetary system based on contract law.

Richard Fisher is on the monetarist side. This is the key to understanding his Harvard Club speech.


He began his analysis with this insight:

“The Federal Reserve is structured to balance “inside the Beltway” influences with “outside the Beltway” thinking.

With this as the foundation, you can imagine how accurate the rest of the speech is. He continued:

The governors of the Fed, in Washington, are appointed by the president of the United States and confirmed by the Senate. The 12 bank presidents, like me, who operate the System in the field and also sit on the Federal Open Market Committee (FOMC) with the Fed governors, are not. Instead, we are selected by, and serve at the pleasure of, boards of directors drawn from the citizenry of our districts.

Here it is, folks: the Party Line that goes back to the secret meeting at Jekyll Island in 1910. The first-name-only conspirators deliberately created the 12 regional banks to fool the public about the fact that the FED was a central bank.

Is conspiracy too strong a word? Not according to Frank Vanderlip, one of the conspirators, who wrote in his 1935 autobiography:

I was as secretive, indeed I was as furtive as any conspirator. Discovery, we knew, simply must not happen, or else all our time and effort would have been wasted. If it were to be exposed that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress. I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System.

The regional banks were set up to provide the illusion of regionalism. From day one, the New York FED has been the main bank. Its president always has a vote on the Federal Open Market Committee (FOMC), which sets monetary policy. The other presidents rotate in and out, making a coup unlikely.

As for the system of representation locally – who gets onto the regional bank boards – the Federal Reserve Bank of San Francisco provides the evidence of bank control.

The nine directors of each Reserve Bank are evenly divided into three classes, designated A, B, and C. Class A directors represent commercial banks that are members of the Federal Reserve System. Class B and Class C directors represent the public interest and cannot be officers, directors, or employees of any bank. Class B and Class C directors encompass the broad economic interests of the District, including industry, agriculture, services, labor, consumers, and the nonprofit sector. Class A and Class B directors are elected by member commercial banks in the District. Class C directors are appointed by the Board of Governors.

What’s that last sentence? Did you read it right? You did. The local commercial banks elect the A and B directors, and the Board of Governors in Washington, a government agency, whose domain name ends in .gov, appoints the others. But Fisher wants us to believe that “we are selected by, and serve at the pleasure of, boards of directors drawn from the citizenry of our districts.”


Where did he grow up? The Wiki entry informs us.

A first-generation American, Fisher was born in Los Angeles, California but grew up in Mexico. His father was Australian, while his mother was South African, of Norwegian descent. Following graduation from Admiral Farragut Academy, he attended the United States Naval Academy in Annapolis, Maryland from 1967 to 1969, before transferring to Harvard University, where he earned a bachelor’s degree in economics in 1971. From 1972 to 1973, he studied Latin American studies at Oxford University. Completing his education in 1975, he earned an M.B.A. from Stanford University.

The eyes of Texas may be upon him now, but not for most of his life. He represents the elite, which is why he gave his speech at the Harvard Club.

Then he added this: “On the policy front, the job of the Fed Bank presidents is to bring a Main Street perspective to the table.”

Stop that laughing! I’m telling you to stop it right now.

When I was asked by the Dallas Fed board to become president of the Bank, I then met with Alan Greenspan. I asked the Chairman how I could best serve the System. His answer was crisp: “Just speak to the truth,” he said.

No, I really mean it. Stop that laughing. We are all dignified adults here. This is very serious.


Fisher has served as John the Baptist to the FED. He does not cry out from the wilderness. That has been Ron Paul’s task for 35 years. But he has been crying out in the outer court of the temple. As with all FED members, he is there to protect the moneychangers.

So, he cries out in the name of Irving Fisher against Keynes’ spiritual heirs, who he says have gone mad fiscally. He admits that the FED has added massively to its balance sheet, meaning the monetary base. He says, “Thus far, and no farther.”

By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. Last Friday, speaking in Germany, [European Central Bank President] Jean-Claude Trichet said it best: “Monetary policy responsibility cannot substitute for government irresponsibility.”

He went on to say this.

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we have reached our limit. I would be wary of further expanding our balance sheet. But here is the essential fact I want to emphasize today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place.

If he had been Pinocchio, he would have fallen nose-first across the podium due to the shift in equilibrium.

The Federal Reserve System can monetize anything it wants to, and has. It has monetized over $1.2 trillion in Fannie Mae and Freddie Mac bonds – two agencies that were officially private in August 2008. Congress had nothing to do with that decision, except to allow the FED to monetize the debt of a newly nationalized pair of bankrupt agencies. Bernanke went along with Hank Paulson’s unilateral nationalization of $5 trillion in mortgage debt. Not only did he go along with it, he bankrolled it.

Take a look at a chart of the asset holdings of the Federal Reserve. Notice how the FED sold has off Treasury debt and replaced it with toxic Fannie/Freddie agency debt.

Having put the shuck on the rubes of the Harvard Club, Fisher then escalated his rhetoric.

Those lawmakers who advocate “Ending the Fed” might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house. The Fed does not create government debt; fiscal authorities do. Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of those who control the purse strings – the Congress, working with the president.

This is the same old Punch and Judy show that monetarists and Keynesians have been playing ever since 1936. The monetarists condemn the national government for its spending, but only after the government has bailed out the big banks and large corporations that were threatened with bankruptcy during the recession that was caused by the central bank’s prior monetary inflation. The Keynesians remain silent during the boom phase, never calling on the central bank to stabilize money. Then they complain during the recession that the central bank is being too tight with the monetary base. The result of this Punch and Judy show is the astronomical increase in both the monetary base and debt. Neither side ever convinces the other to put on the brakes and stop both the expansion of money and the increase in debt. Only the Austrians do recommend this, in boom times and busts. They are represented only by Ron Paul. And we know what Fisher thinks of Ron Paul.

Here is a rule governing the legitimate use of rhetoric. You use clever language and images to call attention to the facts. You are not supposed to lie about the facts in order to mislead your audience. For example, you are allowed to identify your target as an intellectual weasel, but always with the facts to back it up. Your audience will remember “intellectual weasel,” but that is legitimate when your target really is one.

Why did Bernanke go along with Paulson and buy all that Fannie/Freddie debt? Because he is a Keynesian, but a Keynesian who is a believer in Friedman’s monetarism. He is therefore a follower of Irving Fisher’s 1930s theory of credit deflation – not the contraction of fractional reserve banking – as the cause of the Great Depression.

Fisher praises the FED.

The Fed has reduced the cost of business borrowing to the lowest levels in decades. It has seen to it that liquidity is widely available to banks and businesses. It has kept the economy from deflating and it has kept inflation under control. This has helped raise the economic tide.

He is still one of the boys. He is still a true disciple of Irving Fisher. He is still inside the courts of the temple.

One of these days, someone will overturn the tables of the moneychangers. It can’t happen soon enough for me.


This man claims that the FED is outside the beltway. He claims that regional FED banks represent Main Street. He says that the FED buys all that Congressional debt. With this as background, he offers a challenge:

The leaders of our government cannot attempt to talk their way out of the problem like their predecessors did. They must fix the problem. Now. If they fail to do so, then the election, for all its hoopla, will prove to have been nothing more than a case of putting old, rancid wine in new bottles.

I think this assessment will prove to be prophetic. I also believe that Bernanke will load up the FED’s balance sheet with rancid wine.

If there were an ETF for rancid wine, I would be a buyer.

January 18, 2011

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 © 2011 Gary North