In his last public opportunity to quiz Federal Reserve Chairman Ben Bernanke, who appeared before the House Financial Services Committee on July 18, Texas Congressman and Republican presidential candidate Ron Paul took the time to put things into perspective:
For the past few years the Federal Reserve System has received criticism from all sides of the political spectrum, and rightly so, for its unprecedented intervention into the economy and its bailouts of large Wall Street banks and foreign central banks.
This has been Pauls theme ever since he entered Congress following a special election in April 1976. In a position paper that his staff prepared in June of 1976, Paul attacked a pending bill in Congress to fund the International Monetary Fund following the breakdown of the Bretton Woods agreement when President Nixon took the dollar off the gold standard in 1971.
The staffer primarily responsible for that paper, Gary North, remembers starting work on Friday, June 11, 1976, and being given the task of preparing the paper in time for the Monday deadline. He worked all weekend on it, and when it was published, it made such an impression on Senator William Proxmire, then chairman of the Senate Banking Committee, that he invited Paul to testify before his committee. Says North: At the time, I had never heard of a House member testifying to a Senate Committee. I have never heard of it since.
But that testimony launched a three-decades-long campaign by that lone congressman to question the existing monetary system, especially the centerpiece of that system, the Federal Reserve.
In his July 18 testimony, Paul recalled his primary problem with the IMF the same problem he has with the Fed is that it is a central bank that was deliberately designed to enrich its supporters and friends in the banking system and protect them from the costs of making bad decisions, while impoverishing the middle class and the poor who pay those costs.
He said he has always been an opponent of the system and not the chairmen of the Fed, be they Volcker, Greenspan or Bernanke. The system itself is flawed, he said, and more debt is never the answer. He decried the lack of any attention by the Fed to the real market solutions to the continuing unending series of economic and financial crises that face the United States and now the rest of the world, namely the work ethic, real savings, and real money.
He said he wanted to contribute to the conversation and then asked the Fed chairman a series of questions:
Paul: Under the Constitution, who has the authority to manage monetary policy?
Bernanke: Congress has the authority but transferred it to the Fed in 1913.
Paul: But Congress doesnt have the power to do that! Thats amending the Constitution! Mr. Chairman, who has the right of oversight [of the Fed]?
Bernanke: The Congress. We accept that, and the need for transparency. But it is a well-established fact that an independent central bank will provide better outcomes.
Paul: [But] the Fed operates in secret. Congress has a right to know, an obligation to know. Central banking destroys the middle class. The Fed is the facilitator for big government, financing wars [and it] eventually ends up in a crisis. [The] first step is transparency. We demand to know trillions and trillions printed out of thin air. [You] keep doing the same thing: spending never ends, wars never end.
Bernanke: All of our actions have been fully disclosed.
At this point the reader needs to remember that what limited disclosure the Fed has allowed has only come following congressional action and court demands. The Fed never supported transparency, but disclosed only when it was forced to.
Paul then clarified the difference between his position and that of the Fed. It starts with definitions. The most beaten up word in the economic language is the word inflation and next to it is its sister, deflation. Back to the testimony:
Paul: The need to prevent deflation is one of the purposes of the Fed, right?
Paul: But [increasing the money supply] never allows the markets to clear. Youve done a pretty good job [with that]! M1 [a measure of the supply of money in the economy] has grown by 16 percent [in the last year while] M2 [a broader measure] has grown by over 9 percent. Do you consider the decline in house prices as deflation?
Bernanke: No. Inflation is increases in [the] prices of goods and services.
Paul: [Thats] one of the problems in our discussion the meaning of words and what the words inflation and deflation mean. Because by my definition inflation and deflation is when the supply of money increases or decreases. If [youre] watching changes in house prices and goods and services, youre watching the wrong thing.