Ron Paul Testimony Before the Senate Banking Committee

Ron Paul reads his written submitted testimony to the Senate Banking Committee hearing on Federal Reserve Reform on March 3, 2015

Testimony of Campaign for Liberty Chairman Ron Paul

Senate Banking, Housing, and Urban Affairs Committee Hearing on Federal Reserve Reform

March 3, 2015

Chairman Shelby, Ranking Member Brown, and members of the Senate Banking, Housing, and Urban Affairs Committee, thank you for holding this hearing on the important topic of Federal Reserve Reform.  On behalf of Campaign for Liberty’s nearly three quarters of a million members, I request the Senate Banking Committee follow up this hearing by taking the first step toward Federal Reserve reform by reporting S. 264, the Federal Reserve Transparency Act, better known as Audit the Fed, out of committee and to the floor for consideration as soon as possible.

The Audit the Fed bill introduced in the Senate by Senator Rand Paul has the bipartisan support of 32 cosponsors.  Its House companion, H.R. 24, has been introduced by Representative Thomas Massie and continues to build support, currently featuring 141 cosponsors.  This vital legislation has twice passed the House of Representatives.  In 2012, it passed by a vote of 327 to 98.  In 2014, it passed by a vote of 333 to 92.  Despite passing the House twice with overwhelming majorities, it has never received a standalone, roll call vote in the Senate.

The Audit the Fed legislation repeals language in Subsection (b) of Title 31 Section 714 of federal law prohibiting a full audit of the Federal Reserve’s monetary policy operations.  The bill requires the Government Accountability Office (GAO) to perform an audit of the Fed’s discount window operations, open market operations, agreements with foreign governments and central banks, and Federal Open Market Committee directives within a year after the bill becomes law.

A full audit will also allow Congress to finally carry out informed oversight of this congressionally created institution by revealing what deals the Federal Reserve has made with foreign central banks and governments, Wall Street firms, and American banks.  It will help Congress and the people better understand how the Fed evaluates economic conditions and what contingency plans it is drawing up in the event of a recession, or a market meltdown similar to what occurred in 2008.

In recent weeks, the Federal Reserve, along with its apologists in Congress, the financial sector, and the establishment media, has been waging an unprecedented public relations campaign against this bill.  Of course, the Federal Reserve does not want to admit they oppose transparency, so they are resorting to distorting the intent and effect of this bill.

The most common criticism of the Audit the Fed bill is that it will somehow limit the Federal Reserve’s independence.  There are two flaws with this argument.

First, nothing in the Audit the Fed bill gives Congress any new powers to interfere with the Federal Reserve’s conduct of monetary policy.  Despite repeated requests, neither Federal Reserve Chair Yellen nor any other opponent of the audit bill can point to any section of the bill that gives Congress any new authority over the Federal Reserve’s operations.  The reason they cannot point to such a section is simple; there is nothing in the text of this bill giving Congress any such new authority.

Secondly, the idea the Federal Reserve is “independent” of political pressure is a myth.  It is so common for the Fed to adjust its policies to help or hurt incumbent politicians that economists have a name for it: the “political business cycle.”  As economists Daniel Smith and Peter Boettke put it in their paper “An Episodic History of Modern Fed Independence,” the Federal Reserve “regularly accommodates debt, succumbs to political pressures, and follows bureaucratic tendencies, compromising the Fed’s operational independence.”

Writing in Forbes, Dr. Norbert Michel of the Heritage Foundation summarized Smith and Boettke's history of Federal Reserve chairmen adapting policies to please the current administration:

  • William Martin (1951 – 1970).  President Eisenhower directed his Treasury Secretary to put the “utmost pressure” on Chairman Martin to “get a greater money supply throughout the country.”  When Martin refused, Eisenhower pressured him to resign or reconsider.  Martin reconsidered.
  • Arthur Burns (1970 – 1978).  President Nixon repeatedly worked with Burns to secure easy monetary policy with the view that it would help win elections.  On one of Nixon’s famous tapes, Nixon and Burns openly mocked the idea of Federal Reserve independence.
  • G. William Miller (1978 – 1979).  President Carter found Miller uncooperative, so he replaced him as Fed Chair (he made Miller his Treasury Secretary).
  • Paul Volcker (1979 – 1984).  Ronald Reagan openly cultivated a working relationship with Volcker and repeatedly asked him for tighter monetary policy.  Alan Greenspan reports that, in one meeting, Reagan reminded Volcker that the Federal Reserve Act was subject to change.
  • Alan Greenspan (1987 – 2006).  Alan Blinder, appointed to the Fed Board by President Clinton, publicly suggested Greenspan was catering to Clinton.
  • Ben Bernanke (2006 – 2014).  A 2012 New York Fed publication notes: “The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship…. This relationship proved beneficial during the 2008-09 financial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.

Chair Yellen claims that had the audit bill been in effect in the late seventies and early eighties, then-Federal Reserve Chairman Paul Volcker would have faced irreversible pressure from Congress to abandon his efforts to keep interest rates high.  This statement is ironic considering that the one reason America faced hyperinflation in the seventies was because several of Mr. Volker’s predecessors accommodated the Executive Branch’s desire for cheap money.

Opponents of the audit bill also claim that the Federal Reserve is already audited and is fully transparent.  These arguments are at best disingenuous, at worst, outright deceitful.  While it is true the Federal Reserve is subject to some limited audits, these are financial audits that only reveal the amount of assets on the Fed's balance sheets.  The Audit the Fed bill will reveal what was purchased, when they were acquired, and why they were acquired.

Perhaps the real reason why the Federal Reserve fears a full audit is revealed by examining the results of the one-time GAO audit of the Federal Reserve’s response to the financial crisis that was authorized by the Dodd-Frank Act.  This audit revealed that between 2007 and 2010, the Federal Reserve committed over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies.

More evidence of what the audit might reveal was raised in 2013 when former Federal Reserve official Andrew Huszar publicly apologized to the American people for his role in what he called “the greatest backdoor Wall Street bailout of all time” — the Federal Reserve’s Quantitative Easing program.  Can anyone doubt an audit would further confirm how the Fed acts to benefit the economic elites?

Ironically, the Federal Reserve and its allies being forced to resort to distortions and fear-mongering about the bill shows there is no legitimate reason Congress should not pass this bill immediately.

Every American is affected by the manner in which the Federal Reserve performs its core function: the conduct of monetary policy.  Yet federal law prohibits the people, through their elected representatives, from learning the full truth about how the Federal Reserve conducts monetary policy.  It is long past time to bring transparency to monetary policy.

Therefore, on behalf of Campaign for Liberty’s nearly three quarters of a million members, and the nearly 75% of American people that support auditing the Fed, I urge this Committee to report Audit the Fed out as soon as possible so the Senate can finally hold an up or down vote on this important legislation.

Smith, Daniel J. and Boettke, Peter J., “An Episodic History of Modern Fed Independence.” 11 December 2014. Available at SSRN: http://ssrn.com/abstract=2135233 or http://dx.doi.org/10.2139/ssrn.2135233

Michel, Norbert. “The Fed Is Nervous, And Maybe That’s A Good Thing.” Forbes.com. 09 February 2015, with citations from Smith and Boettke’s “An Episodic History of Modern Fed Independence.”

Huszar, Andrew. “Andrew Huszar: Confessions of a Quantitative Easer.” WSJ.com. The Wall Street Journal.  11 November 2013.

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