End the Fed? A not-so-crazy idea.
Congressman Ron Paul's bill may never pass, but history suggests the US economy would be better off without the Federal Reserve.
Since it was introduced in February, Representative Ron Paul's "Audit the Fed" bill (H.R. 1207) has gained 282 congressional cosponsors. If adopted, the bill would allow the Government Accountability Office to review, not only the Federal Reserve's balance sheet, but its recent monetary policy deliberations and transactions.Skip to next paragraph
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Fed Chairman Ben Bernanke opposes the plan, saying it would undermine the Fed's hallowed independence.
But Mr. Paul, a noted libertarian who ran for president last year, also wants to keep the Fed out of Congress's clutches – by scrapping it altogether. That's the goal of his follow-up Federal Reserve Board Abolition Act (H.R. 833). Although that measure has yet to gain a single cosponsor, it has plenty of grass-roots support, and Paul hopes that members of Congress will jump on the bandwagon once their eyes are opened by a no-holds-barred audit.
Wacky stuff? Well, if not having a ghost of a chance is enough to make a bill bonkers, Paul's measure probably qualifies. But that doesn't mean you've got to be crazy to believe that the US economy would be better off without the Fed.
The Fed's apologists suggest otherwise, of course. They note that the US spent nearly half the years between 1854 to 1913 in recession, as opposed to just 21 percent of the time since the Fed's establishment in 1913. Who would want to go back to those bad old days?
But consider: the US economy has actually grown less rapidly since 1914 than it did before. And inflation has been much worse, despite both the Civil War, which featured the nation's worst inflation, and the Great Depression, which featured its severest deflation!
What's more, the frequent downturns before 1914 were due, not to the lack of a central bank, but to foolish government regulations. Topping the list were bans on branch banking, initiated by state governments and then incorporated into federal banking law. The bans propped up thousands of undercapitalized and under-diversified banks – banks unfit to survive major local shocks, let alone macroeconomics ones. They also caused bank notes – competitively supplied counterparts of today's Federal Reserve notes – to trade at discounts whenever they traveled far from the solitary offices of banks that issued them.
During the Civil War, state bank notes were taxed out of existence to make way for those of new national banks. Because national banks had to accept one another's notes at full value, their currency was uniform. But national bank notes had to be backed by government bonds.