The Fed and The GOP Weren’t Always Enemies

November 20th, 2010 at 2:28 am | 16 Comments |

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The Fed chairman was testifying before the House banking committee. When he explained the central bank’s planned course of action, the members reacted with fury. Rep. Frank Annunzio (D-Ill.) shouted: “Your course of action is wrong.” Rep. George Hansen (R-Idaho) railed that the Fed was “destroying middle America.” Rep. Henry Gonzalez (D-Texas) called for the chairman’s impeachment.

That was in July 1981. The Fed chairman was Paul Volcker and the course of action the members were decrying was a further tightening of monetary policy. As the economy fell into recession, public outrage toward the Fed grew. Volcker’s mail included bricks from contractors to symbolize the houses they couldn’t build, and keys from car dealers for cars they couldn’t sell.

Yet the Fed stuck to its guns and ultimately won widespread plaudits for taming inflation. An underappreciated aspect of this episode is that President Ronald Reagan not only refrained from jumping on the anti-Fed bandwagon but also defended the institution and its independent role in making monetary policy. “This administration will always support the political independence of the Federal Reserve Board,” he said in a February 1982 press conference in the midst of recession.

As it happened, Reagan, no stranger to hard-money conservative thought, had doubts as to whether the Fed was actually needed. He’d asked that question of both Volcker and his own economic advisors in 1981. Moreover, the president’s political advisors were largely hostile to Volcker, seeing him as a danger to Reagan’s reelection.

But Reagan put sound policy ahead of political considerations. If we were to have a Fed, he realized, it needed to have an independent ability to make monetary decisions regardless of whether they yielded short-term benefits for incumbent politicians.

Fast forward to the present. The Fed is highly unpopular amid bad economic times. This is the case even though, unlike in the early ‘80s, the Fed is not administering tough medicine to control inflation. On the contrary, it is pumping money into the economy in an effort to stir growth. Conservatives largely oppose this policy as risking a resurgence of inflation.

But that only begins to capture the intense conservative antipathy to the central bank. Ron Paul’s “End the Fed” push has struck a chord with many Tea Partiers. Paul, who is likely to head a monetary subcommittee come January, also seeks to give Congress greater power over the Fed through audits of monetary policy decisions. “I think they’re way too independent,” Paul said of the Fed earlier this month.

Now, it’s possible that the Fed’s hard-money critics are right that the current easing is excessive, and it’s possible that they are wrong. If they are wrong, then any effect they have in restraining the Fed’s policy will be damaging, leading to more economic stagnation and possibly deflation.

But there’s a more subtle danger. Suppose the hard-money types are right and the Fed is unleashing a dangerous resurgence of inflation. What then? Will current-day conservatives follow Ronald Reagan’s path in defending the Fed’s independence to do whatever is necessary, however unpopular, to stop inflation? Fat chance. Having demonized the institution and diluted its independence, the Fed’s right-wing critics will have helped bring on the very scenario they warned against.

At this point, they’ll be shouting more loudly than ever about a gold standard. But ask yourself this: How long would our elected politicians, having sacrificed the Fed to public opinion, actually stick with a gold standard, a policy that was notorious for generating angry, populist opposition?

Recent Posts by Kenneth Silber

16 Comments so far ↓

  • CD-Host

    There are very few conservative critics who have even bothered to read about the gold standard in anything other than propaganda. They know nothing about monetary policy, why we have the policies we have and what were the real alternatives. To not understand for example the debates on bimetalism when arguing for a return to a gold are crazy. The first question in implementation that is going to need to be addressed is what will the lending standards be, how to setup tiers of financial institutions to allow for expansion of various monetary basis and at the same time provide some adjustability.

    Most of them don’t even really understand what a bank is or what a bank does. Republicans are not serious about policy, any policy. A government which has a tax system, plus a fiat currency can shift wealth around very easily. I get why small government types would object. But like in so many other things Republicans aren’t for anything in a real sense they just are against.

    Ron Paul in the 1988 campaign had some good things to say on bimetalism. Arguably everything I know about the gold standard I learned from candidate Paul’s campaign. But if you look at the conversation in 1988 as contrasted with today you can see how far the Republican party has fallen (though Paul was a libertarian then).

  • jg bennet


    Federal Reserve: A whipping Boy

    WASHiNGTON (AP) — Pity the poor Federal
    Reserve Board. When economic times are bad,
    the politicians pummel it. When times are good,
    the politicians ignore it.

    The feeling around Congress is that the bank
    makes an ideal whipping boy. It’s convenient to
    pick on and doesn’t fight back.

    By law, the Fed acts independently of
    Congress and the White House in setting
    monetary policies that have a crucial impact on
    inflation, interest rates, unemployment and the
    nation’s overall economic health.

    But by custom, the bank doesn’t get too far out
    of step with the president or the Congress, which
    can shorten the bank’s leash whenever it wishes.

    The politicians don’t remind voters of this fact
    when the Fed’s policies produce economic pain,
    whether intentionally or inadvertently.

    Some monetary experts believe the notion of
    an independent Fed is a myth. “The White House
    sets the tone and the Fed marches to the tune,”
    says Robert Weintraub, chief Republican economist
    for the Joint Economic Committee of
    Congress and a long-time Fed watcher.

    Officials at the central bank disagree,
    contending the bank is not under the thumb of a
    president or Congress. But the bank is not free of
    political tethers, either, they concede.

    “There’s a limit to which the Fed can go
    within the political system,” says one bank
    official, who did not want his name used. “If it
    goes too far, Congress will do something about
    it,” he said, adding that the Fed may now be
    testing where that limit is.

    More than a dozen bills have been introduced
    in this Congress to limit the bank’s independence
    in setting monetary policy.

    The most radical
    change, promoted by Rep. Henry B. Gonzales,
    D-Texas, would abolish the Fed altogether. Sen.
    Edward M. Kennedy, D-Mass., wants to place the
    bank under the direct control of the president by
    making it a branch of the Treasury Department.

    In the meantime, the politicians are having it
    both ways and the Fed comes up a double loser.
    When things work out, the White House and the
    Congress take the credit; when things sour, it’s
    all the fault of the bank, which is personalized
    through its chairman, currently Paul Volcker.

    Ever since Ronald Reagan came to town, the
    Fed has been following his wish to fight inflation
    with a tight-money policy, which means slowing
    down the growth of money and credit in the
    economy to bring about more stable wages and

    But the same policy that has succeeded in
    reducing inflation has produced high interest
    rates and a severe recession.

    So, while the administration regularly boasts
    about how it has cut inflation in half since taking
    office, it blames high interest rates on the bank’s
    “erratic” control of the money supply.

    The administration does not put any of the blame on
    the record budget deficits its spending and tax
    policies have created.

    Congress is heaping plenty of blame on the
    Fed, too, as it rails against “Volcker’s recession”
    or “Volcker’s high interest rates” or “Volcker’s
    scorched-earth policy.” But Congress is not
    willing to accept any of the blame through its
    tacit endorsement of the bank’s anti-inflation
    policies, which they could change in an instant, if
    they really wanted to.

    Other bills would have Congress set interest-rate
    policies directly, leaving the Fed to carry them

  • JimBob

    Ron Paul likely to head monetary subcommittee. Now we need NASA oversight handled by a UFO abductee.!/kennethsilber/status/539244762243073

    You’re weak Silber.

  • armstp

    Its all politics. The Republicans are no more against the Fed than they are against big business. They are just against anything that is being done during a democratic adminstration. It is a joke. I cannot believe anyone takes the Republican party serious about anything. It is just a political game to these idiots.

  • advocatusdiaboli

    Ahem. Greenspan was quite friendly to G.W. Bush and the Republican push for de-regulation of the financial system. And he ignited the credit bubble to keep a Dot-com Bust caused recession from affecting G.W.’s bid for a second term–something we are still paying for now.

  • Nanotek

    whatever else … audit the Fed … until then we don’t know what’s behind the curtain other than what we’re told…

    The Fed is too big and has too much influence over our lives not to audit it regularly

  • armstp

    And it gets stupider yet…

    According to a new Pew Poll less than half the poeple in the U.S. even know the Republicans took the majority in the House. I am not sure what that says about how smart people voted or how many people voted or what the Republican victory even means?

    “The public sees the big picture when it comes to the changing balance of power in Washington. Fully 75% say that the Republican Party is generally regarded as doing best in this month’s midterm elections.

    Far fewer know the specifics about the GOP’s victories. Fewer than half (46%) know that the Republicans will have a majority only in the House of Representatives when the new Congress convenes in January, while 38% can identify John Boehner as the incoming House Speaker.”

  • easton

    Paul, who is likely to head a monetary subcommittee come January, also seeks to give Congress greater power over the Fed through audits of monetary policy decisions.

    um…no, Democrats still hold the Senate, he can be a minority leader but that doesn’t mean much as to his ability to affect policy (unless he can convince enough Democrats to go along with him)

    By the way, that tweet was funny. Thanks JimBob (and why you are subscribing to his tweets is beyond me if you think he is weak)

  • Kenneth Silber

    Ron Paul is in the House. It’s his son who’ll be in the Senate.

  • JimBob

    I don’t easton. Just remember his rather pathetic review of “End the Fed” so I did Google search on Ron Paul Silber and got his twitter account. Like Frum he hates Ron Paul and the idea of free market money.

  • easton

    oh man, brain fart. thanks Kenneth. For some bizarre reason I read Rand and not Ron. It is weird, it has only been a few months but Rand is on the way to eclipsing his father.

  • JimBob

    “At this point, they’ll be shouting more loudly than ever about a gold standard. But ask yourself this: How long would our elected politicians, having sacrificed the Fed to public opinion, actually stick with a gold standard, a policy that was notorious for generating angry, populist opposition?”

    Not even Ron Paul advocates ending the FED overnight and returning to a 19th century monetary regime. What he does propose is ending legal tender laws and letting commodity money freely circulate in the economy. Let the market decide what money people use. As he says, “legalize the constitution. ” Why on earth do so called libertarians like Silber want government to have a monopoly on something as important as money?? Monetary central planning.

  • armstp

    What the hell does Ron Paul know about the economy, economics, monetary systems, the Fed, etc.?

    All the world economic experts should be taking economic advice from that quack? Ron Paul is a buffoon only one very narrow view on the world. His policy prescriptions would be a disaster.

  • JimBob

    The only buffoon I see is you armstp!! You’re a classic buffoon in fact.

  • pnumi2


    All this talk about the Gold Standard has the fillings in my teeth emitting a high pitched sound that only central bankers can hear.

    Shouldn’t there be some discussion about the nature of this quote unquote Gold Standard? Is it going to be like the Gold Standard America was on at the turn of the 20th Century? Or is it going to be a false Gold Standard to inspire confidence in the citizens of the countries who have pegged their currencies to the strongest currency of the moment?

    And all of this begs the question hasn’t the United States and several nations of the West devised this Gold-Plated Standard to buy a few more years of the current satus quo, hoping beyond hope that China will relent and let the renminbi revalue itself upward, which China, according to the laws of free trade and Capitalism, most certainly is under no obligation to do.

    As I have said before if the United States wants a more malible China it should, along with the other 7 allied nations, some of whom had been plundering China since 1839, bend the knee and apologize.

    The Eight Allied Nations all of whom had China sign a treaty with them at the end of the Boxer Rebellion. A treaty which made the Treaty of Versailles look like a prenuptial agreement.

    Now I don’t claim to have any insight into Asian psychology, but I have read a few papers about the 100 Years of Humiliation, which is what the Chinese call the period from the 1st Opium War to the Communist Revolution in 1949. Take a look at it.

    Also see if you can find out what Confusious had to say about turning the other cheek and whether the Chinese think vengeance and repayment are solely in the province of the Judeo-Christian Lord.

  • pnumi2


    The Fed or somebody is going to have to do more than finger wagging and making crusty remarks about China’s undervalued renminbi, if we expect to get out of this with all our junk intact, no less untouched.