Turning and turning in the widening gyre

There is much chatter about the comings and goings of politicians in Washington D.C. The presidential races are watched with the utmost anticipation, and the media obsess over the bickering and scheming of hundreds of federal congressmen. These politicians, of course, have a great deal of power over our country and our lives, especially in this day and age.

However, standing in the shadows, in firm control of our economy and our wellbeing are the generally faceless controllers of the Federal Reserve. The Fed’s Chairman, currently Ben Bernanke, shows his face occasionally, issuing some incredibly obtuse statement about the state of the economy and his policy plans. Unfortunately, the average American cannot understand such statements and thus ignores them. This is the only sad pretense of transparency that we have come to expect from our central bank.

I am writing today to both underscore the extreme importance of this institution and to expose the increasing power being wielded by the bank. Not only does the Federal Reserve have inestimable power over our economy, but the woman who is generally expected to succeed Bernanke will certainly seek to continue expanding this control.

The Federal Reserve has been tasked with two ultimate responsibilities: inflation and employment. It seeks to both control inflation and to maximize employment through manipulation of the monetary supply. In pursuit of these goals, the Fed seeks to balance a precarious juggling act.

The Federal Reserve primarily pursues these goals by controlling interest rates on bank loans, with the purchase of bonds and other securities. Higher interest rates decrease inflation by reducing the amount of money brought into the economy out of bank reserves. A classic example of a high interest rate policy was the Fed’s policies in the late 1970s when interest rates were increased in order to combat rising inflation.

Currently interest rates are very low, ideally increasing employment under classic stimulus principles: more money in the economy boosts consumer spending and thus hiring. Unfortunately, the Fed cannot decrease interest rates below zero but still wants to pump more money into the economy. Instead, they have opted to pursue a policy of quantitative easing.

Under this policy, the bank pumps billions of dollars into the economy each year by purchasing long-term commercial assets from private banks. Predictably, this policy has two primary risks. First, it can lead to higher inflation. More money in circulation reduces the value of the currency, potentially leading to inflation, and the Fed’s quantitative easing pumps enormous amounts of money into the economy.

In addition, the Federal Reserve runs the risk of creating what is known as an asset bubble. These bubbles, as we have recently seen both with the housing and the internet markets, result from too much money being poured into the economy through credit, hence artificially inflating the productivity and value of the marketplace. The disastrous effects of these bubbles need not be explained, I am sure.

It is the Federal Reserve’s job to determine when to raise interest rates in order to prevent both inflation and asset bubbles. Failure to account for either possibility would have an incredible impact on common Americans who will find that their savings accounts have less real value due to increased inflation or who suffer from the sort of economic collapses that we saw in 2008. We are being forced to trust the judgment of bankers and politicians, whose motives and even identities are known to very few Americans. It is a wonder that the media has so little attention to spare on such matters.

The she-devil of Constitution Avenue

Paul Krugman, the former Enron consultant and current columnist for the New York Times, once ironically dubbed Janet Yellen the “she-devil of Constitution Avenue.” Krugman, with the same judgment he used to advocate the artificial housing bubble and predict the transient nature of the internet, assures us that inflation is not an issue and heralds Ms. Yellen for her extremely “dovish” beliefs concerning inflation. Calling her a dove simply suggests that she is less concerned about inflation than she is about restoring employment.[1] This means that if she becomes Chairman of the Federal Reserve, Yellen will be less likely to raise interest rates to fight inflation and artificial bubbles than many.

This predilection is particularly alarming given that Yellen is in large part responsible for the current quantitative easing policy of the Federal Reserve. Additionally, she was in charge of the Fed’s banks in San Francisco, one of the areas hardest hit by the collapse of the last bubble.

Her tendency towards increased government spending suggests that as Chairman Yellen will continue, if not expand, quantitative easing in order to restore full employment. Admittedly, Yellen does seem to be a very intelligent woman, so it stands to reason that we ought to consider whether she would have the good judgment to cut off the spigot should matters begin to spiral out of control. She has repeatedly stated that the government must spend more to bring our country out of the recession, getting further praise from Krugman by doing so. Furthermore, the Wall Street Journal reports that she has always pushed Bernanke into the current policy of quantitative easing.

Yellen was president of the San Francisco Federal Bank and, as the Cato Institute argues, she has defended the Fed’s role in regulating the disastrous bubble that hit the Western States in particular in 2008. A review of her 2010 Senate testimony shows that Yellen defends the role she played in trying to prevent this crisis. She states again and again that the bubble would have been prevented if the Fed had more power, ignoring any possible role that Fed interest rates and policies might have had on this crisis. While she may have been unable to stop this catastrophe, we must seriously ask whether she would consider the Federal Reserve’s role in another asset bubble given her refusal to do so during the mortgage crisis.

Let us put together the pieces. There is plenty of evidence to suggest that Yellen would aggressively pursue quantitative easing as Chairman of the Federal Reserve, hence increasing the risk of inflation or an asset bubble. When combined with her less than strong concern over inflation and her refusal to admit that the Fed’s monetary policy contributed to the housing crisis, her tendencies create a very frightening picture indeed.

A Constitutional Remedy

Predictably, the Constitution provides a very clear alternative to Federal Reserve and its increasing power. In 1791, Thomas Jefferson and Alexander Hamilton engaged in a fierce battle over the creation of the first National Bank. Jefferson argued vociferously that the creation of the bank was unconstitutional.

Hamilton, one of the strongest supporters of big government among our Founding Fathers, justified the bank as an implied power under the Interstate Commerce clause of the Constitution, as well as both the General Welfare[2] and Necessary and Proper clauses.[3] He, of course, ignored the fact that no such understanding of these phrases was accepted at the Constitutional Convention. In fact, an attempt to use simple punctuation to expand the General Welfare clause was resoundingly struck down by the Convention.

Thomas Jefferson, in a famous opinion on the Constitutionality of the bank, argued for a much more strict interpretation of the Constitution. His opinion is widely regarded as a crucial tenant of strict Constitutional constructionism, and I recommend reading it even outside of this specific subject matter.

First, Jefferson claimed that the Interstate Commerce clause argument holds no water, because the bank would explicitly impact intrastate commerce, just as our Federal Reserve does today.

Jefferson refuted the implied powers of the General Welfare clause by pointing out that the government only has the right to “lay taxes for that purpose,” rather than “to do anything they please to provide for the general welfare.”

Finally, he attacked the Necessary and Proper argument by pointing out that all the powers of the government can “be carried into execution without a bank. A bank is therefore not necessary, and consequently not authorized by this phrase.”

This is a powerful argument by one of the leaders in constitutional originalism. The existence of a national bank such as the Federal Reserve is as unconstitutional now as then, and for the same reasons. This fundamental discussion has been ignored, however, as we simply debate how much the Fed should pump money into the economy. We have strayed so far from the actual restrictions that the Constitution sets on the powers of a central bank that we would do well to bring the debate back to these fundamentals.

Even if this does not actually end the stranglehold of the Federal Reserve, it cannot help but reduce its influence by shifting the argument from the pragmatic policy decisions of the Fed to the fundamental discussion of whether it ought to even exist. Instead of arguing about whether it should assume more power, we should be arguing whether or not to give it any power at all.

Any liberal reader will be appalled by this notion. They will ask, “But what would we do without a central bank?” I will preemptively say two things on this subject. First, there was a long period of time in the United States where there was no central bank. In fact, one of the most highly regarded banking systems that America has experienced was the privately run and independent Suffolk banking system. This bank provided an alternative to central banking after Andrew Jackson destroyed the Second Bank of the United States, and it ensured market stability and sound currency in New England for almost two decades.

The Suffolk system was distinctly different from the Federal Reserve. It was intended to prevent the inflation of currency, which it did admirably. It is not just libertarians and Austrian economists that admire the Suffolk System. In fact, the Federal Reserve of Minneapolis published a paper analyzing the bank and its successes, eventually asking “is there a need for a government-sponsored central bank?”

Second, we suffer from the same sort of economic collapses that faced America before the Federal Reserve. Don’t take my word for it, though! Janet Yellen herself made that argument in a speech in early 2013. She began this speech on a humorous note, encouraging her audience to remember a well-known incident where a speculative bubble collapsed, leading to economic hardship. She was, however, not referring to 2008 but to 1907. It was not until 1913 that the Federal Reserve was created, in part due to the crisis of 1907, as she explains. Yellen proceeds to state “it is striking how many of the challenges of that era remain with us today.” Does it occur to her that perhaps the answer is not more regulation? Perhaps the Federal Reserve was not the answer to the crisis of 1907? Indeed, if it were the answer to that crisis, then it stands to reason that we would not encounter similar hardships today.


The Federal Reserve demonstrates incredible power which will only expand when Janet Yellen takes charge. How can we trust our economic livelihood to the decisions of a handful of academics and politicians who meet periodically in Washington? Long ago our government abandoned our Constitution, empowering a bank with incredible power over our lives. It is time to push back against the Fed and retake our rights and our freedoms.

[1] It is a commonly accepted fact that Yellen is a dove on monetary policy. Her apologists may attempt to argue otherwise, and I am happy to engage in that debate should any reader wish to.

[2] The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States

[3] [Congress shall have Power to] make all Laws which shall be necessary and proper for carrying into the Execution the foregoing Powers

 Statueof Freedom atop the Capital building smaller