Audit the Fed

Is a Central Bank Antithetical to Democracy?

Well Groundhog Day has come and gone, and that means—time loops being what they are—it’s time for a libertarian to once again introduce a bill to audit the Federal Reserve.

As he usually does, U.S. Rep. Thomas Massie (R-Kentucky) has stepped up to the plate and reintroduced, for the umpteenth time, a measure to do just that.

“The American public deserves more insight into the practices of the Federal Reserve,” Massie said in introducing the bill. “Behind closed doors, the Fed crafts monetary policies that devalue our currency, slow economic growth, and make life harder for the poor and middle class. The American people benefit when we work to increase government transparency.”

Well, he won’t get any argument from me. I’m libertarian-ish myself, though not with a capital ‘L’: I happen to believe theory needs to work in the real world with real people, that is to say, theory is as theory does. Large ‘L’ libertarians live in a shrink-wrapped political lab.

Massie doesn’t, though. Unfortunately, the slogan “Audit the Fed” has been a rallying cry for so long—I think since the Roman Empire—that it has almost become a caricature of libertarianism.

First it was Ron Paul introducing the bill, then it was his son Rand, then Massie, then Rand again, now Massie again—you get the idea, it’s not a large pool. Audit the Fed is akin to The End is Near as far as doomsday poster slogans go.

Here’s the thing. It’s not only not fringe and not frivolous, it’s an absolutely crucial bill that has to be enacted if the deep state is to be truly corralled, and, with Donald Trump on a torrid march against the federal bureaucracy, now is the perfect time to do it.

The fact that the bill always gets a lot of cosponsors says a lot about its substantive content. For some odd reason, that never translates into enactment, not that the majority of Congress is bought-and-paid-for by bankers or anything. The withering opposition—and, yes, mockery—is a sure signal it’s worth taking seriously, if someone will just rename it and recalibrate the slogan.

It’s an especially good time given Trump’s early crusade to dismantle the federal government and given that the GOP holds both houses of Congress for the next two years.

To be sure, Trump’s efforts to dismantle the deep state are truly breathtaking so far, surprising even his most ardent supporters with his pace of politically “creative destruction” as he drives the bureaucracy into the political and economic wilderness. Just this week the president gained control of the USAID office, a well-known CIA front group whose expertise is interference in the affairs of foreign nations (remember USAID’s Cuban Twitter, which was designed to foment revolution in that country?), and, as I write this, the administration is finalizing plans to dismantle the Department of Education, regulatory brick by regulatory brick.

Many of these noble efforts will ultimately need congressional support and will have to survive court challenges, but no matter. The president’s aim is true, and it is serious.

But there are deep state fundamentals still to contend with. The nerve center and brain of the bureaucratic collectivist state must be captured and eradicated for Trump to complete his mission. He has made a good start, as I wrote about last week, with the Senior Executive Service, but another one of those pillars is the central bank, otherwise known as the Federal Reserve.

To this end, Massie’s bill is a necessary first step in returning control of monetary policy to the people, as the constitution specified. It’s not just monetary policy, either: Reining in the Federal Reserve is necessary to fully unravel smothering climate change regulations it has woven throughout the financial sector, to end the Fed’s massive push toward equity in employment distribution, not to mention its efforts to increasingly concentrate wealth in the hands of the globalist rich through permanent inflation.

And all without any accountability. While Congress and the General Accounting Office (GAO) are made to sit blindfolded in the parlor twirling their thumbs, the Federal Reserve is pilfering the cookie jar in the next room. So let’s take a look.

The Fed: The Deep State’s Financial Arm

The first criticism of Massie’s legislation is that the Fed is already audited, and that is true, so far as those audits go. They don’t go very far. An independent accounting firm conducts a GAAP-based audit annually, producing reports on aggregate reserves and investments, as well as top line balance sheets. Then, too, Congress allows the GAO to perform a very circumscribed review, but anything substantial is off limits.

It’s like submitting to an IRS audit but telling the revenue agents they can’t look at the details of your primary business expenses or revenue. Massie’s bill would remove those restrictions.

The second big argument is that far-reaching audits would endanger the Fed’s independence. That’s rich, considering that the Federal Reserve is a child of Congress, created by the Federal Reserve Act of 1913, in which Congress delegated the responsibility for monetary policy to it, arguably unconstitutionally. Beyond the non-delegation issue surrounding private actors on the Fed’s open market committee, there’s the question of whether a policy of permanent inflation is legislative in character.

The Federal Reserve was never designed, and constitutionally could not be designed, to be independent of Congress. The Fed’s independence, structurally speaking, is intended more to separate it from the executive branch, ostensibly from the political whims of the president but in reality from the political tentacles of the deep state, as the Cato Institute’s Mark Calabria described it in 2015 in The Hill:

The key takeaway from that piece is the revolving door between the deep state and the Fed, and the latter’s lack of operational independence from it. Or, as Larry Kudlow remarked back in 2019 about the Fed: “I don’t want to get into a lot of Fed bashing. They do the best they can. Their models are highly flawed. The deep state board staff, of course, has not been helpful.”

Add in the revolving door with Wall Street at the other end of the tunnel and you have the classic neofascism that informs the modern bureaucratic state.

Meanwhile, without shining a light into the Fed’s inner workings, these actors continue to do God-knows-what with the economy. Only certain data has emerged from the darkness over the years, but what has been exposed is terrifying. After the 2008-09 financial crisis, for example, the Federal Reserve amassed a $4.5-trillion balance sheet. For what economic purpose and how did that help or hinder the American people?

We don’t know because the GAO is not permitted to find out.

Another example: The Federal Reserve’s total reserve bank assets as of this writing is $6.8 trillion, including mortgage-backed securities, federal agency debt, and U.S. treasuries. That’s down from $7.6 trillion a year ago, but still way up from $4.2 trillion at the end of 2018. Many of these securities were acquired through open-market operations, which can’t be audited.

What does the Fed do with all these assets? For one thing, they are used to manipulate long-term interest rates, either to stimulate the economy by growing them, or to restrict growth by selling them off. The bigger the balance sheet, the more leverage the Fed has, and, while it manipulates interest rates to unleash growth binges followed by the fiscal equivalent of sugar lows, it effectively and without any transparency transfers trillions of dollars to the federal government, to globalist financiers, and to both crony capitalists and nonprofit special interests.

It’s no coincidence that after the Fed created at least $3.3 trillion with the wave of its wand in 2020, “650 billionaires in America saw their net worth increase by more than $1 trillion,” as Forbes reported. The ensuing inflation has ravaged the middle class. That’s not an isolated instance. Pumping money into the economy helped fuel the dot com bust in the early 2000s and the housing bubble in the late 2000s.

The Bureaucracy Lives to Grow Itself

Amazingly, the Federal Reserve has been expanding its jurisdiction. In just the past few years, to cite just one example, it changed its mission statements to take a more aggressive role in cajoling banks to regulate for climate change impacts. Among other things, it created a Financial Stability Climate Committee and a Supervision Climate Committee, the purpose of which is to pressure the largest banks to assess the potential impact of climate change in their lending policies. This radical regulatory approach mimics the path taken more than a decade ago when insurance regulators forced insurance companies to make similar assessments about its policyholders, as a way to hold a gun to their head to adopt green-friendly net-zero requirements for insurance.

With its hand on the monetary throttle and its foot on the regulatory accelerator, the Federal Reserve has driven steadily leftward toward Davos. It is dabbling—more than dabbling, actually—in the equitable distribution of employment across the American economic sector, that is to say, it is now basing policy decisions in part on their impact in so-called vulnerable communities.

Or, as the Federal Reserve Board itself puts it:

None of this is the Federal Reserve’s business, but it is our business because the result is a non-market redistribution of wealth that amounts to classic wealth confiscation.

This past year, Dan Katz and Stephen Miran of the Manhattan Institute got to the heart of the matter of all that is wrong with the Fed—both in its traditionally intended functions and in its new but not improved and even more unconstitutional missions—in a piece titled “Reform the Federal Reserve’s Governance to Deliver Better Monetary Outcomes.”

“The Federal Reserve’s record in recent years raises questions about whether it has been operating in line with the best practices of central bank independence,” they wrote. “The Fed’s unique structure, including removal protections, lengthy terms, and private ownership of the Reserve Bank system, is designed to ensure the independence of monetary policy. However, our analysis shows that in practice, the Fed’s current governance has facilitated groupthink that has led to significant monetary-policy errors while allowing the Fed the flexibility to unwisely expand its remit into inherently political areas such as credit rationing and banking regulation.”

For example, they wrote, recent missteps at the Federal Reserve demonstrate that the Fed’s decisions were having significantly negative economic consequences.

“Large-scale asset purchases following the 2008–09 financial crisis distorted the allocation of credit across the economy,” they wrote. “The attempt to tighten policy in 2018 had to be reversed quickly. The Fed’s swift response to Covid-19 is often lauded, but its unilateral transition to a framework where it explicitly sought to overshoot its inflation target, its excessive monetary accommodation, and its dismissal of incipient inflation as ‘transitory’ contributed to two years of declining real incomes and the highest inflation in four decades.”

That checkered record begged an obvious question, they wrote: Why is a supposedly “independent” central bank making such obvious errors?

One might think incompetence, or perhaps it’s an inherent bias in having a cluster of private banks making broad economic decisions for society, as in using its bloated balance sheets for investments in favored progressive causes that make globalist elites ever more money, and which allow the federal government to spend endlessly.

Or maybe its those deep-state staffers and their political agendas as they implement the New Monetary Theory, otherwise known as communism. Maybe the Federal Reserve is not independent at all, but beholden to a master—not to the people, not to a politicized president but to a cabal of political special interests and private bankers.

“Furthermore, the Fed has itself voluntarily waded into highly political debates, such as urging increased fiscal stimulus ahead of a presidential election and incorporating environmental considerations into the financial regulatory framework,” Katz and Miran wrote. “Leadership that was traditionally regarded as technocratic has been replaced with highly qualified, but highly political, personnel who move freely between the White House and the Eccles Building. … Currently, Reserve Banks are private corporations controlled by local private banks, nonprofits, and corporations, without democratic legitimacy.”

The Real Mission

Finally, there is the built-in goal of the Federal Reserve in the first place, which is to mandate, when it suits them, a target rate of inflation, such as its 2 percent goal, that allows banks to set higher interest rates that will deliver stable long-term real earnings on its loans. To say it another way, they have legislated permanent inflation.

In reality, the mission has always been to bake a cake for the bankers who set up the system. That couldn’t happen if the economy remained in the people’s hands. Or, as Murray Rothbard put it in The Progressive Era, the Fed was largely fashioned by the banks as a cartelizing device.

“The government interventions of the Progressive era were systemic devices to restrict competition and cartelize industry, stratagems that followed on the previous failure of industry to sustain successful voluntary cartels,” Rothbard wrote. “Just as other industries turned to the government to impose cartelization that could not be maintained on the market, so the banks turned to government to enable them to expand money and credit without being held back by the demands for redemption by competing banks. In short, rather than hold back the banks from their propensity to inflate credit, the new central banks were created to do precisely the opposite.”

The Federal Reserve was a way to enable the banks to inflate uniformly without worrying about calls for redemption by non-inflating competitors, Rothbard wrote.

The results have been catastrophic—except for billionaires—and in a 2017 congressional hearing on a previous incarnation of his Audit the Fed bill, Massie and other witnesses catalogued some of those train wrecks.

“The case for this bill is strengthened when one considers that the Federal Reserve’s conduct of monetary policy can charitably be described as disastrous,” Norman Singleton, the president of Campaign for Liberty, testified. “As Mr. Massie pointed out, since the Fed was created in 1913, the dollar has lost 95 percent of its purchasing power. According to some, you would need $24 today to purchase what you could buy with $1 in 1913 when the Fed was created.”

The Federal Reserve is also responsible for the boom-and-bust cycle that has plagued the American economy over the past hundred years, Singleton asserted: “Every economic downturn from the Great Depression to the 2008 market meltdown can be laid at the feet of the Federal Reserve.”

Singleton pointed to a 2010 limited audit that was authorized by Dodd-Frank legislation, which was limited to examining the Fed’s response to the 2008 market crash.

“That audit found that between 2007 and 2010 the Fed committed over $16 trillion, which is more than four times the annual budget of the United States, to foreign central banks and politically influential private companies,” he testified.

Just that alone should establish probable cause for a full audit, but that’s not how the deep state works. Between 1933 and 1978, GAO was not permitted to audit the Fed at all. In 1978, the Federal Banking Agency Audit Act gave GAO authority to audit the Fed’s non-monetary policy functions. Still, that act restricted the GAO in four ways: It is prohibited from auditing Fed activities related to transactions for or with a foreign central bank, government of a foreign country, or non-private international financing organization; it is prohibited from auditing deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations; it is prohibited from auditing transactions made under the direction of the Federal Open Market Committee; or any part of a discussion or communication among or between members of the Board and officers and employees related to those foregoing matters.

In other words, the GAO is prohibited from auditing anything of importance, and, as such, Congress is incapable of providing oversight.

Testifying in 1977, the GAO pointed that inconvenient truth out in a hearing on that 1978 audit bill that ultimately built in the auditing restrictions. It was opposed to them from the start.

“Since [1933], with one minor exception, we have not had audit authority with respect to the operations of the Federal Reserve System,” Ellsworth Morse, the assistant comptroller general of the U.S., said. “… [This bill provides] that our auditing would not include open market transactions conducted by the Federal Reserve System. We strongly suggest that this restriction be modified. The open market transactions are the largest category of financial transactions carried out by the System.”

In addition to the large volume of transactions in government securities, Morse testified, the Federal Reserve System also has very sizable purchases and sales of foreign currencies.

“These transactions are also carried out through the System Open Market Account under authorizations and directives of the Federal Open Market Committee,” he said. “…We do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets that it has.”

Obviously, that’s a no-brainer but in the Swamp it was also a no-brainer it was never going to happen. And it still can’t, which is Massie’s point, as he said back at that 2017 hearing:

“A programmatic audit needs to be completed in order for Congress to understand what the Fed does and why the Fed does it,” he said. “Without a complete audit, Congress can’t provide oversight of an entity that it created.”

And that includes looking at the tentacles that tie the so-called independent agency to the deep state.

“Given the revolving door of managers between the Fed, the Treasury, and Wall Street, the opportunity for outside pressure and conflicts of interest abound at the Fed,” he said.

The questions are really simple: How can a monetary policy of permanent inflation be set by private special interests who profit from that inflation in the first place? How can it do so without any congressional oversight? Finally, given all the Fed’s missteps and its negative impact on living standards in the U.S., what is the logic of ceding monetary policy to private banks instead of vesting that authority in the people’s representatives?

The Nuclear Option

As I have made clear in my writings here at the MacIver Institute, I am a fan of a nuclear option in energy, and I am no less so for a nuclear option for the Federal Reserve.

It’s a different kind of nuclear option, to be sure. It’s the one that would kill the Federal Reserve altogether, which is ultimately what is needed both to finally slay the deep state and to restore a truly free market economy.

And just when you think there’s no support for that, well, it turns out there is, and it comes from—wait for it—Thomas Massie.

Massie didn’t want to put all his eggs in one crate, so in 2024 he also introduced a bill to End the Fed, specifically to abolish the board of governors of the Federal Reserve and the Federal Reserve banks and to repeal the Federal Reserve Act, the 1913 law that created the Federal Reserve System.

“Americans are suffering under crippling inflation, and the Federal Reserve is to blame,” Massie said in introducing the bill. “During Covid, the Federal Reserve created trillions of dollars out of thin air and loaned it to the Treasury Department to enable unprecedented deficit spending. By monetizing the debt, the Federal Reserve devalued the dollar and enabled free money policies that caused the high inflation we see today.”

Monetizing debt is a closely coordinated effort between the White House, Federal Reserve, Treasury Department, Congress, Big Banks, and Wall Street, Massie said.

“Through this process, retirees see their savings evaporate due to the actions of a central bank pursuing pursuing inflationary policies that benefit the wealthy and connected,” he said. “If we really want to reduce inflation, the most effective policy is to end the Federal Reserve.”

So who would set interest rates if we abolished the Federal Reserve?

Well, the market would. Here’s how Singleton put it at that 2017 hearing:

Well said. The Federal Reserve is not benign. It exists to thwart democracy and undermine the republic. Simply put, it was the deep state before the deep state was the deep state. Fittingly, it needs to be deep-sixed.

Put it on a poster and show it to a congressperson near you.