Recently by Gary North: On Sacrificing for an Idea

Wall Street is an economic extension of the big banks, which are the government-protected segment of a government-created cartel: the national bank system. The government controls entry into this cartel, thus offering above-market rates of return to those who are approved.

The primary enforcer of this cartel is the Federal Reserve System. The FED provides the fiat money that in turn provides banks with reserves to lend. It also serves as the lender of last resort — officially, to the government; operationally, to the banks. This keeps the largest banks from having to face free market competition.

We can use this syllogism: As goes the Federal Reserve System so go the big banks. As go the big banks, so goes Wall Street.

Wall Street is hostile to any suggestion that the U. S. government has any legitimate authority to audit its creation: the Federal Reserve System. The government’s authority must be limited to enforcing the barrier to entry in banking. Anything beyond this is conceptually and operationally illegitimate. This is the party line of the Wall Street establishment. It has been since before the creation of the FED in 1913. The Federal Reserve was the joint product of a mutually beneficial alliance between the Morgan bank and the largest Rockefeller bank. The story of this alliance is here.

The Federal Reserve System has been described as the Temple. That is because, ever since 1914, it has been sacrosanct: above politics and above the law. It has also been the inner sanctum. No unauthorized person is allowed to open its door.

Congressman Ron Paul dared to introduce a bill, H.R. 1207, that would require an audit of the FED by a government agency. The House of Representatives agrees with him. He got over 300 co-signers of the bill. Barney Frank at first tried to bottle it up in committee. Then he tried to substitute a watered-down version. The committee voted for Paul’s version last week. This was a palace revolt against Frank. This does not happen often in any committee.

This is the first bill in Paul’s long career that has had widespread support. This indicates that the Federal Reserve, for the first time since 1914, has serious opposition in Congress. This in an historic event. The FED can no longer presume that Congress will treat it with kid gloves.

The Wall Street establishment understands the threat.

HACK ATTACK

Consider this hatchet piece on Ron Paul, written by a partner of a financial website, 24/7.com, one Douglas A. McIntyre. He is a frequent author on The Huffington Post.

In assessing Ron Paul’s career and recent effort to audit the Federal Reserve, he began with an apocryphal story about insane asylum inmates.

There is a rumor that has been around Hollywood for decades that some of the greatest silent film comedy scripts were created by screen writers who would bribe wardens at a local insane asylum to allow a patient to sit in on their story meetings. Allegedly, some of the most hilarious moments in the history of comedic cinema came out of ideas from the minds of people who spent all of their time on locked wards. Even the craziest person in the world can give birth to an idea which is both brilliant and intelligible.

To begin an analysis of a serious piece of legislation with an unrelated story that is obviously nuttier than the alleged inmates gives an indication of the seriousness of Mr. McIntyre’s critique.

Mr. McIntyre continued:

Paul came up with the idea some time ago that the activities of the Federal Reserve are conducted in secret and that the public should have the right to know how, when, and to whom the nation’s central bank lends it money. He has finally convinced enough of his peers about the validity of his concerns. Now, the Financial Services Committee has approved an amendment to allow government auditors the right to look at the entire balance sheet of the Federal Reserve. Paul’s quest to bring down the Fed has finally gotten to the point at which the Board of Governors needs to be concerned.

He’s got that right! This is Paul’s position, and the Board of Governors is extremely concerned.

Paul’s amendment is part of a larger bill that intends to deal with the consequences that any future failure of large banks might have on the global credit markets. His program for the Fed may set a precedent that will serve as a model for the entire financial services industry.

To “set a precedent” means to begin a new era. H.R. 1207 is indeed a precedent. It marks the first time since 1914 that a branch of Congress has asserted its statutory authority over its own creation. The legal right to audit is an assertion of legal authority. The Board of Governors sees this.

The Fed’s argument against Paul’s proposal is simple and defensible. The agency keeps important secrets including which large banks need substantial amounts of money during hard times. The public cannot know these details because it would cause a national panic. What if it was common knowledge that Citigroup (NYSE:C) had borrowed $100 billion in emergency funds from the agency? Citi’s stock could lose 90% of its value in a day. The Fed wants to keep secrets to prevent runs on major banks. The Fed, its defenders would argue, is the home to impartial financial minds that have the best interests of the nation’s credit system at heart. The average person would not be able to stand the strain of watching the agency’s daily high wire act up close, certainly not during a crisis.

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North