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Audit of the Federal Reserve System: To be or not to be!

Round and round it goes. Where it stops nobody knows. A comprehensive annual audit of the federal reserve system does not seem likely this legislative cycle.

What does transparency of the federal reserve mean to us? The topic of the federal reserve is very important for our country as we go forward through these rough economic times. It is probably the least understood institution of government yet many consider it the fourth branch. It claims to have the power to control the money supply and its rate of injection it into our economy. The most important accomplishment that an audit can do is to educate people about money, where it comes from and how it can be manipulated. I doubt that any manipulation is intended to cause ill-intent but, it is the unintended consequences of this manipulation that have caused our current problems.

Right now congress is wrangling over billions to further fund unemployment benefits. If we look into the books of the federal reserve, especially around the time of the deflation of spring 2009, we will most likely find trillions of monetary guarantee’s and direct credit. We actually don’t know what we will find because we are not allowed to know. It would, according to the fed, "destabilize" the economy and financial institutions if this information was released. I think that it would only destabilize the idea of what the current central bank stands for and its claims of control.

I was listening to an audio lecture last night of Andrew Jackson’s fight against the then second central bank of the United States. When it was evident that Jackson’s intent was to check its power by starving the bank of capital, by removing future deposits from the central bank and redirecting them towards various state banks; the central bank waged a war of popular opinion against Jackson by culling credit and calling loans due. We had just started to emerge from a recession, some say caused by the central bank’s loose monetary policy, when the bank started calling in loans to force Jackson to politically submit. Nicholas Biddle the director of the bank, along with other popular members of congress, thought that public opinion was positive for loose credit to fund infrastructure projects. Jackson turned it back upon the bank by proclaiming to the American populace that the bank is again using its political power to interfere with government function. The power brokers of the bank blinked and Jackson won the battle. The banks charter expired a couple years later and was not renewed.

The central bank of 1932 was much different than what we have today. They dealt with specie, gold and silver, in those days. Common practice was to release paper notes for claim to specie in the vaults. Banks could manipulate this by releasing more paper notes than they had specie in their vaults. This is where the term "bank run" comes from. The central bank was powerful because all of the deposits from states and tariff’s flowed through the bank. The bank had a never ending supply of specie and paper coming through its vaults and the paper that it issued was powerful and in high regard. It would issue large amounts of paper because there was in theory a never ending supply of specie. There was no fear of a bank run. This system worked great until the panic of 1819. Commodity prices collapsed in the world economy and only specie was accepted by many. This caused everyone to run to the bank for their specie. Many banks called loans due to have the specie for deposits. This caused a massive deflation throughout the country and eventually led to the closure of the second bank as popular opinion was against paper issuing banks. Many people were wiped out from this as they had to sell to pay the bank. Thomas Jefferson and Andrew Jackson had to mortgage their properties to pay their own debts. The courts at the time were not as lenient to debtors.

The 1819 crisis occurred five years after the suspension of the customary legal requirement to redeem banknotes with specie. During these years of continued inflationary policy, credit expanded largely because of the 1816 ramp-up of the second Bank of the United States. It reloaded state-bank coffers and issued notes, and, by 1818, built a pyramid of over $60 million of new obligations atop its meager $2.5 million specie base. A second crisis overwhelmed the markets. The central bank called loans to meet payment for the Louisiana Purchase. The public came to its senses, realizing that circulating paper could not hold its value relative to a veneer of gold intended to be held by banks for occasional redemption requests. The bubble of paper — amassed to support the competitive development of fertile river-bottom farmland in frontier areas — rapidly deflated. Half the debt from the purchase of public land had originated in Alabama, and by 1821 some 60 percent of it had been liquidated (pp. 65, 71). The will to push remedial steps only became urgent after the collapse.

If there is evidence of financial misconduct and the clamor for reform is great enough to question the federal reserves power, you will see the federal reserve play political games much like in 1832. They may threaten, behind closed doors, to not go along with a monetization of debt. Minutes of their meetings already show some signs of dismay with current policy. These concerns do not stem from worrying they are not doing enough. Some of the federal reserve governors want to tighten policy. Many people today are organizing against the federal reserve. I don’t think many want to actually end it though. This should change! I think that if you look at who benefits from central banking it is mostly the rich. The people who control a central bank are inevitably the elite. Their policies coupled with an easily lobbied congress produced the current crisis. The business and re-election interests of the so called right and left political parties are served by the bank.

Central banks wield tremendous power. The federal reserve has managed to keep a comprehensive yearly audit (HR 1207 and it senate companion) from the view of the American people and congress. I think that the game is up though and as this depression worsens clamor for reform will bring transparency to the federal reserve. The proverbial "can of worms" has been opened. Little can be done to put this idea back under its cloak.

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