Learning to Love the Federal Reserve

By Steve Weissman, Reader Supported News

09 January 14

rom the founding of the republic to Occupy Wall Street, populists of the left and right have long despised the idea of America having a central bank. But, at the risk of being tarred and feathered, let me suggest that a very different Federal Reserve could become an indispensable tool for extending politically conscious, democratic control to the nation's economy.

Even to consider such an idea is rank heresy, I know, but remember that Che Guevara, the revolutionary icon of the 1960s, ran the Banco Nacional de Cuba – not very well, to be sure, but without losing his Marxist soul. As Che liked to embroider the tale, Fidel had asked if any of his comrades was an economista, and Che put up his hand, thinking that his leader had asked for a comunista.

Leaning more to the economista John Maynard Keynes and historian Karl Polanyi, I approach central banking as a simple matter of nuts and bolts, which puts me at odds with most left-wing Fed-haters. In my opinion, these comrades unwittingly borrow far too much from an overlapping hodge-podge of Ron Paul libertarians, gold bugs, debt and deficit hawks, small-town wingnuts, and John Birchers, all of whom fear central banks as an unnatural intervention into some mythic "free market."

Markets of all sorts have existed for eons and may seem somehow "natural and organic," as the laissez-faire physiocrats of Eighteenth Century France liked to believe. But theirs is a fairy tale that does not stand up to historical scrutiny. Much like today's semi-globalized marketplace, the path-breaking market economy of England's industrial revolution was "the product of deliberate State action," as Polanyi documented in The Great Transformation (1944).

"The road to the free market," he wrote, "was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism." The pre-industrial enclosure movements, the New Poor Law, the repeal of the Corn Laws, and other government actions forcefully and often brutally imposed and maintained the market economy. In Polanyi's exquisite irony, "Laissez faire was planned."

Later historians have confirmed Polanyi's conclusion, while the political scientist, legal scholar, and philosopher Bernard Harcourt goes even further in "The Illusion of Free Markets," which is a fun read. From the physiocrats and Adam Smith's invisible hand to the supposedly scientific theory of efficient markets that regulate themselves, all are myths. All sell an evolving idea of how to organize capitalist society. None is in any way natural, whatever that might mean.

Right-wing truthers who forever fondle these free-market fantasies have their uses, especially when they ally themselves with Senator Bernie Sanders in his heroic efforts to audit and reform the Federal Reserve. But buying into their cockamamie ideology, as too many left-wing Fed-haters do, will never advance economic democracy.

Knowingly or not, Fed-haters on the left also draw heavily on Eustace Mullins Jr., author of a tome most often called "The Federal Reserve Conspiracy." An acolyte of the American Fascist poet Ezra Pound and a staunch ally of Senator Joseph McCarthy, Mullins saw the Fed as an effort by the Rothschild banking interests to take over the world economy and create a new world order that was somehow Zionist, Communist, and anti-Christian all at the same time. He was, in short, a raving anti-Semite and holocaust denier, and – early in his career – a Hitler lover.

One of Mullins' chief beefs with the Fed and the banking system in general was that they could create fiat money whenever they wanted and with nothing to back it. Ellen Brown, a leading left-wing Fed-hater, takes up this critique in her "Web of Debt" and speaks of it as "a Wall Street Ponzi scheme." It's an interesting take, but her argument misses the larger point. Along with setting interest rates, the ability to expand and contract the amount of money in circulation and provide liquidity when times are tough are among the basic tools a democratically accountable government would need to manage the economy.

Which brings us to the real problem with the Fed as it now stands – who controls it and for whose benefit. The answer is more nuanced than most Fed-haters admit. As we see this week, the president appoints the chairman with the approval of the Senate. Both branches of government usually give the post to a Wall Street insider or friendly academic, but democratic protest did block the nomination of Obama's first choice, former Treasury Secretary Larry Summers. Far more democratic input is needed on a much more regular basis.

The president and Senate also choose the deputy chairman and the five other members of the Fed's board, all of whom sit on the Federal Open Market Committee (FOMC), which sets interest rates and controls the supply of money and credit. But another five voting members of the FOMC are presidents of the New York – read Wall Street – and four other regional Federal Reserve banks, and they are elected by private bankers who nominally own the regional Feds. Defenders argue that this gives the Fed "independence" from the government, but what we need is independence from the bankers.

The solution seems obvious enough, though politically impossible until we elect a far more progressive Congress and the next crisis emerges, in whatever order those two things might happen. But it's not too soon to think through our response. Instead of abolishing the Fed, as the haters want, why not make it fully democratic and fully accountable to elected officials, whom we should hold to account for economic policy? More on that in a coming column.

A veteran of the Berkeley Free Speech Movement and the New Left monthly Ramparts, Steve Weissman lived for many years in London, working as a magazine writer and television producer. He now lives and works in France, where he is researching a new book, "Big Money: How Global Banks, Corporations, and Speculators Rule and How To Break Their Hold."

Reader Supported News is the Publication of Origin for this work. Permission to republish is freely granted with credit and a link back to Reader Supported News.