Auditing the Fed will Audit the State

by George F. Smith

If Ron Paul succeeds in getting the Fed audited, the consequences could be far-reaching. Assuming the audit isn’t rigged to protect the guilty, as a similar bill was in 1978, the Fed will need every obfuscating Keynesian to testify and write editorials on its behalf, to reassure the public that monetary matters really are best left to the gods who rule us, such as Ben Bernanke and Timothy Geithner. Monetarists, too, would likely join the “Save the Fed” crusade, perhaps arguing that even a great free market economist like Milton Friedman considered the Fed useful for preventing and curing recessions.

But the really appetizing part of auditing the Fed is knowing what stands behind it. The Fed is a racket at heart, a con game writ large — what else can you call an organization with the exclusive privilege of printing money in the trillions and handing it over to friends? But if this is true, what does that say about the state, the organization that created and sanctions it? Is the Fed an honest mistake in the state’s otherwise undying efforts to preserve our liberty, or might it be a key component of a bigger racket?

Without the power of the state, there would be no proposal to audit the Fed because there would be no Fed to audit. Like any cartel, it exists to protect its members from market retribution, and only the police power of the state can make us shoulder that burden. A bill to audit the Fed could by force of logic become a state audit, much like the investigations of the 1972 Watergate burglary exposed the grinning skull behind the government’s public persona. During a Fed audit, for example, would it not be reasonable to ask why the people’s elected representatives continue to support a banking system that secretly steals wealth from their countrymen and other dollar holders? Or are we to take the naïve position that most elected officials really are clueless about the Fed’s policy of currency debasement and the effects such policies have had in history?

Partners in Crime

There are any number of ways a Fed audit could bring the state itself under close scrutiny, but let us sketch just one line of argument:

  1. It is well known that banks engage in fractional-reserve lending, meaning that bankers use their deposits in lending operations, with only a part of their loans covered by money reserves. Fractional reserves expand the money supply, which, until the age of Keynes and Fisher, was called inflation. It is also common knowledge that when banks extend too much credit, depositors quite naturally get nervous and start withdrawing their money.

    Although fractional reserves would seemingly qualify as a form of embezzlement — the act of taking for personal use other people’s property without their knowledge or consent — government court rulings have never viewed it as such. As Murray Rothbard observed, a bank that fails to meet its deposit obligations is just another insolvent, not an embezzler. Following the British ruling in Foley v. Hill and Others in 1848, US courts consider that money left with a banker is, “to all intents and purposes, the money of the banker, to do with as he pleases.”

    This holds even if the banker engages in “hazardous speculation.” Thus, according to the state, there can be no embezzlement because the money belongs to the bank, not the depositor. But was there ever a depositor who thought he was turning his money over to the banker so he could “do as he pleases” with it? Furthermore, when the banker, in loaning the customer’s deposit to another party, essentially creates two claims to the same piece of property (the money deposited), there is no way he can meet his obligations to both depositor and borrower at the same time. Why does the state exempt banks from the law of contradiction?

  2. Without a central bank, fractional-reserve banking leads to repetitive crises, as banks are incapable of meeting redemption demands. Banks that have trouble meeting their obligations need money fast, and this is one of the problems a central bank addresses. “The very existence of a fractional-reserve banking system invariably leads to the emergence of a central bank as a lender of last resort,” Jesus Huerta de Soto tells us.

    True, but as de Soto recognizes, central banks don’t emerge from open and candid discussions within the banking community, unless one regards their wish for “a more elastic currency” as an instance of brute honesty. To succeed, central banks need protection from competition; they need to be the monopoly supplier of bank notes. But monopolies in this sense don’t emerge on a free market. A deal needs to be cut between big bankers and influential politicians to create a bank with legal privileges. This arrangement is then forced on us not, presented not as a special privilege but as serving the public interest. And we need to be forced to accept the privileged bank’s fiat money in trade for real goods or services. It bears repeating: a central bank “is not a natural product of banking development,” as Vera Smith concluded in her well-known study. “It comes into being as a result of government favors.” What does a government get in exchange for these favors, a Fed auditor might ask?

  3. With a central bank, fractional-reserve banking leads to repetitive crises, but they may differ from crises without a central bank in two respects: one, because a central bank enforces a uniform rate of inflation (credit expansion), one bank can’t jeopardize the rest by overexpanding more than others; consequently, the day of reckoning is delayed, and the correction needed is more severe. And two, when the crisis hits, the central bank provides a means for more monetary wrongdoing.

    Since the requirement of redemption limits the inflationary potential of a central bank, governments sooner or later get around to outlawing money itself and force us to use exclusively what was formerly only a money substitute. Governments, in other words, outlaw gold and make us use their paper. Question from the auditor: how does this arrangement qualify as a free market, as so many commentators today tacitly believe when they blame the crisis on the free market?

    With gold gone the central bank becomes government’s genie, able to grant it almost unlimited spending. Massive spending in the ’30s didn’t cure the Depression, though it did make government a much heavier load for the market to bear.

    Does the central bank’s ability to orchestrate inflation have any connection with a government’s involvement in war? Might the world wars have been far shorter and less destructive of life and property, while propagating fewer bloody shoots of their own, without the aid of central banking and a fiat-paper standard? The enormous monetary outlays of war go to politically favored firms, which thus have an incentive to foster a more belligerent and interventionist foreign policy. Is this military-industrial-congressional complex killing us? How eager will politicians be to go to war or police the world if they no longer have a printing press to pay for their adventures?

Might we all be better off with a money and banking system that is completely severed from government? And might we be better off with a government that can’t feed on inflation?

The Pujo Committee

Prior to passage of the Federal Reserve Act, Wisconsin Senator Robert LaFollette and Minnesota Congressman Charles Lindbergh Sr. delivered scathing speeches attacking “the money trust” for causing booms and busts. LaFollette charged that the entire country was controlled by just fifty men, a claim that a Morgan partner rejected as totally absurd. He knew firsthand the number was not more than eight.

Following Lindbergh’s resolution, Congress created the Pujo Committee to investigate the big bankers, but the committee was firmly in the hands of the trust itself. During the summer of 1912, the committee scared the wits out of people with statistics and testimonies showing the power Wall Street had over the economy. To the public, Congress seemed to be doing its job by cracking down on corruption, though at no time were Lindbergh or LaFollette called to testify, nor did anyone seem to attach any significance to the fact that the biggest bankers were leading the charge for reform.

The committee concluded that banking reform was urgent and necessary to bring Wall Street under control, and a year later Congress and President Wilson gave the country a central bank as an early Christmas present. As Rothbard notes, the composition of the first Federal Reserve Board more or less reflected the power structure of those present at the Fed’s founding meeting at Jekyll Island in 1910, with Morgan man Benjamin Strong actually running the system as head of the New York Fed.

Power grabs are a frequent and predictable outcome of government investigations. However, any audit that exposes the Fed’s relationship to the state will be worth doing, even if the Fed’s friends keep it where it is.

Download the article as an MP3 file here (10:59 minutes).

George F. Smith is the author of The Flight of the Barbarous Relic, a novel about a renegade Fed chairman. Visit his website. Visit his blog. Send him mail. See his article archives.

  • longshotlouie

    Goldman Sachs says that its program trading software can be used to manipulate markets: (duh)

    The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.

    Given that Goldman obviously knows how to use its own program – which it paid many millions for – isn’t that a virtual admission that Goldman has been manipulating markets?

  • Christine

    The Declaration of Independence Hollywood Style (audio/video)

  • longshotlouie

    Daisy-chains of debt form the links, of the chains, of tyranny.

  • longshotlouie

    Editor’s note: Following is the winning entry submitted in WorldNetDaily’s Independence Day tea party speech contest.

    Fastened upon our ancestors by the despots of faraway lands, the Chains of Tyranny were linked by hereditary bondage, undeserved tribute and indentured servitude. By exhibiting gallant resolve and courage – in some cases against the face of certain death – our Minutemen forefathers gloriously threw off these chains just 233 short years ago.

    Much has changed since that time. Yet today, we hear again the rattling and clanking of the Chains of Tyranny. The chains we hear are held not by foreign powers. Dreadfully, it is those among us, many of whom are our elected leaders, who possess the chains and toil endlessly to cast them across our backs. Now heavier and longer, the Chains of Tyranny have been wrought with new links – apathy masked by complacency, socialism fueled by internationalism, cults of undeserved celebrity and a reckless belief in the equality of results.

    Moreover, they are now deceptively plated in gold. We have been assured, time and time again, by those who hold the chains that they “know better” and that to embrace their shackles would be “for our own good.”

    The threatened return of the Chains of Tyranny triggers that transcendent call for us to assemble here today.

    Who are we? We are the Defenders of Liberty!

    Our hands reach across generations. We do not perceive the value of each other in abstract terms of race, gender, ethnicity or creed. We do not see ourselves as rich or poor. We spurn “identity politics” as a lazy and inadequate substitute for a guarded vigilance balanced by independent thoughts. For we are all individual citizens of America – black and white, man and woman, Mayflower descendent and newly naturalized – and we must all stand united to protect freedom’s priceless but delicate charge!

    We detest efforts by the holders of the Chains of Tyranny to corrupt the everyday meaning of things and turn us against one another.

    Hope is not faith! Change is not reform! Taxation is not charity! Equality is not opportunity! Servitude is not freedom!

    To this end, we reject the following confused ideas tinkered in minds that reason abandoned and faith no longer moderates: Inconvenient truths, audacities of hope, carbon footprints, unearned incomes and government-sponsored “recoveries.”

    We believe there is but one market – the free market – that, if allowed to run unfettered in a free society, can provide all men and women the opportunity to use the results of their work to better themselves, their families and their communities.

    We know that public bailouts, no matter the intention, foster dependence, which in turn fornicates with servitude and begets slavery. For this reason alone, we would rather walk than drive a car made by any government! We would rather be paupers than be made rich by “public” money! We would rather drop dead than be cared for by Nurse Fed!

    We further reject the guise of “universal health care” and recognize this abhorrent creature for what it is: a brazen attempt to seize illegally our wealth, control how we care for our mortal bodies, limit our access to the best medicines, stifle scientific progress and medical innovation, and transform our doctor’s offices and hospitals into DMV-style waiting rooms.

    The Defenders of Liberty will never stand by and ignore the attempts of others to cast off their own chains of servitude. We will not strike accords or offer bribes to dictators! We would rather cut off our hands before extending them to the harbingers of evil!

    Speaking of evil, we know only those true rights: those that are unalienable and endowed by our Creator. We reject penumbral “rights” as false and dangerous ideas contrived in judicial cauldrons established only to massacre those who permeate the bookends of life.

    And finally, we know that our sovereignty shall forever reside in We the People. For this we reassert that any government that limits the God-given right of her citizens to defend themselves automatically ceases to be a government – for such action shall void the social contract from which it was forged.

    We are the True Patriots, left to guard perpetually that shining city upon a hill. We know of her, we dream of her, and yes, throughout history she has had a name: AMERICA! Let us rally around her, for we are the Defenders of Liberty! Let us will hoist our flags, wave our banners and bear our arms! Let us be vigilant and fight any attempt to ravage her! For, as the envious eyes of the world are still cast upon us, we vow not to be the last to feel the sweet effervescence of her freedom!

    God bless America!

    – John Manning


  • VR

    There was the smell of blood,
    broken hearts and dying dreams
    in the air when Americans
    began to lose their jobs
    and were foreclosed on.

    The money, they said, had vanished
    into the maw of the financial “crisis”
    created so banks could suck up billions
    in 401Ks, mutual and pension funds

    in addition to the taxpayer bailout
    and regurgitate it into the mint julep glasses
    of CEOs and shareholders fanning themselves
    while sitting on the financial plantation’s veranda,
    living off the retirement
    of the Middle and Working Classes,

    and in the deep, dead of financial winter
    will drink hot toddies and imported brandy
    while wrapped in cashmere sweaters
    by the comforting fire
    of their remote and casual brutality.

    by Vi Ransel

    Have A Great 4th of July

  • Everyone expose the fraud……..Put the teeth on SB604 in the Senate and bring it home!

    Enough people know about SB604 now…..Lets bring it on out!

  • Christine

    I look forward to the audit!

    We should have a monetary system that cannot be manipulated and a system where the money game does not constantly change at the whim of the FED only to empty the pockets of working folks via government bailouts (taxpayers pay for the mistakes of the financial elites), taxes, inflation, hyper inflation, deflation, depression, bad loans, derivatives. We were not born to work hard only to fill their pockets. We have ourselves and our families to care for…and if the president wants us to buy anything to keep the economy moving, then let the free market handle things and do something about the job losses!

  • Keep The Change

    No problem if the bill does not pass.
    It will be the line in the sand.

  • john

    I really support Ron Paul 100% in all this, but do you guys realize that the FED is the most powerful entity in the world?

    It creates and controls money, in a sense they are a billion times richer then every druglord, celebrity, or CEO.

    How many people do you think can be bought out? id say about 99% of the entire world. Seriously if they came to your doorstep and said il give you 10 million dollars if you stop supporting The Campaign for Liberty deal, what would you say? Now being the masses are becoming informed, its a much greater threat because they cant simply buy out all of us.

    However their are only a few hundred people in congress… Ron Paul is 1 in a million. They can control almost every single media outlet, influential celebrity, news anchor,politician or talk-show host. Right now id say about 99% of the US population doesnt even know about HR-1207 or even who Ron Paul is.

    The only hope we have is if Ron Paul runs in 2012 and if people around the USA generously donate about 100 million dollars for his campaign. Way more people will have to get involved for it to work. People would have to hand out fliers non-stop, have him campaign around the USA every single day, have him show on every media outlet.

    I mean for gods sake, Senator Shelby destroyed HR-1207 in the Senate, a bill for transparency in the most corrupt central bank and nothing else? Yet people dont even know about this aside from a measly 1% of the population.

    The real tragedy about people in the USA is they probably know by now whats coming from Obama and the corrupt congress/senate, but they just dont seem to think they can do anything about it, so they continue to support him out of spite for voting him in (hell atleast he can do “some” good right?)

    But if you guys have your hopes pinned on HR-1207 for ending the FED, you are going to sorely be disappointed. They have UNLIMITED resources and influence, yet most Ron Paul supporters are branded as far-right wing nutcases.

    I see so many people that hate Ron Paul because he wants to do things like end the Department of education… These same people support Obama, a guy who fired 3 inspector generals for exposing his corrupt friends, a guy who bailed out banks and took over a car company (moussalini style) yet gives nothing to the tax-payers, a guy who became a senator by having his 3 competing candidates expelled from the race. And a vice president who was found too have Plagiarised a SPEECH? Imagine if Ron Paul did that, the media would have crucified him. Or maybe if he did that stuff they wouldnt have because he wouldve been SO GOD DAM EASY TO BUY OUT? HMM…

    It seems the media is done reporting news, instead they are literally thinking for the average american by having popular talk-show hosts and news anchors share their “strongly worded opinions”, its actually kind of scary.

    So its my belief that Obama supporters are just very shallow people who basically vote against themselves because theyre told to do so, yet foolishly believe that Ron Paul loony right-wingers are crazy and their not. Its a simple case of projection, they’re being controlled not by their head (facts and logic), theyre being controlled by their shallow emotions (fear, arrogance and jealousy). That is why/how so many people are pitted against the non-violent and non-interfering right wing people who support Ron Paul.

    So as for ending the FED, Im not so sure this will work without more support from the public, but ofcourse it always has my support and il continue to call my local representatives. I sure do hope this passes!

    Ron Paul 2012!!!

  • Keep The Change

    Where’s The Change?

    Where’s The Stimulus?

    Where’s The Troops?

    Where’s The Transparency?

    Where’s The Birth Certificate?

    • Derek

      HAHAAHA, I’m in love with this post!

  • The fed is a black mark on usa history of liberty the people will eventually wise up and demand the fed be abolished or bring back some sort of commodity standard.

    I think this economic meltdown will do more good for freedom then bad in the long run, of course in the present its a disaster for freedom, but some times you need to go to the edge before you start moving back.

    • B Berry

      That’s precisely correct. The Fed will have to become either much more transparent (democratic) or it eventually will be removed.

  • Ross

    The battle has just begun.96 yrs of debt enslavement has created a lot of parasites.They will try every trick conceivable from deception,lies,intimidation,violence and even murder.Nothing is beyond those who are driven by the weakness of powerlust,since their status is based on a false premise and they have no real talents or wisdom to rise above their own depravity.

    Cunning and the ignorance of the American people has sustained them till now.

    Without the enslavement of the American people,they are nothing and they know that we are becoming aware.

  • john

    Hmm, i suspect that right now we will have more freedoms then we ever had or ever will have in the span of human existence on earth. I wouldnt bet on the War on Drugs ending any time soon… or the war on terror/communism.

    • Derek

      We are all slaves to the FED.

  • onemore

    It’s A Great Time In History

  • Although, I personally am so far to the left that even the democrats appear to me to be “right-wing,” I consider myself to be a strict constitutionalist. It is my opinion that since its inception there has been an organized and systematic assault by the conservatives in the United States on the civil liberties written into the US Constitution. The “War on Drugs”; “War on Terror”; “War on Communism” and a host of other wars waged by the right wing are really nothing more than a War on People–an excuse to erode civil rights to the point of non-existence. I invite you to my website devoted to raising awareness on this puritan attack on freedom:

    • revolverBoy

      David, please take a quick look at this scale, which gives us a simple view of the political spectrum:


      Consider that the Framers are mostly considered libertarian in the way we refer to it today. First I would like to know how someone who considers himself a strict constitutionalist can also describe himself as far left. The ideologies are night and day.

      And secondly, I would like to point out that a true conservative – in the classically liberal sense – abhors war, due mainly to the damage militarism causes to personal liberty and financial stability.

      Much of the conservatism you find in Congress should actually be called opportunism (what true conservatives would call neo-conservatism). And you seem to be dreadfully mistaken about from which end of the spectrum attacks on freedom are coming. At the far right you have anarchism, which believes in absolute freedom for the individual (even limited legal authority is looked upon with mistrust). In the far left, you find totalitarianism, which is total government control of society and which dismisses and seeks to abolish the concepts of individualism and personal liberty.

      As a people who have traditionally cherished freedom, we need to understand where the threat is coming from if we have any prayer of fighting it.

      • wm

        Dear revolverBoy,

        I read your post and I am wondering what reading you recommend so I may get a better understanding of the afore mentioned scale of the political spectrum. The problem I am having is when I hear people in public or on television or on the radio speak, they say they are one thing, but it seems their views do not match that thing. Then they disagree with a bill or a viewpoint of some other political person that should fall perfectly into their spectrum views.

        Anyway, I have not found a concise clear article on the matter. You seem to have a command of the subject.


        • revolverBoy

          Hi, WM.

          My grasp of the subject is far from a commanding one, but my interest has introduced me to a variety of readings. Articles on the topic seem scarce, so you’ll have to put the time in reading some thick books (j/k, they’re not that thick). Here are some good ones:

          -Leftism Revisited: From De Sade and Marx to Hitler and Pol Pot, by Erik von Kuehnelt-Leddihn
          -Liberal Fascism, by Jonah Goldberg
          -Liberty or Equality: The Challenge of Our Times, by Erik von Kuehnelt-Leddihn
          -Road to Serfdom, by Friedrich Hayek

          There are many others, but these can give you some perspective. For a quick, fresh outlook on the leftist-fascist connection in the U.S., “Liberal Fascism” is an absolute must-read.



        • Derek

          You should not worry about what you classify as politically… you should first discover what you believe in and apply that logic to politics. Why can’t we all just be Americans? I’m so tired of labels, just vote what you believe in, the country would be a better place.

          • William Mackey

            Derek, I believe that one of the reasons we let ourselves get so screwed is a lack of understanding and education. If we knew that we are a democratic Republic and what that meant, we would know what our fundamental policies are. I think there is a chance you would not really know what “Americans” means. That is why it is important to understand the language and the policies pertaining to our government so we can fight back when others try to impinge. Your heart is in the right place and I solute you for caring, but please do not condemn understanding and education. It is folly.

  • William Mackey

    Comprehensive, a little off subject there in the main, but your article does bring up the question, and if the question is, “will there be more scrutiny?” then we should all scream yes. We are not looking to lynch so much as we are looking to correct or to improve or to stop criminals from steeling billions from the pockets of our citizens every year. If in the process someone does get hung then fine, but I suspect the good people of the Earth would just like to keep their hard earned gold to themselves and not be forced to give the majority of it to criminals, I mean royalty, I mean bankers. If the collateral damage is born by the state it will be corrected by the new wealth of a nation! Yes?