On Tuesday, the United States Senate voted on a bill to audit the Federal Reserve. This movement is often circulated throughout Twitter under the hashtag #AuditTheFed. Many on the Republican side of the aisle are in favor of this legislation, although it fell short of the 60 votes needed to pass in the Senate. The bill, otherwise known as the “Federal Reserve Transparency Act of 2015”, is sponsored by Senator Rand Paul and has 26 co-sponsors, including some of Paul’s biggest rivals for the White House, Sens. Marco Rubio and Ted Cruz. The bill calls for an audit of the Fed and that the report should be given to the Comptroller General of the U.S. (the director of the Government Accountability Office).
The legislation was scheduled for a vote by Senate Majority Leader Mitch McConnell, who supports his fellow Kentucky Senator for president. With Paul slipping in the polls, McConnell likely brought this issue to the Senate floor to bring attention to his campaign.
With all this being said, what does it mean to audit the Federal Reserve? Let’s start with the basics. The Federal Reserve was signed into law by President Woodrow Wilson in 1913. It is the central bank of the United States, essentially meaning that it conducts our nation’s monetary policy. The Fed, as it is often referred to, is a semi-private agency with only loose oversight by Congress. It was created as a result of the financial panic that ensued in 1907, and was a means to provide a form of money to the failing banks. After the Fed was created though, it managed to do the complete opposite of its intended purpose. It created major price instability and caused over 10,000 bank failures. Economists from Ben Bernanke to Milton Friedman to Anna Schwartz have all argued that the Fed is the main reason that the recession of the 1920s turned into the Great Depression.
The Federal Reserve’s role has changed since its conception with two major pieces of legislation. The Federal Deposit Insurance Corporation (FDIC), created under President Franklin Roosevelt during the Great Depression, greatly impacted the role of the Fed. The FDIC is able to bail out banks by giving them a certain amount of government-funded deposit insurance. When the FDIC reaches its limit and cannot bail out any more, the Fed comes in to pick and choose what remaining banks it wants to save. Since the Fed is around to bail banks out, banks are more likely to participate in risky business that will agitate the free market. As with all other institutions created by big government, it allows people to act carelessly because they have a government that will use taxpayer money to clean up the mess they made. No logic there. The other law that significantly impacted the Fed was the amendment added to the Federal Reserve Act in 1977. This amendment revised the Fed’s purpose to keeping employment high and inflation low. Even a member of the Fed itself said that this “dual mandate is a difficult objective because concentration on one variable puts the other at risk.”
Overall, it is not surprising that Republican candidates are skeptical of the Federal Reserve. It has lead to more harm to our economy than any recession, and will more than likely continue its corrupt ways. That’s where the “audit” of #AuditTheFed comes in. Since Congress is the only institution that can oversee the Fed, it is common sense that it should take a look at the Federal Reserve to discover its true practices, especially after its balance sheet went from $900 billion in 2008 to almost $4.5 trillion today. The Federal Reserve System continues to hold the future of our economy in its hands and will no doubt be an important issue as the 2016 race continues.