Fed up: the political movement to curtail the Federal Reserve goes from fringe to mainstream.

• Author: Doherty, Brian

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REP. RON PAUL (R-TEXAS), the libertarian-leaning congressman and failed 2008 GOP presidential candidate, has been suspicious of the Federal Reserve since before first entering Congress in 1976. In a 1981 article that mentioned the then-obscure legislator, United Press International reported that Paul "has proposed abolishing the Federal Reserve, repealing laws which make the dollar legal tender, and switching to currency issued by banks, 100 percent backed by gold."

That was the year Paul first proposed a bill to audit America's central bank. He recruited 44 cosponsors, but the bill never made it out of committee. The congressman introduced another bill to audit the Fed in 1983 and got less than half as many colleagues to sign on.

On another six occasions, Paul introduced bills that would have abolished the Fed entirely. Those acts of legislative defiance accomplished nothing much besides giving the congressman a reputation as an eccentric gold obsessive, hectoring an institution that was seen by almost everyone, critics and supporters alike, as foundational to the functioning of the modern world. Roll Call, a newspaper covering Capitol Hill, chided Paul after he won reelection to Congress in 1996 for his "idee fixe" of "a return to the gold standard," which it described as a "rallying cry that hasn't been a real issue since 1971."

What a difference an economic crisis makes. In 2007 and 2008, as Paul ran for president, the candidate found to his own surprise that his young-skewing crowds reacted to trash talk about the Federal Reserve more than any other element of his small-government, anti-war agenda. So in 2009, with many economists blaming the Federal Reserve at least partly for inflating a housing bubble whose crash continues to inflict the most economic damage seen in the U.S. for a quarter century, Paul started pushing another version of his "audit the Fed" bill, this one numbered H.R. 1207. And as of press time, the bill has attracted a remarkable 282 co-sponsors, more than a majority, giving it a nontrivial shot at passing through the House of Representatives.

H.R. 1207 would lift existing restrictions on what auditors from the Government Accountability Office are allowed to look into when examining the Fed's books. Specifically, the bill would allow investigators to report on the Fed's dealings with foreign banks and nations, its "actions on monetary policy matters," and the operations of its Federal Open Market Committee, the wing whose decisions most directly affect the U.S. money supply. The legislation is cosponsored by every single Republican in the House as well as 105 Democrats.

For the first time in Paul's long career of tilting at Alan Greenspan's windmills, popular sentiment against the Federal Reserve has its chairman, currently Ben Bernanke, running scared. Last summer Bernanke launched an unprecedented public relations campaign, explaining himself in venues from 60 Minutes to town-hall-style meetings broadcast on PBS. In July testimony to the House Committee on Financial Services, Bernanke warned that H.R. 1207 would damage global trust in the Fed's political independence and "could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability."

Paul, after shepherding his idea from fringe to mainstream, is almost giddy. "Now the Federal Reserve is less popular than the IRS!" the congressman told a July gathering of Young Americans for Liberty in Washington, D.C. "This issue is never going to go away. Who would have thought a politician could talk about Austrian economics and get applause?"

The Austrian Opposition

With its power over interest rates and the supply of U.S. dollars, the Federal Reserve System is the most influential economic institution on the planet. That influence comes surrounded by an impenetrable aura of mystery. Hardly anyone, citizen or congressman, completely understands what the Fed does, how it operates, or what the effects of its actions will be.

Here is a highly simplified outline. The Fed is a set of 12 regional banks under the command of a seven-member board of governors appointed by the president and approved by the Senate. Its 12-member Federal Open Market Committee (FOMC)--the board of governors plus five regional bank chiefs--is responsible for adjusting the federal funds interest rate, which is the rate banks charge each other for loans. The FOMC does this through "open market operations," buying and selling securities to affect the amount of money in the economy and thus the interest rate paid by banks to get more cash.

This process is hard enough to describe, let alone comprehend, and previous Fed chairmen have found it useful to keep their public pronouncements about the central bank's operations maximally vague and obscure. A classic from Paul Volcker, chairman from 1979 to 1987: "We did what we did, we didn't do what we didn't do, and the result was what happened." Volcker's successor, Alan Greenspan, who enjoyed the longest stretch of low-inflation prosperity in Fed history (nowwidely seen as possibly laying the groundwork for the crash), helped reinforce both the central bank's reputation for effectiveness and the expectation that its actions would remain inscrutable.

But these days the Federal Reserve faces challenges to both its power and its mystery, thanks to both hot public opinion and cold academic analysis. Politicians are demanding a peek behind the curtain, and holdovers from Paul's 2008 presidential campaign have...