Why Did the GAO Just Audit the Fed?
Some of the shriller Fed critics offer simple but misleading slogans like “The Federal Reserve is a private entity” and “The Fed isn’t audited.” The truth is more complicated, and the historical background matters for citizens trying to understand why, how, and how well the recent GAO audit of the Federal Reserve was conducted.
The Federal Reserve was created in the Federal Reserve Act of 1913, a product of compromise among a variety of political forces. Back then, as well as over time, the Fed’s governance has included a variety of interesting features designed, in theory, to promote the independence of monetary and related policies from muddy political forces. Fed independence is constrained by law, however. Independence does not mean unaccountability, or freedom from scrutiny by Congress.
The proximate moving force for the creation of the Fed has been called the ‘Panic’ of 1907. In this episode, increasingly widespread but rational concern about the quality of bank deposits led to bank runs and disruption in lending and payment systems, together with a sharp economic downturn. The new central bank was designed and advertised to promote banking stability and an ‘elastic currency’ — a money stock that was managed to meet the needs of commerce, and didn’t drive downturns all by itself.
Twenty years later we had the worst banking crisis in our nation’s history, the product of a few forces including Federal Reserve policy itself. We added a new government agency, the Federal Reserve Board, to ‘govern’ the government-chartered but member-bank ‘owned’ Federal Reserve Banks. We added a new Federal Deposit Insurance Corporation on top of the Federal Reserve as another means to try to instill and maintain depositor confidence in banks. We also added a similar Federal Savings and Loan Insurance Corporation for the banks’ sister industry. In 1970, after a euphemistically-named ‘paperwork crisis,’ a new Securities Investor Protection Corporation was created to stand behind investor accounts at securities firms.
We didn’t stop there, of course, including the development of a variety of government guarantees and entities advertising safer and more liquid investments for housing and related financial markets. Read more
