Jeffrey Tucker: Everything You Need to Know About the Fed

[RUSH TRANSCRIPT BELOW] In this episode, Jeffrey Tucker unpacks President Donald Trump’s growing dispute with the Federal Reserve and his efforts to remove Federal Reserve Governor Lisa Cook for alleged mortgage fraud.

“There’s a lot more at stake than just this one regulation about residences and mortgages. It has to do with whether and to what extent the Fed is actually accountable to the President of the United States,” says Tucker.

He’s the founder and president of the Brownstone Institute and senior economics columnist for The Epoch Times.

How did the creation of the Federal Reserve fundamentally change America? Does Trump have the authority to fire a Federal Reserve Governor? And what does it really mean to be an independent federal agency?

“What’s striking to me about this is that the Fed has been around since 1913. This question has never really been asked at this level—much less answered—for all these years in this country,” Tucker says.

Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of The Epoch Times.

RUSH TRANSCRIPT

Jan Jekielek:

Jeffrey Tucker, so good to have you back on American Thought Leaders.

Jeffrey Tucker:

My pleasure. Good to be here, Jan.

Mr. Jekielek:

Let’s start with this recent firing of Federal Reserve Governor Lisa Cook. This has been contentious, and people are coming in on both sides. What’s your take?

Mr. Tucker:

She refuses to resign, believing that it can’t happen, that she’s untouchable in some sense, and that the president cannot do this. The problem is that the law, as written by Congress, the implementation legislation of the Fed, says that the president can fire a Federal Reserve Board governor with cause. Right? That’s what it says. Which implies that the president is in charge.The president is what keeps the Fed accountable. 

Now, Trump believes this, and so he found somebody on the board that he can fire with cause. Now, the allegation—I have to say allegation because that’s the way we talk—but actually, it’s true. She named two separate primary residences in her mortgage applications. You can’t have two primary residences. The advantage of doing that is that you get favorable interest rates because, on your primary residence, there’s less risk. So you get a more favorable loan rate. 

So she got two favorable loan rates. And then you’ve got really interesting problems concerning the deductibility of interest. You can only deduct the interest that you pay on a loan from your primary residence. If you buy the second, third, and fourth house, that’s on you. So actually, this is a federal crime to do this. And maybe it’s common. Maybe it goes on all the time. We don’t really know. Maybe there’s a certain class of borrowers who just do this routinely. 

Lisa Cook treats it like it’s no big deal, like a parking ticket or something like that. But it’s actually a federal crime. So if you’re looking for some reason to go after a Fed Board governor with cause, this is a good cause. So I think Trump will prevail in this particular case, but it will have to be decided most likely by the Supreme Court. What’s important here, Jan, is there’s a lot more at stake than just this one regulation about residences and mortgages. It has to do with whether and to what extent the Fed is actually accountable to the president of the United States. That’s what’s at issue. 

What’s striking to me about this is that the Fed has been around since 1913. This question has never really been asked at this level, much less answered. For all these years, this country has pretended as if there’s such a thing as an independent central bank, and everybody knows what that is. Well, there’s another word for independence—that is unaccountable. Independence sounds great. Unaccountable sounds bad.

Actually, the Fed is unaccountable. They have not been held to account for any outside audits in its entire history. Any political intervention is widely seen by financial markets as something like a catastrophe. You’re risking the nation’s financial stability, and so on and so on. But you know, in the end, we are governed by this document called the Constitution, and we’re a nation of laws. And the Constitution has three buckets.

It has the judiciary, it has a legislative branch, and an executive branch. In the org chart of the federal government, printed by the federal government that everybody agrees is true, the Federal Reserve is under the executive branch and reports to the president. You can see it. The org chart is very clear about that. You can say it’s independent. Well, is that just sort of a norm that we just have a hands-off policy?

Mr. Jekielek:

In the judiciary, precedent is hugely important. Is that the case here? Because clearly, as you’ve outlined, the precedent has been independence.

Mr. Tucker:

We don’t really know, in a constitutional sense, what that means. And you’d think that we would know, but we don’t actually know what it means for there to be an independent agency under the executive department. So what’s exciting about the times in which we live is that we’re finally getting answers to these questions. The Supreme Court has been very clear that the president is in charge of the agencies, executive agencies. 

So let’s just say the Department of Labor, USAID [United States Agency for International Development], the Department of Energy, the Department of Agriculture, or HHS [U.S. Dept. of Health & Human Services], can, in fact, fire employees. Now, five years ago we didn’t know the answer to this question, right? I mean, I think we’ve had these discussions for a while. We didn’t actually know whether the president was really in charge of executive agencies. The Supreme Court, in a series of cases, has been very clear the president is in charge of executive agencies. 

But now Trump is taking on the great question of American life, which is the status of the Federal Reserve under the law. That is an unanswered question. So this is a taboo topic. We’ve never been here before. No president since 1913 has taken on the Fed the way Trump is taking it on now. And the Supreme Court, I think, is going to have to decide that this is an executive agency.

Mr. Jekielek:

For those who are uninitiated, why would the president take on the Fed right now?

Mr. Tucker:

President Trump is annoyed with the Fed because he thinks that they’re keeping interest rates too high. Now, you can agree or disagree with that. I happen to not really agree with that. But I do agree that you need some accountability for the central bank. You can’t just have this floating financial institution, arguably the most important institution in the United States, the most impactful institution in the United States.

Mr. Jekielek:

And by extension, the world.

Mr. Tucker:

Yes, that’s right. The globe, because we’re on a world dollar standard. So the Federal Reserve is the most powerful institution, arguably, in the world. And it’s just this free-floating agent out there that nobody knows to whom it reports, if it reports to anybody. But under the Constitution, the founding fathers were not idiots. They knew the monetary issue was an important issue for any country. But they addressed a lot of things in specifics in the Constitution. They addressed copyrights and patents. They even addressed the post office. They addressed all sorts of specific issues. Trade, for example, is there. 

But one of the issues they address in Article I, Section 8 is money power. And they specifically grant to Congress the job of managing currency and coining money. So that belonged to Congress, and that’s for a reason. Because they understood that monetary power is quite frequently abused by the executive. Kings, coin clipping. There’s hundreds and thousands of years of abuse of the monetary financial system by big-shot executives, whether it’s pharaohs or kings or princes or whatever. 

They wanted it to belong to the Congress, which is to say the people. That was a specific decision made for a specific reason. It’s very wise. And they also even restricted the states from making anything other than gold and silver as money because they wanted to mitigate against the problems of inflation, depreciating currency, because they knew this had led to upheavals in the past. You can read the Founding Fathers on money. They had a lot of views on this topic.

Thomas Paine is most famous for having written Common Sense and railing against the ermine robes of King George, whatever, but actually, he has a lot of writing on the monetary question, too. He hated paper money. He said paper money was the source of great evil that leads to inflation and business cycles, trade cycles of booms and busts. He had a very sophisticated economic understanding. I’m not saying that Tom Paine was some sort of unique figure. This whole generation understood that bad money can ruin a country and a society and send the entire culture into upheaval.

They wanted sound money, and they wanted hard money, and they wanted the money to belong to the people, guarded by the people for the people. That’s why they had, in Article I, Section 8, they granted to Congress the power to coin money and restricted even the states. Now, we had a Tenth Amendment, so states have a lot of rights, but they did not have the right to create paper money. That’s in the Constitution. So that’s how serious they were about this topic. 

Now, soon after the founding, there was an effort to create a national bank, and it didn’t last long. We had the first national bank and the second national bank throughout the 19th century, in the first half of the 19th century. Keep in mind, a national bank is different from a central bank in important respects. A national bank is really a bank for the government. It’s like Congress makes debt, the National Bank buys it and holds it, maybe prints money to buy the debt. And so they have this relationship between the bank for the government and the government has its own bank. That’s the National Bank. 

Now, it’s famously subject to all sorts of corruption, as even from my description. Bond rackets, debt scams, profligate spending—there’s bad stuff associated with national banks, so it was inconsistent with the American ethos. This was not a central bank. It was just a bank for the government. That’s what it was. It went away, then it came back, then it went away again.

Andrew Jackson famously railed against it. That’s a monster. A lot of the debates about money in the first half of the 19th century surrounded this issue of the national bank. Then we had a long period of what’s called free banking. It lasted for many years, and there were changes in the regime regarding the relationship of the Treasury to money. Were we going to have money? Were we going to have a gold standard, a silver standard, or bimetallism? There were all sorts of acts coming out from Congress regulating this stuff. 

But during the 1870s, 1880s, and 1890s, we had a growing outrage against what was called wildcat banking. We had railroads going through the country, and everywhere the railroads went, property values would rise and businesses would start popping up. Of course, banks popped up in that area too. They started lending money to everybody. If the railroad failed or didn’t actually show up at all, the banks would go belly up, take everybody’s deposits, and people would get angry. 

That was called wildcat banking. There were lots of booms and busts. Banks were regarded as normal institutions, like grocery stores or newspapers—just another market institution. They could fail or succeed, but it was determined by the markets. Now that’s a little fraught from the depositors’ point of view. You can’t know for sure. You’ve got to pick well. 

But there was competition between banks, and bad bankers went out of business. Good bankers thrived. I mean, it’s kind of a decent system overall, but maybe not, you know, incredibly popular for people who lost their deposits and that sort of thing. But there was a lot of pressure during this period to stabilize the institutions. 

Mr. Jekielek:

In our society today which is very focused on safety and prioritizes safety, this wouldn’t work.

Mr. Tucker:

Yes. Even in the world, it was an unusual situation. America had a uniquely free system. There were other examples of free banking in this period of history, but America had a pretty darn free system. It was imperfect, but it was pretty good. There were no real guarantees, at least not from the center. So it was a pretty good system. You can complain about the system, but it actually was a kind of handmaiden or shepherd of the greatest period of growth in industrial history. 

What happened to the American economic structures between 1860 and, say, 1910, was a marvel for the whole world. It was during this period that we got the commercialization of steel. We created new cities with skyscrapers. We had sound recording and photography and flight and electricity, lighting up homes and cities and communication, telephones. The most marvelous period of invention and expansion of incomes, democratization of prosperity that we saw in America made America famous all over the world. In the second half of the 19th century, there was a growing sense across the entire planet that whatever America was doing, they were doing it the right way.

Mr. Jekielek:

Democratization of prosperity. I love that term.

Mr. Tucker:

All the incomes were rising across all classes. It’s not like the tales that you hear from the Gilded Age, which is that the rich got richer and the poor got poorer. All the data shows that everybody was growing wealthier systematically. Yes, some more than others, but everybody was better off. The monetary system we had was free banking at first, and then we had a codified gold standard after the Civil War. That was a government imposition. 

The beautiful thing about the gold standard is that it restrained congressional spending. There was no ability to print. The existence of physical gold restrained credit expansion. It puts money in the hands of the people. Gold and silver circulated among the people. So this was a hard money country, with gold coins dangling in your pockets. 

And banks, if they were issuing notes, which they did, would keep gold in their vaults. It was a good system. It was a brilliant system. Remarkably, during this period, after the gold standard and then all the way up to, say, 1910 or so, what happened to prices?

The value of money gradually grew, imagine that. You save money, and then after five years, you go back to that money that’s in your mattress, and you find that it’s more valuable than it was when you put it in. That’s a remarkable thing. We call that deflation now. But at least under the gold standard, it meant that the propensity to save was, even apart from the interest you earn, you would be rewarded for your prudence and frugality. 

So America became a country of frugality and saving. Saving was always rewarded by prosperity, invention, and creation. It was glorious. It’s no wonder that by the 1890s, almost all of European politics said, we’ve tried the aristocracies, we’ve tried our monarchies, we’ve tried our kings and queens and multinational big shots running everything in our empires, but let’s face it, we’re all going to eventually be Americans. Look at what they’re doing over there. This experience really did inspire the entire planet. 

America was never more confident than it was under the gold standard in those years. It was also during those years that we developed all of our civic pride, stories of the founding fathers, our national holidays, the music that we associate with America, the marches, and the flags and signs and symbols. American pride, and you could say even patriotism, was born during this period, and for good reason.

My point is that this is all very interesting, but the monetary regime being hard money, money belonging to and controlled by the people and by independent enterprises was a major reason for that. So now we have to fast forward to the Fed because that’s where things really began to change.

Mr. Jekielek:

Why did all this happen in1913? 

Mr. Tucker:

A lot of it had to do with the panic of 1907. But like in all politics, sometimes the crisis is exaggerated for a reason. There was something like a frenzy after 1907. We can’t stand this system anymore—ups and downs and bank failures and panics, and oh, we don’t know if the money is there. This is a problem. We don’t know if the debt holders are even going to be paid. We need to bring science to monetary policy. 

One of the things that was part of the ethos of the time, you could look at the prosperity that unfolded over those 30 or 40 years and say, that’s a miracle of entrepreneurship, enterprise, and freedom. Or you could look at that and say, wow, this is a consequence of good managers, excellent engineers, excellent science, the primacy of rationality over randomness. 

There are two interpretations you could give. As time went on, that second interpretation prevailed. So there was a growing sort of valorization of expertise and management. They said, look, we should bring the spirit that’s given us all these great inventions in the private sector to government itself; let’s put the experts to work on banking and money. The experts did come together, famously at Jekyll Island, and put together this new institution. It’s a funny institution with a funny name, because it’s actually not a national bank. 

Yes, it is a national bank, but it was more than that. It became a kind of regulatory cartel owner of all banks in the country. You could not be a bank unless you were a member of the Federal Reserve. The Federal Reserve was going to be responsible for all clearing systems—how we got paid, when you finally get the thing that you’re going for, when the money arrives at the institution that it’s intended for. That’s called clearing. And that was going to be entirely charged by the Fed.That was entirely managed by the Fed. 

So there was going to be no more wildcat banking, no more independent banking. Banks were not going to be these free enterprise operations where they pop up and go away. No, it was all going to be controlled by the Fed. So it was both a national bank and a private banking cartel granted special rights by the federal government. It exists in this strange place. And that was in 1913.

Mr. Jekielek:

How is it private?

Mr. Tucker:

It’s entirely privately owned. These are privately owned banks. They’re privately owned banks with a federal charter from the government. 

Mr. Jekielek:

The banks being the members?

Mr. Tucker:

Yes, all the banks are privately owned, so it’s a private cartel. It’s like the banks—the biggest banks leaned on Congress to codify a centralized system that would retain their private status while forbidding competition from outsiders, from wildcat banks and random people. So the system itself is privately owned, or you could say it’s quasi-public-private. I don’t know what to compare it to. I’m sure there’s a good comparison there.

Mr. Jekielek:

Clearly the Board of Governors is not private.

Mr. Tucker:

That’s right. So this is where we get into a lot of ambiguity. This is where it gets really interesting. Is it public or is it private? And if it is public, who controls it? The voters? Congress? The Supreme Court? The president? Who? What does it mean to be an independent agency? We know from the Supreme Court that these don’t really exist in other areas of the federal bureaucracy. We know now that the president’s in charge of them. 

Well, what about the Fed? That was always ambiguous in the law. So what happened was, this is the way it’s normally described. Congress decided, in its wisdom, to take its powers over monetary matters, Article I, Section 8, and delegate those to this new institution called the Federal Reserve. Now, you should just reflect for just two seconds, because you and I are both interested in words. The word Federal Reserve is, by itself, funny, because it doesn’t say central bank. Americans hated the idea of a central bank because that was more like Germany and Bismarck or whatever. 

They didn’t want that. A central bank is not an American institution, so they called it something completely different. It’s actually kind of genius. They called it first the word federal, federal meaning decentralized, consistent with the 10th Amendment, these United States, we don’t have a central government. We have a federal system. 

So to accomplish that federal piece, the new central bank had branches. It had the Minneapolis Fed, Atlanta Fed, Dallas Fed, Chicago Fed, San Francisco Fed. So there are many Federal Reserve banks around the country, for no apparent reason really, except to create the illusion of decentralization. So there was that. And even now, they’re gigantic and they employ all these researchers, and they say interesting things. 

But really, there’s no reason for all these feds around the country. The second part, this word reserve is funny when you think about it, because it implies that they have something. They’re in possession. We have the reserves. Just in case we need them, we have the reserves. If there’s a crisis, we’re going to be there to help you. You can have confidence in the system because we have reserves, whatever. In those days, it was gold. You don’t need to worry. 

Finally, we have a system that’s stable and functioning and scientific. Now, the science part of this thing is also high employment, or at least low unemployment, and some sort of economic stability. So they had this sort of mission, a big, broad mission, managerial mission over the whole country. The original Fed, keep in mind, the founders of the Fed and the ethos of the time were tired of the chaos. 

They were tired of the chaos of the markets. They were tired of the bank failures. We’re going to stop that. But we’re also going to guarantee low inflation. This was widely believed. Now, there are plenty of people out there that think the Fed is just a big demonic conspiracy, and racketeers. Maybe there’s an element of that or whatever. 

But what I see in the founding of the Fed is a sincere and authentic desire to stabilize the system, bring intelligence, rationality, managerial prowess, and expertise to a sector of society that had long been subject to waves of chaos. I think they had every intention of doing good work. The founders of the Fed weren’t bad guys. Many of them wanted sound money.

In fact, some of them wanted to stop the credit expansion. They didn’t like the way these wildcat banks were created. You have a bank pop up, Bob’s Bank. It says, oh, the railroad’s coming along. Here’s your money. They will lend you the money, and they will collect your deposits. Then the bank goes belly up and people lose their deposits. And then the bandits would be on the run. 

They didn’t like that. They were kind of stodgy old-timers in a way. Let’s have gold and a frugal, drifty middle class and stop with all this nonsense, right? So this was sort of the ethos of the first Federal Reserve. But the problem is that in the end, despite its name, despite the intentions of the founders, it was a central bank.

Mr. Jekielek:

I did not know that federal meant decentralized. I thought that federal meant centralized,which is a function of the federal government.

Mr. Tucker:

Yes, this traces back to ambiguity about the word in American history.

Mr. Jekielek:

Maybe this reflects a shift in how society thinks we should be governed.

Mr. Tucker:

Yes, even in the founding period before the Constitution, there was a lot of mix-up about these words because they were the federalists, you know. And a lot of people looked at the federalists and said, you’re not federalists; you don’t believe in a federation of states; you’re centralists. You want a central government. The people who objected to the Constitution came to be called the anti-federalists. 

Now, that’s funny because, of course, they were the real federalists. I mean, if you believe the anti-federalists, they believed themselves to be the real federalists, and what was called the federalists were really centralists. So this is where the ambiguity comes from. But I think generally we use the word federalism to mean a decentralized system. And in American history, that means granting rights to states. And we still have many, many states’ rights. We still have a federalist style system.

Mr. Jekielek:

100 percent

Mr. Tucker:

And Lord Acton said that federalism was the only true great innovation of American political life. The idea that you would have an overseeing kind of structure that was severely restricted in its power, but most of the powers belonged to the historical political units called the states. Lord Acton said that was the great achievement of American history. 

Mr. Jekielek:

The famous term is, laboratories of democracy. Dr. Joseph Lapado, Surgeon General of Florida, just declared that he’s going to get rid of all vaccine mandates. There are other super-mandated states that believe the opposite of that. We’ll see how this all plays out. 

Mr. Tucker:

It’s important, and it connects to our topic because of the very name Federal Reserve. I mean, this thing never would have gotten through under any circumstance under a different name. If it had been called the Third National Bank, it would have been dead in Congress in no time. But because it was called a Federal Reserve.

Mr. Jekielek:

Or the Central Reserve.

Mr. Tucker:

Or the Central Reserve, or the Central Bank, or the Bundesbank, or the Bank of England. These were central banks. But in America, we didn’t have that. We had a Federal Reserve. And they created all these branches around the country just to underscore the point. And in those days, progressivism, what came to be called progressivism, was an ethos alive in the country. The belief that we would take the tools of science and apply them to public policy to engineer progress. This was the essence of progressivism. 

That revealed itself in a number of ways which we now find regrettable, like eugenics policy was a progressive kind of policy. The prohibition of alcohol was kind of this mandatory uplifting of the population, a consequence of progressivism. But 1913 was a remarkable year because you had another aspect of progressivism, the income tax. Before 1913, just imagine, every penny you earned, you got to keep. It didn’t belong to the federal government at all. They had no access to any of your income before 1913. 

So we had the constitutional amendment that enabled the income tax. We had a really shocking amendment to the Constitution that eliminated the bicameral Congress and forced the Senate to be elected by the people in the states, instead of being appointed by the state legislature. It fundamentally changed the structure of the US Senate and eliminated the bicameral structure of the founding fathers and replaced it with what was essentially an experiment. 

The Federal Reserve was the same kind of experiment. It was a progressivist experiment in the application of expertise and science to the sound management of the monetary system of the country. But what’s interesting is that anybody would have predicted this. Thomas Jefferson certainly would have. Thomas Paine, this whole generation would have predicted. If you get anything like a central bank, a national bank, or a central bank, it will be abused. No matter the intentions, it will be abused. 

What presented itself soon after the Fed was founded? The war in Europe, the Great War. It was a mess, a terrible mess. And Americans wanted nothing to do with it. But at some point, what kept America out of wars for the most part was, well, we just didn’t want to afford it. We didn’t have the money. Solve your own problems. We’re over here on the other side of the world. We can mind our own business over here. We don’t have the money. 

Now, with the Fed, you have the money. You’ve got a printing press. You’ve got this weird power of this one institution to buy and hold government-created debt with money that didn’t previously exist. Check. You know, a credit; the nation had a credit card with an infinite balance on it. You know, an infinitely high limit.

Mr. Jekielek:

What could go wrong?

Mr. Tucker:

What could go wrong, exactly. Again, the founders of the Fed didn’t really imagine this. They thought, we’re responsible guys. We know what’s what. We would never do something like that. Well, they lost control of it right away. The Fed was probably the reason why the U.S. entered the Great War. That was probably the reason. 

Certainly, and there’s been a lot of empirical research about this, the Great War would never have happened without central banks in Europe funding it. The entire Great War was a central bank-funded fiat money, debt-financed project made possible by central banks, among which the Fed. The Fed didn’t invest itself as heavily in the war as, say, the Bundesbank, or the Bank of England, or something like that, or the Russian central bank. 

But still, I don’t think the U.S. would have ever entered that war were it not for the Federal Reserve. And then the problems began. People don’t understand this, but soon after the war ended, the U.S. experienced one of the worst inflations between 1918 and 1921. The data is a little unclear on this, but as best we can tell, the dollar lost as much as half its value. 

This was not entirely because the Fed was going into the open market and buying government debt and printing money, because we were under this gold standard, but because the U.S. had involved itself so much in lending to foreign governments. They paid back this in the form of gold. We experienced a huge influx of gold to the country, which did two things. It reduced the value of all existing stock of money. That’s the way inflation works. A huge importation of gold from abroad led—just like it did in the Spanish Empire—an importation of gold leads to inflation. So we experienced this big inflation, in part because of the war. 

And then a business boom that resulted in a huge business cycle bust in 1921. Now fortunately, in those days, we weren’t yet disciples of John Maynard Keynes, and we weren’t using the power of the federal government to try to reverse the economic downturn. There was a complete laissez-faire, hands-off policy—who cares? And the thing corrected itself in 18 months. We were back again. That was the very first crisis of the Federal Reserve. It happened very, very quickly afterwards, inevitably.

Now at that point, they should have said, you know what, let’s unplug this stupid money machine. For all the problems of the wildcat banks, it’s better than this, better than total war, conscription, mass death, and upheaval all over Europe that the central banks caused, but they didn’t do that. The Fed went back to trying to run a sound business policy. But five years later, they couldn’t fix the problem. And the credit expansion extended. It continued. 

And then the Fed faced another problem. Every president wants lower interest rates. We have four years. We get a new president in. He inhabits this sort of world. He gets annoyed. He wants to see rising prosperity. He wants to see economic growth, so he can get credit for that. 

And a major inhibitor of that always is the limitations of the financial system. And if the Federal Reserve has the power to determine the lending rates between itself and its member banks, which it does, it can set any rate it wants, then the Fed bears responsibility for the interest rates all the way up and down the yield curve throughout the entire country and can drive growth, or it can drive a pullback on growth.

Mr. Jekielek:

Hence, the president is taking issue with the Fed right now.

Mr. Tucker:

Again, I’m not here to agree with Trump’s evaluation of this. Although in his defense, he’s a businessman. And he’s worked in debt and banks all of his life, raising huge empires all over the place of business and dealing with banks. And he always wants the best rate. As a businessman, he’s not going to accept the rate that’s given to the general public. He wants the best rate for the money that he’s getting. He believes in debt. He believes in leverage as a businessman. He came of age in the age of leverage. 

So he believes in leverage, and he believes in low rates. So he’s using that model and applying it to the entire country. So I get it. I think it’s reckless, but I get it. So this may not be the ideal conditions under which to challenge the Fed’s so-called independence, but I am nonetheless delighted about it. I think this is a reckoning we have to have. Who’s in charge of this thing that we call the Federal Reserve?

Mr. Jekielek:

There’s a great number of institutions in this country that are involved in finance, both public and private. There is a large debt in America right now that has been accelerating because of the interest payments. How much of a responsibility does the Fed have for this?

Mr. Tucker:

Yes, that’s a big question. I do recall that when I was a sophomore in college as an economics major, I discovered the power of the central bank in terms of its capacity to drive prosperity, drive inflation, and send whole societies into upheaval like the French Revolution and the Bolshevik Revolution. If you look at the Weimar inflation of Germany, arguably without which we would never have seen a Hitler, you realize that the monetary piece of public policy is huge. It’s gigantic. 

Once you start looking into it, you can become obsessed with it, and I did. I wrote my undergraduate thesis on the Federal Reserve, in fact, and on the gold standard. And it was the longest thesis in the history of the academy where I attended because I just got obsessed with it. Because I think it is really important.

Lots of people argue for a constitutional amendment to balance the budget. A lot of people want Congress to cut spending, and so on and so on. But until you unplug the Fed’s capacity to just print money and cover up for all the profligacy of Congress, we’re never going to get there. We need sound money, or we’re never going to get anything remotely like a balanced budget. It’s the Fed that makes it all possible. The Fed provides a moral hazard that results in ever bigger government, ever more debt, forever. 

I’m cautious about people who always want to paint the chairman of the Federal Reserve as some sort of demonic devil guy. I don’t think that’s really true. A lot of these guys have every aspiration to run a good policy. I think Jerome Powell knows what’s right. And I think he wanted to run a sound policy. He inherited Ben Bernanke’s policy of zero interest rates, which is a grotesquely irresponsible policy. It never should have been imposed after 2008, and it bloomed up the assets of the Federal Reserve. 

They wanted to normalize the balance sheet. Jerome Powell had every intention of doing that, and he did. He started cranking up interest rates a little bit at a time, wanted to normalize Federal Reserve policy, make it more responsible, clean up the Fed’s balance sheet, get all these bad mortgages off the books, and set us back on a good policy. He is a sensible, reasonable human being. 

But they came to him in early 2020 and said, Mr. Powell, you may be a good manager of the monetary system. You may be a good and respected head of the banking system. You also have responsibilities to larger issues, like the priorities of the federal government, too. We’ve got a virus on the way, and we’re going to have to deal with this in a big way. This campaign you have to raise interest rates has got to stop right now, starting now. 

I don’t have a transcript. I don’t know for a fact this happened, but look at the data. They got to him and said, you have to serve the cause right now. You are federally chartered. You have a responsibility to the government here. We want these interest rates to fit and match what’s about to happen. 

So sure enough, around March 10th, he slammed the rates back down to flat zero and accommodated trillions and trillions of dollars of congressional spending for the coronavirus and created more money in those 18 months to two years than we’d ever seen in American history, certainly since World War II. It was an unbelievable thing. This is not what Powell wanted, but it’s what he had to do, because he was being pushed from every side. But we don’t know who.

Mr. Jekielek:

And because the structure existed to actually do it.

Mr. Tucker:

Because it was possible. You can send your college kid off with a credit card with an unlimited balance on it and tell them to be frugal and be careful about his spending. But he’s probably not going to be. That’s essentially what we’re dealing with with the Federal Reserve. We’ve got the whole federal government on this Fed credit card, and they just can’t stop. They can’t stop it.

Mr. Jekielek:

Who is ultimately responsible for this seems to be unclear. 

Mr. Tucker:

Yes, that is right. This is what I think we’re going to have to get settled. And this is why I admire what Trump has done so much with this. What Trump has done here with this Lisa Cook thing is just brilliant. He found a way to test the powers of the people’s elected leader over this central bank that has lived for more than 110 years in this kind of obscure floating realm of independence. 

We don’t really have access to their books. We don’t really know what goes on at the Fed. Yet they have to present reports to Congress. The government can audit them like they audit the Pentagon or anybody else, but they’ve never been exposed to an outside audit like any big company would be. They’ve never been outside. Even Rand Paul has introduced legislation, along with his father before him, going back decades, to audit this thing. It still has not been audited. 

So there’s weird stuff. It’s an unaccountable institution. It’s really a beast. It’s responsible for the financialization of the U.S. economy, the explosion of the capital goods sector at the expense of the consumer goods sector. It’s arguably been the reason for the blow-up of the managerial state, the puffiness and frothiness of the corporate world, the centralization of business, and the persistence and rise of corporate media. It’s a lot of things.

Mr. Jekielek:

What’s the frothiness of the business world exactly?

Mr. Tucker:

Ever since 2008 and zero interest-rate policy, we have a whole sector of society of people inhabiting high-level corporate positions getting paid very high salaries because of their resumes and not actually doing anything.

Mr. Jekielek:

OK, that’s frothiness.

Mr. Tucker:

This is well documented. It’s a shock, really, and the Fed bears most responsibility for that. That was the zero interest rate policy. When money is free, you would be crazy not to carry debt. You would be crazy. If you make any money at all, you’re going to be making more than it costs you to borrow money. 

Mr. Jekielek:

But that only works for people who have the ability to access that money. 

Mr. Tucker:

That’s right. It’s a very specific group of big players. It’s a big business. That’s the reason why big box stores are taking over everything. We’ve got a weird situation in this country. We don’t have small businesses that are happy to do small business. Most businesses that have started these days are being acquired by another business. And those businesses are acquired in hopes of being acquired again. It’s a crazy thing. 

This is especially true in the world of finance. You would never start a fund with the expectation to hand the fund off to your kids or their kids. No. Your goal is to impress buyers who buy you, and their goal is to impress even the higher buyers. Everybody wants to be Goldman Sachs. It’s terrible.

Mr. Jekielek:

People who understand how this works have consulted with those small businesses to make their numbers look just right for the people doing the acquisitions. But the inherent value of these small businesses is not that great. It creates this strange world.

Mr. Tucker:

It’s very strange. A lot of it is because of the leverage and the debt finance and the financialization that’s taken place. There’s so much fakery in the world because of the central bank. So we’re at a very interesting time because we are maybe on the verge of solving this problem. What is the central bank? To whom is it accountable? Is it an executive agency, like the original charter of the federal government says? Or is it somehow independent? 

By the way, can Congress really give up its powers? It was given control in Article 1, Section 8, over the money and the coinage. That’s what the Constitution said. This is your job, Congress. Can they really just write legislation and say, we don’t like this so much, and toss it over to the Executive Department? Can they really do that? Can you just delegate whatever you want? How do we know that the Federal Reserve Act was even constitutional? Do we know that? Has it ever been tested? 

It’s never been tested. I’m not sure they can really do that. And if they’re going to do that, then they have to expect that the head of the executive departments, the head of the executive branch, will expect to have some sort of managerial control over the central bank because Article 2, Section 1 says the US president is the head of the executive branch. The Federal Reserve lives under the executive branch. It’s not complicated. Okay, the Constitution says this power belongs to Congress. Congress punted, and gave it to the president. Well, now the president’s going to be in charge. 

Do I think it’s the way it’s going to be? Is the Supreme Court really going to say, we know there are three branches of government and all that kind of stuff, but that central bank. We’re just going to let that float around. That’s not good. You can’t say that. There’s nothing in law that would seem to make it possible for the Federal Reserve to forever claim to be some independent, floating, all-powerful hegemon.

Mr. Jekielek:

Then there is the shoe on the other foot test. What would be the ramifications of a decision in the future? It’s not clear which of these solutions makes the most sense, including an independent NGO making decisions for the executive branch.

Mr. Tucker:

That’s what the founders feared the most. They feared an unaccountable central bank. That’s why it never really gained traction.

Mr. Jekielek:

Does it look like Congress is taking control of monetary policy? What would that even look like?

Mr. Tucker:

I don’t really have an answer to that. I wrote an article for the Epoch Times a couple of days ago. At the outset of the article, I warned everybody, this is the most boring article you will ever read. I did a taxonomy of monetary regimes, like 10 possible policy priorities and systems that you could have in this country as systems and also possible routes of reform, paths to reform. 

I can map out to you right now what I think is the ideal system, and I think we had that in this country. It was free banking combined with a congressionally established and presidentially enforced gold standard. I think that was beautiful. It’s not so simple to say, let’s go back to that. I don’t know how you would do that. I don’t know how you get from here to there. 

But look, we have what we have right now. We’re going to get something different soon, probably as a result of a court decision over this very provocative, but quite brilliant move by Trump to go after a Federal Reserve Board governor—fire her for cause and then just see what happens. I don’t know. I don’t know how it’s going to end up. I can see dangers in all directions. 

I will tell you this. I think it’s time for some accountability and it’s time for some clarity about what this thing we call the Federal Reserve is, to whom it’s accountable, and whether and to what extent the voters have any place or role in oversight and controlling it. If we don’t, we’re going to continue to lose our economic freedom, our independence, our aspirations for an enterprising economy with frugal people who can save money and be rewarded for doing so. There has to be a change. We live in times of great nostalgia where people want to recapture what we’ve lost as a nation. Freedom, independence, frugality, prosperity, families that can live off one income. 

None of this is going to be possible unless we can figure out a way to restrain the Federal Reserve. I think in a circuitous and sometimes familiar way, President Trump gets that. Intuitively, he understands that. This institution must be held to account. It must be accountable to the people and to the people’s representatives. And I think that’s a good decision. I think it’s a good step to see how it turns out.

Mr. Jekielek:

Jeffrey Tucker, it has been such a pleasure to have you on the show.

Mr. Tucker:

My pleasure. Thank you, Jan.

 

This interview has been partially edited for clarity and brevity.