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The Fed Owns Most American Monetary Economists

Economics / Economic Theory Sep 16, 2009 - 06:28 AM GMT

By: Gary_North


Best Financial Markets Analysis ArticleThe Social Security system has long been described as the third rail of American politics. "Touch it, and you die." You get electrocuted. If you should somehow survive, the next subway train will cut you in pieces.

There is such a rail in academia: the Federal Reserve System.

A fascinating article appeared on the Huffington Post on September 10. Its title was good, and its content was better: "Priceless: How the Federal Reserve Bought the Economics Profession." The title is a veiled reference to a popular series of MasterCard TV ads. The author began with this, and never looked back.

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

It is a long article and well worth reading. It presents evidence that the Federal Reserve for three decades has had almost the entire profession of monetary economists on its payroll, one way or another.

He offers this example. In 1993, Greenspan informed the House Banking Committee that 189 economists worked for the Board of Governors (a government operation) and 171 worked for the 12 regional Federal Reserve banks (privately owned). Then there were 703 support staff and statisticians. These came from the ranks of economists.

This was only part of the story: the proverbial tip of the iceberg. From 1991–1994, the FED handed out $3 million to over 200 professors to conduct research.

This is still going on. There has been growth. The Board of Governors now employs 220 Ph.D.-level economists. But the real growth has been in contracts.

Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That is a great deal of money. This amount of money, the author implies, is sufficient to buy silence. He adds that there are fewer than 500 Ph.D.-level members of the American Economic Association whose specialty is either money and interest rates or public finance. In the private sector, about 600 are part of the National Association of Business Economists' Financial Roundtable.

If you count existing economists on the payroll, past economists on the payroll, economists receiving grants, and those who want in on the deal, "you've accounted for a very significant majority of the field."

In addition, the FED has editors of the academic journals on its payroll or grants list.

"It's very important, if you are tenure track and don't have tenure, to show that you are valued by the Federal Reserve," says Jane D'Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.

This suggestion is dismissed as "silly" by Robert King, editor-in-chief of The Journal of Monetary Economics, who is a visiting scholar at the Federal Reserve Bank of Richmond.

Just plain silly. Nothing to it.

If you do not get published in an academic journal, you do not gain tenure at the top three-dozen universities in the United States.

The author cites a 1993 letter from Milton Friedman, which was sent to a critic of the FED, Robert Auerbach.

"I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results."

How many economists who sit on the seven top journals as editors are connected to the FED? Almost half: 84 of 190.

Nothing to it. Silly. It's just one of those things, just one of those crazy things.

The author cites testimony from Alan Greenspan before the House Banking Committee in 2008. This quotation is all over the Web. I will use the version cited in the Wikipedia article on Greenspan.

Referring to his free-market ideology, Mr. Greenspan added: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

Mr. Waxman pressed the former Fed chair to clarify his words. "In other words, you found that your view of the world, your ideology, was not right, it was not working," Mr. Waxman said.

"Absolutely, precisely," Mr. Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

And yet, and yet. . . .

The author did not ask what I thought should have been an obvious question. "Why was the Federal Reserve System immune to criticism from 1914 to 1975?"

Ask that question, let alone answer it, and you will not get your article published in anything but a conspiracy journal or


The Federal Reserve System has been untouchable from the day that the Senate passed the Federal Reserve Act late in the afternoon of the day before Christmas recess in 1913, when only a handful of Senators remained on the floor to vote, and Woodrow Wilson signed it that evening.

There have been a few critics in Congress. In the Wilson years, there was Congressman Charles A. Lindbergh (the father of the flyer). He laid it on the line. His statement appears in his Wiki entry.

This Act establishes the most gigantic trust on Earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized, the people may not know it immediately but the day of reckoning is only a few years removed. . . . The worst legislative crime of the ages is perpetrated by this banking bill.

In the 1930's, there was Congressmen Louis McFadden, a former banker. He was the author of the 1927 law that prohibited interstate banking. (It was repealed in 1994.) He was a hard-liner. He moved to impeach Herbert Hoover in 1932. For a Republican, this was unique for his era. Seven House members voted with him. He even introduced a resolution to bring conspiracy charges against the FED's Board of Governors. It also failed. He was hard-core. He was a fringe figure, as hard-core people usually are.

In the 1940's, there was Jerry Voohis, a fiat money greenbacker whose claim to fame was that he lost to Richard Nixon in 1946. In the 1950's and 1960's, there was Wright Patman, the eccentric populist from Texas, who chaired the House Banking Committee. For the last three decades, there has been Ron Paul.

That is pretty much it, 1914 to 2009. This is why Ron Paul's bill to audit the FED is such a breakthrough. For the first time since 1914, the FED is being called into question.

That is why the Huffington Post article misses the point. The economics profession, the American political system, and the media have been silent about the FED until the last year. This is what needs explaining.


Back in my graduate school years, a generation ago, there was only one thoroughly critical book on the FED that was written by an academic free market economist: Fifty Years of Managed Money. The author was Elgin Groseclose, who was an advocate of the gold standard. The book did not go down the memory hole. It never got out of it. In 1980, it was republished under a new title, America's Money Machine. It stayed in the memory hole. The good news is that it is now available on-lime for free.

All this is to say that the FED received a free ride from academia and everyone else long before it began doling out hundreds of millions of dollars a year to academic economists.

How was this possible? I offer these suggestions, each of which would make a great rejected doctoral dissertation topic.

  1. The advisory cartels that shape public opinion and politics in every nation, without exception has always favored central banking.
  2. The methodologies of all schools of economic opinion except Austrianism and Marxism favor central banking.
  3. Politicians of all parties want a lender of last resort to buy government debt at below-market prices.
  4. Investors and their brokers want a floor for stock prices.
  5. A conspiracy of bankers has pursued a cartel protected by central banking ever since 1694: the Bank of England.

But, you may respond, some of these topics are suitable for a dissertation topic in a history department. Political science, too. Quite true, and the dissertation will be rejected on the day the ABD (all but dissertation) student proposes it. Yet the FED does not fund historians and political scientists.

The protected status of central banking is universal. This is not unique to the United States. Central banking is by far the most protected anti-democratic institution in the modern world. The supporters of no other institution publicly defend the institution on this basis: a necessary means of protecting the nation from its legislature.


Modern economics, except for Austrians and Marxists, teach that economics is a true science. Its model is physics. The economists are unwilling to accept the fact that human beings, unlike rocks, make decisions. These decisions make economics a realm of human action rather than physical cause and effect.

The Austrians begin with acting individuals to explain economic causation. The Marxists (all eight of them) begin with the mode of production. The Marxists are collectivists in every sense, but they view economics as a science based on dialectical materialism, not physics.

There is a third group, behavioral economists, who also break with the mainstream. But they do not break with the mathematical formulation of their theories of human action.

The supply-siders have yet to develop their theories into a consistent system. There is no college-level textbook based on their views. Their main pitch is that the government can and should cut marginal tax rates so that the government can and should collect more revenue.

The methodology of Keynesians, neoclassical economists, monetarists, behavioral economists, public choicers, and even rational expectationists are united: it is possible for central bankers to create economic growth and avoid recessions by increasing the money supply. They argue about the correct rate of fiat money growth. None of them concludes: "Shut down every central bank and let the free market decide the correct supply of money, given the right of non-fraudulent contract."

This is a legal question: What constitutes the right of contract in monetary affairs? This has been answered comprehensively and in great detail by Prof. J. H. de Soto. No other legal theorist-economist has ever presented anything comparable to his 874-page book, Money, Bank Credit, and Economic Cycles. It is on-line for free.

The economics profession favors either central banking or else, in the case of strict monetarists, believe the central bank can keep the economy working smoothly by a constant increase of the money supply by 3% to 5% per annum.


Until Ron Paul's H. R. 1207, Congress had remained comatose with regard to the FED ever since 1914. Bernanke is the first Chairman to face skepticism regarding the independence of the FED. This has to do with politics. Politicians want to find out which big banks got how much. This has nothing to do with the fundamental question, namely, the theoretical case for a bankers' cartel enforced by a central bank.

That question has not been raised by 99.9% of academia, the media, and politicians since 1914.

The Powers That Be will keep the public bamboozled for as long as the economy does not collapse, either through mass inflation, mass depression, or both.

They have had a free ride for a long time. The central banks' bad policies have resulted in what Austrian School economists had said would happen. Only they have provided a highly developed theory of how central banking necessarily distorts supply and demand, and why this distortion will inevitably be corrected by economic crisis. They do not say when, only that it must take place when the market vetoes the plans of entrepreneurs and politicians who believed in central bank central planning.

The bills are coming due. The crash will come. The consumers' veto will come. The FED's free ride will end.

In the meantime, audit the FED.

    Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    © 2009 Copyright Gary North / - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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