Paul Volcker's Last Words: A Pack of Lies

Gary North - December 13, 2019

Paul Volcker was 6' 7", unafraid of the media. He was not afraid of financial journalists.

Because he spoke his mind, financial journalists believed he was speaking the truth. But his version of the truth rested on Keynesianism, which is a pack of lies. These lies go back to 1694: the creation of the Bank of England.

He was an apologist for the establishment. From August 1979 until August 1987, he held the most important private office in America: Chairman of the Board of Governors of the Federal Reserve System. From that august position, he spoke his mind. His mind was governed by two all-consuming ideas: (1) the free market economy needs a government-created monopoly central bank over money in order for it to function smoothly; (2) the voters through their elected representatives have no right interfere with the absolute autonomy and independence of a group of unelected bureaucrats who seek to control the entire economy by controlling the money supply.

There is no other government agency which defends itself publicly on this basis: democracy is illegitimate. The Federal Reserve is the only federal agency whose spokespeople come before the American voters and announce that the voters have no right to interfere with the workings of this agency. This agency protects itself from an audit by the government, despite the fact that it was created by the government. It does not let the Government Accounting Office do a full audit on its operations. It never has. Congress allows the Federal Reserve to get away with this. No other federal agency is given this degree of autonomy.

The textbook writers and sycophants who are the court prophets of American government insist that this outlook is right.

VOLCKER'S NEXT-TO-LAST-WORDS

Volcker died on December 8. Immediately, London's Financial Times published an extract from the forthcoming paperback edition of his autobiography. The Times usually keeps its articles behind a pay wall. This time, however, it made an exception. Extracts from this article were published all over the financial media. Above all, the media published this statement:

Not since just after the second world war have we seen a president so openly seek to dictate policy to the Fed. That is a matter of great concern, given that the central bank is one of our key governmental institutions, carefully designed to be free of purely partisan attacks.

He was lying through his teeth, and he knew it.

Harry Truman intervened in the Korean War to demand that the Federal Reserve set interest rates below market. This was the Treasury-FED Accord of 1951. It is well known among historians of the FED. The FED has its version posted here.

After the war ended in 1945, most policymakers were concerned with preventing another Great Depression. But inflation proved to be a much greater concern: Between June 1946 and June 1947 Consumer Price Index (CPI) inflation was 17.6 percent, and from June 1947 to June 1948 it was 9.5 percent. The Fed's priority thus switched from financing the war to restricting inflation, but President Truman and Secretary of the Treasury John Snyder were both strong supporters of the low interest-rate peg in order to protect the value of war bonds.

The United States entered the Korean War in June 1950. With inflation on the rise, the FOMC felt strongly that the continuation of the peg would lead to excessive inflation. Throughout that year, the FOMC tried various tactics to raise short-term interest rates, but was successfully opposed by the Treasury.

By February 1951, CPI inflation had reached an annualized rate of 21 percent. As the Korean War intensified, the Fed faced the possibility of having to monetize a substantial issuance of new government debt, which would have placed even greater upward pressure on prices. But the administration continued to urge the Fed to maintain the peg, a position the FOMC found increasingly untenable.

This was a crucial accord.

On March 4, 1951, the Treasury and the Fed issued a statement saying they had “reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose and to assure the successful financing of the government’s requirements and, at the same time, to minimize monetization of the public debt” (William McChesney Martin, Jr., Collection 1951).

At the time, it was not known how profound an effect that statement would have. But the accord marked the start of the development of a strong free market in government securities, which continues today. In addition, the debate over the consequences of interest rate pegging marked a shift in thinking at the Fed. Monetary policymakers began focusing actively on bank reserves and the control of money creation in order to stabilize the purchasing power of the dollar. But most important, by establishing the central bank’s independence from fiscal concerns, the accord set the stage for the development of modern monetary policy.

The tradition of Federal Reserve independence began because of the resistance of the newly appointed Martin against the attempted interference into the interest rate market by President Truman and the Treasury Department. This interference had gone on after World War II for six years. But Volcker blames Trump as the source of this interference. He denied the post-War history of the FED. That history was based on the interference of a Democrat President.

The financial media were dead silent on this obvious lie. They let Volcker get away with it posthumously. Donald Trump is fair game, and so a lying dead man, praised as a man of truth, once again gets the last word. His last word was a lie.

This is what Federal Reserve Chairmen do. They lie. They deceive. They conceal the facts. The Federal Reserve is built on a lie, namely, that the free market economy needs central-bank inflation in order to function properly. The lie has been dominant in Anglo-American life since the founding of the Bank of England, a private, profit-seeking bank, in 1694.

I find it ironic that an article on this intervention was published in the Financial Times in 2012: "How the Fed defeated President Truman to win its independence." The Times put it behind its paywall. I am happy to report that a reprint of the article is here. It ended with these words.

In the end, the treasury and Fed reached their famous “Accord”, under which the Fed limited its future support for the bond market to only $200m, an amount which was exhausted within 3 days of the announcement. The Fed was now free to set monetary policy, but the administration exacted its pound of flesh. Chairman McCabe was forced to resign, and was succeeded by William McChesney Martin, who was thought to be a placeman who would inevitably do the treasury’s bidding.

That was not how it turned out. Martin, in the words of Truman’s chief economist, “double crossed” the president, and doggedly pursued the path of an independent central banker. When chairman Martin accidentally encountered Truman on the streets of New York some years later, the ex-president greeted him with one word:

Traitor!

Whatever Truman’s view, the modern Fed was born. Times are now very different. But the independence of the central bank from fiscal dominance remains an important cause, and not one to be discarded lightly

Volcker went on in his article: "I trust that the members of the Federal Reserve Board itself, the members of Congress responsible for Fed oversight, and indeed the public at large, will maintain the Fed’s ability to act in the nation’s interest, free of partisan political purposes."

The Federal Reserve acts in the interest of the six largest banks in the United States. That is what it has done since 1914. It is the enforcement arm of the most important cartel in the world.

Volcker attempted to wax eloquent about the wonders of democracy and the supposed fact that it is under assault today. He did not mention Donald Trump. He did not have to. He was a spokesman for the American establishment right up until the end. This is a political hit piece.

Today, threats facing that model have grown more ominous, and our ability to withstand them feels less certain. Increasingly, by design or not, there appears to be a movement to undermine Americans’ faith in our government and its policies and institutions. We’ve moved well beyond former president Ronald Reagan’s credo that “government is the problem”, with its aim of reversing decades of federal expansion.

Today we see something very different and far more sinister. Nihilistic forces are dismantling policies to protect our air, water, and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.

Volcker had no competence in matters of air, water, and climate. First, there are no policies to dismantle the protection of our air and water. Second, with respect to climate, there is no international government agency in charge of world climate, which is the only way men in their madness could even dream of controlling the climate. There is no government in charge of world anything. World government has been the dream of the one-worlders who have run the left wing of the American establishment for a century. Fortunately, the Left is far less close today in establishing such a world government than it was in 1945 and, before that, 1919.

Volcker's rant went on:

Seventy-five years ago, Americans rose to the challenge of vanquishing tyranny overseas. We joined with our allies, keenly recognising the need to defend and sustain our hard-won democratic freedoms. Today’s generation faces a different, but equally existential, test. How we respond will determine the future of our own democracy and, ultimately, of the planet itself.

There is a need to “keep at it”. It cannot be set aside.

Paul Volcker kept at it all his career. He lied and lied and lied. He deceived and deceived and deceived. His lies and deceptions were plausible because he was forthright about those truths that he was willing to invoke in public, but he invoked them always in terms of a framework of lies.

Volcker was head of the least democratic government agency in American history. It is the only agency that comes in for the public and declares in its authoritative splendor that the government should not tell this government agency what to do. He actually defended this idea in his article. He told the voters to take a flying leap at a rolling doughnut, and he did so in the name of the religion of democracy.

The financial press bought it -- hook, line, and sinker.

CONCLUSION

Financial journalists cannot think straight. They cheered Volcker's defense of democracy, which was in fact a defense of anti-democracy. They reprinted it. They got on the bandwagon.

Paul Volcker was a liar. His career was based on a lie: the idea that a central bank monopoly created by the government must be completely independent of the government. He implicitly blamed Trump for violating this principle, despite the fact that the principle did not exist until 1951, when his predecessor, Martin, defied Truman on this very point. Volcker knew this. Maybe today's financial journalists don't know it, but if this is the case, they are appallingly ignorant about modern economic history.

The central problem is not the independence or lack of independence of the Federal Reserve. The central problem is the very existence of the Federal Reserve. It is a government agency at the top (Board of Governors) which in turn is comprised of 12 completely independent, profit-seeking regional central banks. It is a hybrid. It is a government-created enforcement agency of the largest American banks. It has the power of economic life and death over the economy. Its spokespeople tell the public that the FOMC, a tiny committee of tenured, salaried bureaucrats, should be in charge of the central institution of the modern economy: the money supply. The textbook writers promote this idea. The public believes it.

There will be a day of reckoning when these arrogant, independent power-brokers finally produce the blowup that intervention into the free market always produces. That blowup will come. Then the bureaucrats at the Federal Reserve will blame somebody else. This is what bureaucrats always do. That is what Volcker did. Nihilism, aka Donald Trump, is the supreme threat to both the American economy and democracy. We are supposed to take a liar's word for this.

I don't.