Examining The Relationship Between The Federal Reserve And Government Debt

Hearing On Monetary Policy And The Debt Ceiling

Committee on Financial Services Subcommittee on Domestic Monetary Policy
May 11, 2011

Opening statement from Congressman Doctor Ron Paul:
“For far too long, monetary policy and fiscal policy have been viewed as completely separate issues.  Congress controls fiscal policy, the Federal Reserve controls monetary policy, and never the twain shall meet.

The truth, however, is that fiscal and monetary policy have always been tightly intertwined.  In fact, the Federal Reserve has served as the enabler of bad economic policy for many decades.  Without the Fed’s relentless expansion of the money supply during both the Greenspan and Bernanke eras, the U.S. Treasury never would have been able to issue the staggering sums of debt that now threaten our economic well being.  This Treasury debt is the very lifeblood of deficit spending, permitting one Congress after another to spend far more than the Treasury collects in taxes.  It is precisely this unholy alliance between the enabling Fed and a spendthrift Congress that I hope our witnesses will address today.

Until 1971 the United States operated on a gold exchange standard, meaning dollars could be redeemed in gold by foreign governments.  The dollar was thought to be ‘as good as gold’ because the U.S. would never renege on its gold exchange commitment.  The U.S. had to keep that commitment or risk gold outflows that presumably would keep the government from engaging in loose fiscal and monetary policy.

Unfortunately, the system did not in fact keep government spending in check.  The federal government ran large budget deficits throughout the 1960s, with the Federal Reserve duly covering the gap and inflating the money supply.  Foreign creditors understood that the dollar was being devalued, and increasingly began to exchange their dollars for gold.  Rather than bring monetary and fiscal policies back into balance, however, the federal government under President  Nixon defaulted on its obligations by closing the gold window in August of 1971.”

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