It appears we are in the middle of a debate concerning our banking system. Judging from this article, it appears we are seeing a struggle between congress and the Federal Reserve Board, with the outcome determining whether we will retain our idiosyncratic nominally private central bank or move to a more traditional fully politicized central bank. It is interesting as it reopens a debate which was settled nearly two centuries ago, and, though we have eroded the significance of that victory with subsequent laws, the letter of that decision has stood since Jackson defeated the Second Bank of the US, we have not had an explicit central bank.

And, to be fair, we are still abiding by the tradition of 1836, congress does not want to explicitly nationalize the Fed, they just want "oversight". In other words, the Fed will continue to exist as a nominally private entity, but all decisions will either be made explicitly by congress, or by the Fed at the behest of congress. In other words, in all but name, congress will become the managers of the Federal Reserve.

It is hard to say how bad an idea this is. I know I have gone on at great length about how disastrous the Federal Reserve is, but, at least to some degree, the Federal Reserve is driven by apolitical concerns. It may be a bad idea to try to manage the money supply, it is at least a bit better to do so by monetarist rules (or even Keynesian ones), than to have an explicitly political management. And that is what congress will bring to the equation.

As it stands now, the Fed runs the money supply on two principles. Both are mistaken, but at least they are not explicitly political.The Fed, on paper at least, tries to manage the money supply to ensure consistent growth while, at the same time, staving off "inflation"*. It is a bad policy, and one against which I have argued, but at least is, for the most part, apolitical. Obviously, as congress holds a lot of control, the Fed does, from time to time, have to answer to the congress, and can be forced by public or congressional pressure, into loosening credit, increasing the money supply, or otherwise manipulating the money supply for political ends, but, most of the time, at least the Fed is relatively predictable and consistent in their handling of the money supply. And as a result, no matter how disastrous managed currency might be, at least it is managed consistently, giving monetary matters some degree of predictability, ameliorating the harm done by currency management.

If congress effectively takes over the money supply, either by explicitly establishing an oversight bureaucracy, or by establishing the principle or regular congressional review, such decisions will no longer have a hint of economic principle behind them, nor one bit of consistency. Every monetary decision will have two justifications, what is in the headlines and who has the most votes in congress. And, worse still, as creditors are always outnumbered by debtors, I doubt a month will pass in which the money supply does not grow by a considerable amount. If nothing else, I can guarantee congressional oversight will result in money supply inflation that will put the late 1970's to shame. If you want hyperinflation, political control is the surest path.

Obviously I would prefer to see a return to gold, and even more to a free and independent banking system. But I also know that is not coming soon, the public has been too firmly brainwashed into believing gold is bad. But until we can get the public to reconsider their beliefs about gold, the Fed is clearly the less harmful of the two options. They may be engaged in a fool's errand, but at least they have some predictable policies behind their decisions. A political management through congress would not have even that. So, much as I might dislike the Fed, I have to say they are the lesser of two evils, and for now have my support.

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* I use "inflation" in the colloquial sense, meaning a general rise in prices. Technically, inflation means an increase in the money supply, and so the Fed obviously cannot avoid true inflation, a sit exists entirely to increase the money supply. Nor, given their operating principles, can they really avoid a rise in prices. So, what they truly avoid, is a too rapid increase in prices, which the public has been misled into calling "inflation". It is a confusion of cause and effect, akin to calling every cough "pneumonia" or every pain "a broken bone", and it has equally confusing results, but as it is the common usage, I will use it that way for the moment.

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POSTSCRIPT

Most bizarre in this whole thing has to be Ron Paul's support of congressional review. I suppose he thinks doing so will open up the Fed's operations and bring about general dissatisfaction with managed currency, but in this case he is just wrong, and is in fact serving the interests of the big government types. Review of Fed actions by congress will not increase public interest one whit, so review will not increase public discontent, but it will give congress the ability to politicize every monetary decision, moving a bad system to a worse one, changing from a somewhat predictable monetary system into a completely political, unpredictable one. Coming from the man who co-authored "The Case for Gold" it is disappointing, and convinces me more than ever that Ron Paul is losing his perspective. Between his unwillingness to distance himself from white power and other less than savory "anti-Zionist" groups in the primaries and now his serving as a cat's paw for big government types, I have to say I feel completely justified in so ardently opposing him last year.

POSTSCRIPT II

To find my writing on monetary inflation, I would suggest starting with the links listed in  "Bad Economics Part 6", "Bad Economics Part 5", "The Inflation Engine", "Explaining Past Crashes", "A Thought on the Clinton Surpluses" and "Cause or Symptom? or, Who's to Blame?". Not all the links in those articles relate to monetary inflation, but most do. You may also want to read "Monetary Issues Made Simple Part I" and "Monetary Issues Made Simple Part II" to understand my basic perspective on monetary questions, as well as "Why Gold?" for my arguments in favor of gold.

I would also recommend reading some of my writing on the benefits of predicatbility and consistency. Specifically "In Praise of Slow Changes", "Predictability", "Conservatism, Incremental Change and Federalism", "Empathy" Threatens not "Justice" but Predictability", "Sotomayor and Empathy", "Humor and Nightmare", "In Defense of Standards" and "Addenda to "In Defense of Standards"".

You may also enjoy "Hair of the Dog? ", an argument against the continued use of monetary inflation to stave off economic slowdowns, and "The Best Historical Example", a look at the many changes in government resulting form the Civil War, which includes many monetary changes, such as the early phases of central banking.