A Fraudulent Legend: The Myth of the Independent Fed

Abstract

The idea that the Fed is, and ought to be, independent of politics is part of the ideological legacy of the “Progressive Era” of the early twentieth century. In order to combat the age-old skepticism about government intervention that emanated from the Jeffersonian tradition in American politics (i.e. “that government is best which governs least”), the Progressives used their positions in academe, journalism, and government to wage a crusade against the “spoils system” whereby the managers of government enterprises were typically political patronage appointees (Rothbard 1995). In its place, they argued, should be an army of professionally trained (by Progressive intellectuals) bureaucrats who would in theory serve only “the public interest,” especially if civil service regulations could protect them from political pressures and firings, granting them effective lifetime tenure in their jobs. No longer would the management of government enterprises change hands with every election cycle. That would supposedly assure that government employees would serve the “public interest” and not private political interest.

[E]very aspect of this mythology [Fed independence] is the very reverse of the truth. We cannot think straight about money, banking, or the Federal Reserve until this fraudulent legend has been exposed and demolished.

Murray N. Rothbard, The Case Against the Fed