A Farmer's Tale: Political Folly and the Fed

I once spent a long, agonizing evening in a decaying farmhouse in eastern Iowa, watching a young farmer's life fall apart.

I still think of that farmer, nearly 30 years later, whenever I hear presidential candidates like Rick Perry and Ron Paul condemn the Federal Reserve Bank as the root of all evil and its policies as unconstitutional. Maybe they don't know they're playing with fire. Maybe they do, and don't care.

I met this young farmer in the early 1980s, during the farm debt crisis. This crisis had followed the farm boom of the early 1970s. Grain exports had soared, mostly to the Soviet Union. So did crop prices and farm incomes. Interest rates were low. The government eased regulations on lending to farmers. Older farmers, remembering the Depression, put their money in the mattress. Their sons and other young farmers, lacking this memory, bought up all the farm land they could, figuring they were going to get rich.

For a while, they did. Then prices fell. President Carter slapped a grain embargo on the Russians, to punish them for invading Afghanistan. Inflation went through the roof, the result of Presidents Johnson and Nixon fighting a war in Vietnam without raising taxes to pay for it. Carter named Paul Volcker the president of the Federal Reserve Bank, with orders to get inflation down: Volcker did, with bank interest rates of 20 percent or more. In desperation to pay their loans, farmers grew more grain than ever, creating a glut that only sent per-bushel prices further down. 

The upshot was that American farmers found themselves making less and less money on land worth less and less, while payments on the loans they took to buy that land rose and rose. The biggest farmers, who (then as now) reaped the bulk of farm subsidies, survived. So did small farmers, most of whom depended on jobs in town.

The impact fell on medium-sized farmers, big enough to have bought land, too small to make a killing on subsidies. Many couldn't make their payments and went broke: bank foreclosure sales became a weekly and daily event across the Midwest. Many small banks went broke themselves and got merged into big, remote banks.

Everyone suffered -- small farm towns, businesses serving farmers, banks, especially the farmers themselves. By the time the crisis ended, thousands had lost their farms.

This fate faced the young farmer I met when reporting the crisis story. The farm had been in his family for four generations. He felt an obligation to the land and to his heritage. He was desperate. So desperate that he became easy prey for some of the most despicable characters in this sad rural drama.

As night fell outside on the leveraged fields, we sat at his kitchen table and he brought out document after document, article after article, learned paper after learned paper, proving that he didn't owe the money after all, that it was all a Washington scam perpetrated by the Federal Reserve Bank. He would take it to court, he said, and he would win.

Of course, he never had a chance. But he, like many other farmers, had been convinced by far-right "consultants" that the act of Congress which created the Federal Reserve system in 1913 was unconstitutional. According to this reasoning, all the Fed's actions, including its creation of the U.S. currency, also are unconstitutional. Hence, the dollar is an illegal currency. This farmer's debts, of course, were denominated in dollars. Therefore, the debts were illegal and didn't have to be paid. He was in the clear. Or so he thought.

I never heard what happened to him. I assume he lost the farm. Other farmers like him took the constitutional argument to court, and invariably lost. Some of the so-called consultants peddling this snake oil went to prison.

This belief that the Fed was unconstitutional led easily into a rejection of Washington's authority over the economy and, by extension, the government's overall legitimacy. One leader of this far-right contingent, the Posse Comitatus, preached that all political power is local. The highest form of government, they said, is the county and the highest authority the sheriff. By this logic, everything national, from the Fed to the IRS, is illegal. Citizens don't need to pay taxes. Since money isn't backed by gold, it also is illegal. So debts to banks can be ignored.

Ideas have consequences, some of them bloody. Distraught farmers killed their bankers in Iowa and Minnesota, and sometimes themselves. In North Dakota and Arkansas, a Posse Comitatus member killed three lawmen before being killed himself. The lives of bankers, judges and IRS agents were threatened. 

This is anarchy. It denies the existence of the United States as a nation. National laws, national courts and nation authority are meaningless. Modern commerce, the economy and the rule of law become illegal and can be flouted at will.

Obviously, neither Paul nor Perry have gone this far, but they're coming dangerously close. In an era when so many Americans, like farmers in the '80s, are losing their homes, their livelihoods and their hopes, political leaders who toy with this desperation risk reaping the whirlwind.

As everyone has read, Perry said the Fed committed a capital crime, treason, by printing money to stimulate the economy, which is one of the powers which the Act specifically granted it. "Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous in my opinion," he said in Cedar Rapids, Iowa, not far from the home of that farmer I met 30 years ago.

If Fed President Ben Bernanke prints more money, he said, "We'd treat him pretty ugly down in Texas." This kind of talk is irresponsibly close to the violent anti-Kennedy rhetoric that flourished among Texas politicians before John F. Kennedy's fatal trip to Dallas in 1963.

Let's be clear. Bernanke's policies may be wise or unwise, and they may or may not work. But he and his colleagues are doing the work assigned to them by Congress, in 1913 and since. To call them traitors is beneath any American, especially an announced candidate for the presidency.

Ditto with Ron Paul, who has made a political career out of bashing the Fed. Paul is a strict constitutionalist who opposes anything not overtly approved by the Constitution. The Fed, like most things in this country, came along a century or so after the Constitution was signed. (The founding fathers made several passes at creating a national bank: nothing stuck until 1913, when a series of financial panics convinced Congress to get the nation's financial house in order.)

Paul wants to abolish the Fed outright and has introduced bills in Congress to that end: none came close to passing. He argues that the Fed's activities are illegal. He blames the Fed for all inflation since 1913 and the erosion of the US dollar, forgetting that the inflation would have been a lot worse if Volcker hadn't slammed on the brakes in the late '70s and early '80s. He wants to give Congress all control over monetary policy, not an argument likely to impress people who watched Congress' recent inability to control anything, including itself.

All this is simplistic. The Constitution grants Congress regulation of the currency, which Congress delegated to the Fed in 1913. The Fed's tasks include supervising and regulating banks, regulating the money supply and providing services to banks. Its statutory goals are to prevent inflation and maintain maximum employment.

Sometimes, this is contradictory. Sometimes, high interest rates are needed to control inflation, while low interest rates are needed to stimulate the economy and create jobs. The Fed's task is to find a middle road -- a hard job at the best of times, perhaps impossible now. (The European Central Bank, which oversees the euro, has an easier mandate, to prevent inflation, which is why European interest rates usually are higher than American rates.)

All this is constitutional, and has been so ruled by courts at all levels. The Constitution both gave Congress control over the currency and that Congress can pass any law that is "necessary and proper" to help it in this job. The Federal Reserve Act of 1913, like the earlier creations of national banks, is part of this power, just as creation of the U.S. Mint helps Congress carry out its mandate to coin money. 

The Fed has taken a lot of flack since the Recession began. It clearly dropped the ball by keeping interest rates low, turning a blind eye to banking abuses, helping inflate the housing bubble and putting too much trust in the market to police itself: even Alan Greenspan, the president at the time, concedes this point.

But this supports the argument that the Fed has to use its powers more vigorously, not that the Bank should be killed off or its powers trimmed. Paul wants to do both -- he also wants closer Congressional audits of the Fed -- and Perry sounds like he agrees.

People who talk this way want to submit the Fed to direct political control, which means that monetary policy in this country would be subject to the whim of which politicians sat on which Congressional committees. Since Congress created the Fed, it clearly has oversight over the Bank. But this doesn't mean day-to-day control, which is what Paul seems to want.

The President appoints the Bank governors and Congress ratifies their appointments. But their terms, especially of the Fed president, usually end in non-election years, which has helped keep the Fed out of the political debate. Monetary policy is so complex and important that it cannot be held hostage to some politician's wish to get re-elected.

Paul and Perry seem to blame the Fed for all the nation's financial woes. This is nonsense. The current recession -- like the debt crisis that finished off that poor Iowa farmer three decades ago -- is the result of terrible government policies and a market failure: the Fed's sin lies in not trying to halt this folly.

Comments

[Scott Reetz]

Mr. Longworth,
I enjoy your site--thanks for keeping it going. However, how does your commentary about the Federal Reserve relate to the Midwest? Rick Perry and Ron Paul are not even Midwesterners. How is this discussion about the fed playing out in the Midwest? I'm reading a biography of William Jennings Bryan, and this reminds me a little of the political battles over free silver. The Midwest is the center stage for political confrontation, because we are so diverse, and this makes it interesting to live here. More Midwest, please. Thanks!