did i think it should be less privatized? i understand the importance of geographicical representations. i think we should have people living in the region an appointee, but yank of a right to formal power where the entity primarily concerned picks its own people. >> you're assuming from your comment that this is a government entity, when it is a quasi government and has a lot of private implications from its independence. don't you think it should be more independent in its structure as well. >> independence from the -- i think you get independence with seven-year terms and 14-year terms. i don't think the financial industry which really dominates selecting the regional presidents should be independent from the whole society in setting the policy which governors it. when you talk about setting interest rates that's a

governmental function. i didn't say they shouldn't be open to it. i would be very surprised that someone thought that was not a governmental function. >> i see my time is up. >> i now recognize mr. ellison from minnesota for his five minutes. >> thank you, mr. chairman. could you elaborate further on what benefit you see from ensuring greater representation of people of diverse experience and the federal reserve's open market committee? >> i have a fundamental belief in the electorate making the decision. there is nothing comparable. as a matter of fact today with their being some vacancies on the board of governors, half the votes on the open market committee are cast by people and we did a check of what are the

members of the boards. it's kind of a closed system. the board members are selected to put in great input from the president. they then pick the regional president and it is private sector governance of an important part of what we do. again, i am not talking about what they do in the regions under economic activity. the bill says they should not vote on monetary policy. i just don't understand what the rational is for letting private sector people with the financial industry generally not in every case being the predominant influence, pick the people who come to washington and vote on one of the most important governmental policies. that's been the premise of most of what we talk about. >> congressman frank? i have some information that suggests that on the board if you look by profession. >> the regional boards. >> one person from labor. you have four academics.

you have 41 people from banks and 47 people from other four corporations. it is that we generally don't say it's kind of a corporate. let the profession governor itself. and i think that is a mistake when you have a large number from the financial industry they tend to be very financial in all this. there ought to be a board of representation on voting on monetary policy. not in what's done in terms of regional activity. these are the people that come to washington. i understand people want some geographic diversity. we should do that. it's very surprising. we don't do that for any other federal agency. we don't say that the people in the energy industry or we don't say that votes on labor policy

are set by boards where unions are the predominant influence. the president appoints people. they're subject to senate con flir nation. they're not picked. half the votes don't come from groups that are dominated by labor unions. that's the analog to the fmoc votes from regional presidents. >> mr. frank, i still have a little time left. on this issue of mr. diversity on the board i talked about professional diversity. it seems like there's been a lack of ethnic and racial diversity, too. do you think that, you know, including more voices from consumers who are and from urban areas, rural areas, people whoef dealt with hard hit neighbors, neighborhoods with forclosure, do you think these kind of experiences -- >> i think that would be good on the board. but even with that, even if i picked the boards personally, i

wouldn't want them voting on federal government policy. i do not think that private citizens should pick other private citizens with no intervention from any electoral process. no appointment, no confirmation by the senate. it's really as i said anomalous for people who believe in democratic self-governance. yes, i would like to have more -- et beer representation on these local boards. even with that, i would not want them -- by the way, they tend to be self-selected. i wouldn't want them, again, voting to set important national policy. everyone acknowledges the monetary policy is very important. some people think it's been too loose. i don't think the justification for that. i would say and ill say again to the chairman, i know he wasn't here when we were voting on it. you also have this situation about wlornts they should be subject to aappropriation. if you had all senate appointees

and senate confirmation that would be okay. others might say shouldn't they be subjected to the appropriations process. >> thank you. i now recognize the gentleman from new jersey, mr. garrett. >> thank you. i'll just run down a series of questions. start after the very beginning, mr. brady, the question i'm not sure i heard the answer to in my mind, your definition under the bill, i am the co-sponsor of a sound dollar is that just the language of saying if we hit our 2% inflationary as opposed to anything else? >> it doesn't say an explicit target of 2%. >> is that something that should be clarified in the bill?

>> i'm very open to that. i would like to see congress set that type of target. in a rules based system. >> does the ranking member have a comment on that point by any chance? >> no. i'd be concerned about how you would do that statutorily. we're in a world where the dollar has a domestic role and international role. the international role of the dollar is very significant specially since we are confronts competitors in the world, the people's republic of china primarily who use the currency -- >> for other purposes. >> i would not want to disable ourselves from dealing with that aspect. >> the next question for both of you, if you did pass legislation similar to this, how do we know whether they are meeting the standard if we don't set a standard, and then secondly, is there con kwenss if we're not

minding the standard. >> i think that's a good question and it proves why we shouldn't pass the bill. >> now the rest of the story. >> for the rest of the story, i think setting a clear mandate. whether we set explicit target or not i'm certainly hope to that in holing them accountable to that i think is key. mr. garrett, one point i would like to make, that going forward i think it's a terrible mistake to require all the federal reserve bank presidents to be appointed ancon firmed by the senate. one, it will further polite size the federal reserve board including leading to vacancies as we have today. and it will concentrate more power on wall street in washington. i think it will be less independent as the fed because regional bank presidents have an independent staff so they can actually not rely just on the chairman's staff, but on their own to assess economic policy. as you know finally the board of

governors actually approves these regional reserve bank precedents. we have accountability within the system. >> i guess i sit here and wonder maybe as the chairman does, what our role in this is under either one of your scenarios? you're saying you don't have that appointment under the ranking member's position it would go through presidential appointment. i can see some benefit to that. then i can see we in congress -- that's all over the senate as far as monetary policy. we're left out to hear the chairman testify occasionally and say this is what they're doing. >> i assumed that's what you wanted. >> no. >> may i respond? >> i wanted to delve into it a little more. >> i did offer an aem. but you voted against the appropriations process that seemed to double the issue. >> i'm open to the idea.

>> ohm in the idea in the sense that the roof is off. >> there is. we're trying to do things different. >> reclaiming my time ranking member, you did raise one other question that i thought the chairman would raise. you said with regard to the process that is the constitutionality of it. you said it would be more constitutional if we had the president appointment not a private sector, but a more public sector. it raises the fum question is where is the constitutionality for either one of the proposals that are before here? >> first, mr. garrett is suggesting that we rushed things through two years ago, i think we had dozens of role calls, a lot of meetings.

i gather you have some concerns about your own. >> never concerned about my own vote. but concerned about legislation being dropped in at 3:00 in the morning in a conference committee that we did not have any hearings on. >> we had vast hearings on this. >> that's not the debate what we're having here. >> i understand you don't want to talk about your vote subjects appropriations. >> no, i only like to discuss what we're discussing here and not the way things were held in the past. >> the constitutionality of my provision is what it says in the constitution that important government offices should be appointed to the president subject to confirmation by the senate. i think that voting on monetary policy in indisputably an important public policy and ought to be executed by public offices in the constitutional manner. >> for the last word, do you care to chime in? >> congress holds constitutional responsibility for monetary policy. we have through history contracted that out to the federal reseven bank with a

clear mandate. now lately a more muddled mandate and to make the point, one, i don't think we want to envision a day with 535 members of congress are setting monetary policy in america. secondly, of the banks and monetary authorities around the world only two give equal weight to unemployment. only two have in effect a muddled mandate. the others have set price stability as either the primary or the high ar arkly the single mandate. >> mr. chairman, may i have one sentence. i thought my republicans weren't favor of american exceptionalism. >> i wish by would have dell with that on the federal -- and fannie and freddie years ago. i do think chairman garrett for his efforts to -- >> gentleman, would yield. the republicans have been in

power since 2011 and have done zero on fannie and freddie. what's holding you up? >> i'd like to reclaim the chair's time. >> i wish you would. >> but i do. this would conclude the first panel. i do want to thank our two colleague for the a lively discussion. i appreciate you very much for being here. now we will have the second panel be seated. i would like to introduce the witnesses on our second panel. dr. jeffrey harr ner -- dr. peter kline.

without objection, your written statements will be made part of the record. you will now be recognized for five minutes. summary of all your testimony and we'll begin. >> chairman paul, ranking member clay. >> put your mic up close. is it on? >> and distinguished members of the committee. it is an honor to appear before

you. left of the market the production of all goods including money passes the profit and loss test of socially beneficial production. like all private enterprises a gold mining company produces if the revenue exceeds the cost of buying its inputs. it's production the beneficial because the outputs exceeds the values of those inputs in producing other goods to satisfy other customers in. the market money production is regulated by profit and loss. changes in demands bring forth more production. if the demand for money increases making the value of gold coins rising then minting company would increase production. as a supply of gold coins increase their value would decline. as the demands for resources increase, their prices would rise. the profit would dissipate and resource allocation into and production of money would be optimal for society at large. the production of paper money andfy dish area media cannot be

regulated by profit and loss. it is always profitable for banks to produce more fiat money. it is also profitable for a bank to issue fiduciary media through credit creation. although the production of fiat money andfy fire area media cannot be -- it will render an outcome superior to that of commodity money and 100% reserve money substitutes. first that it can keep the price level stable. there is no social benefit from a stable price level, however. entrepreneurs earn profits and avoid losses by anticipating changes in prices of all goods including money. and elastic currency makes the task more difficult by adding

another dimension to the purchasing power of money. second it has claimed that an elastic surnsy can prevent price deflation. there is no social benefit from price deflation. faced with lower prices entrepreneurs reduce their demands for outputs. this leaves production, production and real incomes in tact. looking at evidence across 17 countries over 100 years, in a 2004 american economic review article demonstrated there is no correlation between price deflation and economic downturns. the third claim for an elastic currency is that it can accelerate economic growth. there is no social benefit from attempting to accelerate economic growth beyond the rate people prefer. instead of building up the capital structure of the economy more fully, monetary inflation through credit exchanges generates the boom bust cycle. on their research on the performance of the fed in 2010,

they concluded that under the fed the economy has suffered more instability than in the decades before the fed's accomplish jchl and even it's post woshld war ii performance has not clearly surpassed that of its pretd sesz sor, the national banking system. economic theory demonstrate that an elastic currency system infers no benefit on society. the fed should be abolished and a market money system of commodity money and money certificates should be established. a direct route to achieve this end is to convert federal reserve notes into redemption claims for gold with a 100% reserve of gold and to redeem the portion of reserve deposits banks hold at the fed into cash so that banks hold 100% cash reserves against their checkable deposits. at that point, production of

money and money substitutes should be done by private enterprises under the general laws of commerce. thank you. >> i thank the gentleman. recognize dr. kline. five minutes opening statement. >> thank you chairman and member for the the opportunity to discuss such an important topic. my testimony analyzes the fed and the reforms considered today from the perspective of an organizational economist. how does the federal reserve system measure up as an organization. are its objectives achievable as appropriate for a government agency. are these objectives consistent with a healthy and growing economy. is the fed effectively structured, managed and governed. do key decision makers have the information and incentives to make good decisions. are they penalized for making mistakes. my answer to these questions are very strongly negative.

the fed has been given a task managing and stabilizing the u.s. economy that is impossible for any government planning board. the fed has vast authority and very little accountability. the fed can take actions that do enormous harm to the u.s. economy. since 2008 the fed has done exactly that. it has pumped money into the financial system at unprecedented rates. it has kept interest rates near zero thus discouraging prudent behavior. the fed has done everything it can to prevent the market adjustments needed for recovery from the financial crisis. all this has happened without oversight, without external check and balance and without discussion and debate. this kind of set up is a recipe for disaster. everything we know about organizations with vast authority and without external check and balance tells us that

they cannot possibly work well. industrial planning fails because planners cannot and should not pick winners and losers among firms and industries. likewise monetary planners lack the insent vs and information to make efficient decisions about open market operations, the discount rate and reserve requirements. the fed simply does not know the optimal supply of money or the optimal intervention in the banking system. no one does. add the problems facing any public bureaucracy, inefficiency, waste, mission creep and it's increasingly hard to justify giving so much discretion to a single unaccountable, independent entity. mismanagement of the money supply not only affects the general plus level, it also distorts the relative prices of goods and services. this makes it more difficult for entrepreneurs to weigh the costs and benefits of alternative actions. encouraging them to invest in the wrong activities that is to

make investments that are not consistent with what consumers are willing and able to buy. devaling the currency and raising prices by injecting liquidity into the financial system rewards debtors while punishing safers. just as art financially low interest rates reward some market participants at the extent of others. instead of winner picking, we shall allow market forces to determine the price of money, the level of loans, the level of borrowing and saving and the direction of investment. i do support eliminating the dual mandate, getting the fed out of the full emploit business. but i would drop the price stability requirement also. the need that we need a central bank to fight inflation is misunderstood. price levels rise because the central bank has created too much money. not because the economy is overheating needing the government to cool it off. central bans don't fight

inflation, they create it. nor do we need a lender of last resort which protects not mom and pop savers and noviceors, but incompetent bank executives and their financial partners. i agree with mr. brady that a discretionary bailout policy encouraging moral hazard. but an explicit transparent and even handed lender of last resort policy has the same result. if you know the government stands ready to bail you out, you'll take risks you should not take. instead we should allow banks to compete with each other and succeed or fail based on their ability to satisfy their customers. reforms such as increasing the number of fed governors, shortening their terms or hanging how they're select rd fine, but do not get at the root of the problem. instead we should replace the ole fashioned central bank with a modern progressive, market based alternative such as a commodities standard or competition among currencies. a market based system would free

entrepreneurs from the unpredictable and seemingly arbitrary whims of government planners unleashing entrepren r entrepreneurs to invest and grow the economy. not only in the long run, but now when we so desperately need it. thank you. >> thank you. i recognize dr. taylor, five minutes. >> thank you, mr. chairman, for the opportunity. ranking member, clay. thanks for bringing these important issues for politics discussion. in your opening remarks you mentioned we have nearly 100 years of federal reserve history to learn from. it seems to me the lesson is very clear. highly december cession their policy leads to problems and poor performance. more systemic rules based policy, steady as you go policy leads to far superior performance. in the great depression the federal reserve cut the growth of the money supply.

>> we can't quite hear it. >> it's been on the whole time. sounds better to me. >> in the great depression, the federal reserve cut the growth rate of the money supply and that raised unemployment to unprecedented levels. in the 1970s, a discretionary ghost stop policy led to double digit and unemployment and double digit inflation, low income growth and double digit interest rates. in the 80s and 90s, a more focused policy, more systemic, more rules based in my view, led to long expansions, low inflation, declining unemployment and eventually higher economic growth. and unfortunately more recently we moved back to a more interventionist discretionary policy, much less systemic. the results have been a major financial crisis, major

recession, and now abysmally low growth recovery. so you can look at the details. it seems to me the evidence is pretty clear that we need to improve the degree to which monetary policy is rules based rather than discretion. i think the legislation to change the dual mandate and focus on price stability which is in the bill would help in this regard. so many of these interventions have been based on an effort to address unemployment and the result has been exactly the opposite. they've creted these discretionary actions which have been harmful. those worried about removing the dual mandate will increase unemployment, i think the historical evidence is the opposite. you can look at the 70s, this

highly interventionist policy led to very high unemployment. the 80s and 90s, less intervention and paul volcker explicitly tried to interpret the mandate to focus on price stability. the results were dramatically better unemployment. of course, now you have the federal reserve citing the dual mandate more than it has ever had before to justify these interventions. i think the evidence is clear, the idea is this unemployment rate is unacceptable. it's way too high. i think part of the reason for that is monetary policy. now i agree mr. chairman the dual mandate is not the whole answer. i would also encourage the congress to require that the federal reserve go back to the reporting requirements that were removed in 2000. that were requirements that the fed had explicitly reported its

goals for credit growth and monetary growth. things like that could be replaced. the environment that the federal reseven explicitly report its strategy whether it's money growth or interest rates whatever they want to do. in fact, if there's an emergency and they want to deviate from it, this is their business, but they need to explain why. it seems these kinds of changes in addition to the restrictions the federal reserve, or the idea that we balance the voting responsibility among all the presidents not just give special voting responsibility so om of the presidents, i think those reforms in congressman brady's bill would help a lot.

thank you very much, mr. chairman. >> i thank you and i now recognize dr. gail brait for his opening statement. >> chairman paul, ranking member clay. it's an honor to be here especially given that i am a former member of the staff of this committee and that i served on the team that drafted the humphrey hawkins full employment and balanced growth act. i wish to speak in support of the mandate. that law was drafted at a time of acute eratical conflict on economics and on the staff, i was a young liberal. one of our colleagues james pierce, two other