The Federal Reserve Fits Naturally into the “Capture Theory” of Regulation as a Government-Enforced Cartel

Chicago School economists who researched the Progressive Era regulatory institutions referred to a “capture theory” of regulation whereby regulators were routinely “captured” politically by the industries they were supposedly regulating “in the public interest.” The “independent” Civil Aeronautics Board enforced a monopolistic, cartel-pricing scheme for the benefit of the airline industry for decades; the Interstate Commerce Commission did the same for the trucking and railroad industries; and so on. George Stigler (1975) was perhaps the most prominent Chicago School economist associated with the capture theory of regulation, which was mentioned by the Nobel Committee upon awarding him the Nobel Prize in Economic Science in 1982.

The Fed fits naturally into this capture theory mold as a government-enforced cartel for the benefit primarily of the banking industry, which has always been the Feds main source of political support. . . . 

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When Congressman Henry Gonzalez proposed legislation in the 1990s that would have opened up some of the Fed’s behavior to public scrutiny, the banking industry’s trade associations swung into action again and mounted a powerful and successful political campaign in opposition to the Gonzalez reforms. The same thing happened yet again when Congressman Ron Paul introduced legislation to audit the Fed in 2009.

At the time of the Gonzalez proposals Rothbard (2013) asked the trenchant rhetorical questions: “[W]hy should bankers be so ready to defend a federal agency which controls and regulates them, and virtually determines the operation of the banking system? Shouldn’t private banks want to have some sort of check, some curb, upon their lord and master? Why should a regulated and controlled industry be so much in love with the unchecked power of their own controller?”

The obvious answer to these rhetorical questions is that the banking industry is so supportive of the Fed as its “regulator” because the Fed regulates the money supply for the benefit of the banking industry and not “the public.” The more power (and the more secrecy) the Fed has the better as far as the banking industry is concerned.

—Thomas DiLorenzo, “A Fraudulent Legend: The Myth of the Independent Fed,” in The Fed at One Hundred: A Critical View on the Federal Reserve System, ed. David Howden and Joseph T. Salerno (Cham, CH: Springer International Publishing, 2014), 66-67.