The party platform adopted at the Republican NationalConvention includes a number of remarkable planks.To a monetary economist, for example, the party’s proposal to restore some kindof metallic monetary standard is so outlandish as to be an almost irresistible target.

More serious is the Republicans’proposal for an annual audit of the United States Federal Reserve. This, likethe gold-standard plank, is partly designed to appeal to the libertarian followers of Ron Paul, the Texas congressman and perennial presidential candidate who is hugelypopular with the Republicans’ “Tea Party” wing. While Paul would go further,and abolish the Fed altogether, several bills in the US Congress have mandatedan annual audit; earlier this year, one such billwas passed by the House of Representatives (but not the Senate).

The Republicans’embrace of the audit idea taps into libertarians’ general distrust of government. But there is also distrustof the Fed on more specific grounds – distrust that extends well beyond theranks of the Tea Party. The Fed, its critics complain, has used its expansivepowers to engage in a range of unprecedented interventions that have propped up large financial institutions. So themonetary authorities, they argue, must be in the pockets of powerful bankers.

To be sure, centralbankers should be democratically accountable for their actions. Butaccountability by audit would carry significant risks. Undertaken bypoliticians, an audit might be viewed as an opportunity to score politicalpoints or steer policy in self-serving directions, with delicate informationleaked in order to pressure policymakers. While monetary policy conducted byindependent bureaucrats is imperfect,handing over effective control to congressmen with one eye on the next electionwould be infinitely worse.

The Republicanplatform notes that the audit would have to be “carefully implemented” toensure that the Fed remains insulated from political pressures. Indeed, itwould.

An audit would alsoreveal more details about financial-market interventions like those in 2008,when the Fed purchased mortgage securities from Bear Stearns and AIG. The riskhere is that providing too much information in real time about the securitiesthat the Fed is buying and the institutions that it is helping coulddestabilize markets.

This danger is not hypothetical. We saw an example of it the lasttime there were massive government interventions in US financial markets – namely,during the Great Depression. In 1932, the Fed was unwilling to help stabilize acollapsing banking system. But someone had to do something. So PresidentHerbert Hoover created the Reconstruction Finance Corporation, an independentgovernment agency, to aid illiquid butfundamentally sound banks.

The RFC’s largestloan in the summer of 1932 was to a bank run by former Vice President CharlesDawes. Not only was Dawes, like Hoover,a prominent Republican; he was also an ex-RFC official. Although Dawes refusedto make use of his political connections when his bank was pushed to the brink,the RFC nonetheless faced accusations of favoritism. Populist members of Congress,predictably outraged, demanded an audit andinsisted on publication of a list of all banks that the RFC had aided.

Publicationof that list in January 1933 led to a crisis of confidence in banks that wererevealed to have borrowed from the government. Bank runs started almostimmediately and quickly engulfed the country, resulting in the Bank Holiday of1933 – that is, in the forced closure of the entire US banking system.

So it is not justpolitical pressure that an audit must avoid. It must also avoid destabilizing financial markets and institutions.That requires aggregating information and allowing for suitable delay beforepublishing it. Can we trust politicians to understand and respect this,especially in an election year? It is no coincidence that the demand byCongress for the list of RFC loans occurred in 1932, also a presidentialelection year.

Fed officialsunderstand that their institution can remain independent only if it isaccountable for its actions in the court of public opinion. That is why the Fedhas been taking steps to become more transparent: it releases the minutesof Federal Open Market Committee meetings and publishestranscripts with appropriate delay, while FOMC members give speechesdetailing their views. Moreover, in a recent innovation, the Fed now publishesthe inflationand interest-rate forecasts of FOMC members and Reserve Bank presidents.

The Fed almostcertainly will move even further in the direction of transparency. Othercentral banks are doing likewise. No less is required to reconcile independencewith accountability in a democratic society. But an audit overseen by politicians is not the right way.