What is the Federal Reserve For, Exactly?

George Will’s November 30, 2024, column asked the question as to what, exactly, is the purpose of the Federal Reserve System.  This is a reasonable concern, especially given the way governments throughout the world have been using their central banks to spend money like drunken sailors on leave.  Unfortunately, although Will pontificated for 750 words or so, it was evident that, while he clearly intended the title of his column to be rhetorical, he himself has no realistic idea of the role or function of a central bank, much less any bank other than a bank of deposit.

Who REALLY Owns the Federal Reserve?

On paper, the Federal Reserve System, the central bank of the United States, is owned by its member banks.  Member banks are required to purchase a special form of preferred stock paying a minimal dividend but carrying a meaningless vote.  This is not, however, true ownership.  As Louis O. Kelso once pointed out, control means ownership in all codes of law, and as we will see below, the federal government, while it does have “legal title” to the Federal Reserve System, controls it by having the president of the United States appoint the Chairman of the Board of Governors, and by receiving all revenue in excess of what is expended in operations.

America’s Kryptonite

Saturday, March 25, 2023, saw an astonishingly stupid article appeared in the Washington Post.  “The Dollar is Our Superpower, and Russia and China are Threatening It.” by Fareed Zakaria (p. A18), while no doubt well-intentioned, reinforced some very bad, even extraordinarily dangerous ideas about money.  These have not only the potential to destroy every economy in the world, including that of the United States, they have gone a long way toward doing it.

A Keynesian Contradiction

The first principle of reason is that nothing can both “be” and “not be” at the same time under the same conditions.  This law or principle of (non) contradiction simply means that something cannot both exist and not exist at the same time, e.g., nothing can be a little bit dead.  Something is either dead or alive; Schrödinger’s cat is only half dead and half alive because there’s a fifty percent chance it’s either one, which is known for certain when the box is opened.

Federal Reserve Follies

On Halloween, the Wall Street Journal reported the frightening news that the government’s money machine, the Federal Reserve, has been losing money.  “How is this possible?” you ask in wonder.  How can an institution that creates money out of thin air for politicians to spend like drunken sailors on leave be losing money?

How to Become President

On Monday, July 25, 2022 (halfway to Christmas), Senator Elizabeth Warren of Massachusetts published an article on page A-17 of the Wall Street Journal, “Jerome Powell’s Fed Pursues a Painful and Ineffective Inflation Cure.”  We can agree with the title, and even several things Senator Warren says, but end up disagreeing with the article taken as a whole.  Warren identifies a part of the problem, but then analyzes it using a very flawed paradigm, and offers exactly the wrong solution, or (more accurately) non solution.

Stupid Federal Reserve Tricks

It really is amazing what you kind find rooting through old documents, correspondence, what have you.  When you have access to an archive that records a social movement of which most people have at best an inadequate understanding, it is easy to become frustrated at just how obtuse people have been.

CESJ Looks at Money, Part II

This is the second part of a posting completing the one begun last Wednesday.  Recently members of the CESJ “core group” got into a discussion with a couple of monetary theorists who confused what CESJ says about Just Third Way monetary reforms and the proposals of, e.g., the American Monetary Institute.  The monetary theorists requested a detailed analysis of exactly where what CESJ advocates from the AMI’s proposal.

A More Just Tax, I: Monetary and Credit Reform

We’ve been having a sporadic series of postings addressing President Trump’s proposed tariffs, starting with “The Two-Part Tariff Question” and continuing with “Is There an Alternative to Tariffs?”  At the end of the latter we concluded, “[T]here is clearly an alternative to tariffs . . . but only if you agree that the sole purpose of taxation is to fund government.  If you’re worried about other goals, however, is there a way to achieve them in a less harmful (or even beneficial) way?” and promised to look into that in the next posting in the series.

Good as Gold, VIII: Toward Monetary Reform

The mistakes England made with the Bank Charter Act of 1844 managed to get themselves duplicated in the United States with the National Banking Act of 1863 (amended 1864).  In both cases the legal tender reserve currency was backed by government debt, convertible into gold, and inelastic, i.e., fixed in amount, to try and avoid inflation.  This lack of understanding about money and credit caused or contributed to a series of financial panics and currency crises in both countries.

Wilson and the Fed, XV: The Fight for Reform

The Federal Reserve Act of 1913 was an epic struggle by progressives and populists against diehard Republicans and the financial interests to overcome the obvious weaknesses of the Aldrich Plan, and establish a long-delayed and critically needed central bank for the United States. This was an essential first step in breaking the slavery of past savings that prevented most people from becoming owners of capital.

Wilson and the Fed, XIV: Response to “The Bankers’ Panic”

Following the Panic of 1907 — known as “the Bankers’ Panic” — caused in large measure by massive money creation for stock market speculation and the failure of an attempt to corner copper by the president of the Knickerbocker Bank and Trust, strong pressure was put on Congress to pass emergency legislation. The Aldrich-Vreeland Act of 1908 allowed for a temporary reorganization of the financial system. Groups of banks were organized into national currency associations and permitted to issue banknotes on an emergency basis.

Wilson and the Fed, XIII: The Silver Question

Reform proposals to straighten out the financial system in the United States began almost immediately following the Panic of 1893. The most feasible was probably the “Baltimore Plan” of 1894.[1]

Wilson and the Fed, XII: Who Needs a Central Bank?

Abraham Lincoln’s 1862 Homestead Act had opened up access to the landed capital of the “Great American Desert.” The frontier had, of course, existed before the Act, but it needed an aggressive program of expanded capital ownership in land before most people viewed the move west as a viable option.

Wilson and the Fed, XI: Wilson’s Arrogance

Unfortunately for the leader of a country that was not only confronted with a turning point in its own history, but was poised to become a major player on the world scene, Woodrow Wilson combined elitist arrogance with an essentially weak and vacillating character. He seemed to feel that he was a natural leader because of his scholarly attainments[1] and his position, regardless what he might do (or not do) with either.

Wilson and the Fed, X: Wilson’s Economic Genealogy

Not surprisingly, we find that Woodrow Wilson’s economic theories — such as they were — were consistent with his political philosophy.  That is, the élite runs everything because ordinary people are incapable of running their own lives without massive State oversight and direction.

Wilson and the Fed, IX: Wilson’s Political Genealogy

We have already noted that, as was manifest from his doctoral thesis, Woodrow Wilson derived his political philosophy from that of Walter Bagehot. What many people may not sufficiently appreciate is the degree to which Bagehot’s philosophy, both political and economic, derived from that of the totalitarian political philosopher Thomas Hobbes.

Wilson and the Fed, VIII: Wilson’s Philosophy

Even commentators favorable to Woodrow Wilson are not able to put a positive spin on his style of leadership, although they speak of it (and of Wilson) in glowing terms, e.g., “genius,” “brilliant,” “incomparable.”[1]  This was probably the result of sycophants currying favor, and not out of conviction.  As Arthur Link noted in his book on the Wilson administration,

Wilson and the Fed, VII: Consumed By Ambition

There is such a thick patina of reverence coating the reputation and presidency of Woodrow Wilson that it is extraordinarily difficult to appreciate just how great a disaster his election was for the United States. Part of this was due to Wilson’s character. The rest was the result of his philosophy of government.

Wilson and the Fed, VI: The Campaign and Victory

Yesterday we finished looking at the four (or, depending on how you’re counting, four-and-a-half) major candidates during the presidential campaign of 1912 — the first and (to date) the last time two third party candidates had a significant impact on the campaign.  The Republican candidate was William Taft, the Democratic candidate was Woodrow Wilson (and William Jennings Bryan), the Progressive Party candidate was Theodore Roosevelt, and the Socialist Party candidate was Eugene Debs.