The Federal Reserve Bank’s independence being called into question is a huge can of worms that nobody has seemed to properly dissect. There are excellent arguments on both sides of the issue that have been discussed; however, they have failed to touch on a few keys parts of the equation. Most opponents argue against the secrecy and lack of oversight, while proponents argue transparency would threaten the working operations and undermine objectives. With the continuing topic in the press of reserve currency status of the US dollar and the mounting government debt, it is the very workings of the Fed that need to be examined.
It is precisely the FRB’s independence of the government that may ultimately cause the US dollar to rally, rather than decline, in a Zimbabwe-like devaluation that some are predicting. With the vast majority of the world’s wealth and debt denominated in US dollars, it is of great interest that the right steps be taken in determining the fate of the FRB. The FRB was given the authority to print the nation’s money with the Federal Reserve Act of 1913. It is this very act that most call into question along with the need for oversight.
A few years ago, when I first heard about the Federal Reserve Bank being neither Federal or a Reserve, I did some further investigating. After reading many stories in cyberspace about who owns the bank, I decided to file under the Freedom of Information act to find out exactly the ownership of the FRB. Turns out that some of the stories were on to something, but none of them really had it right. The ownership is distributed amongst the nation’s commercial banks, with the list to numerous to name. However, a few top name banks were majority owners such as JP Morgan (JPM), Citi (C), and Wells Fargo (WFC). JP Morgan alone owned just under a 50% stake in the New York Federal Reserve Bank, which is the bank with the most power of the 12 regional Federal Reserve banks. This is according to the list that the FRB itself drew up in a 2005 compilation obtained through filing the freedom of information act. Each of the 12 regional Federal Reserve banks are owned through a non-transferable stock by the numerous commercial banks that operate in the district. This is different from a typical common stock ownership, and is described on the FRB’s website. The stock owners receive a 6% annual coupon from the Fed’s operations each year, but don’t participate with the normal rights of common stock holders. It is this ownership that most people question, but don’t fully understand. It is an area that does need more clarity. How can the Fed be truly independent, if it is owned by private banks? How can this go on without oversight? These are absolutely great questions, but so are the questions that dig further into it. If there is to be oversight, would you really want that to be handled by Congress? With the wasteful spending, stimulus packages and cut-throat two party political battles, which fox is worse to watch the hen house?
The ultimate question to ask is what makes the US dollar a reserve currency in the first place? And how are dollars that we work hard to earn protected? In addition to the biggest and best military in the world, the answer is the very independence of the FRB itself. When everyone talks about the printing of money, most people including the one’s doing the talking don’t understand the process. It is not a magical golden spigot. The “printing” actually refers to the lending of credit to the US Government. Each dollar is not an actual store of value that is just printed from thin air. It does appear to come from thin air, and does in a way, but the point is what the dollar is in the first place. If the government were merely printing dollars without recourse, it would be the dollar that you would have to worry about. If that were the case, it would be a Zimbabwe type situation with massive inflation. Problems in Zimbabwe arose from excessive government meddling with the currency. However, in the US, each dollar printed is printed as debt or “credit money” that is accountable.
It is the separation of government and Congress not meddling into the money process that adds faith. The US government owes a debt for each “credit dollar” that is created. Similarly, when a bank lends out money, it is using a fraction of the reserves that its customers have given it. These are dollars that most people have in their bank account. The bank lends out this money, thus creating more money. More money is created, as when the lender deposits this money that they borrowed, into their own account, they have “credit money” that is entrusted to a new bank. At the original bank, its customers still have money on deposit which has now been lent out. This multiplier is how additional money is created. The FRB originates the process as it is lending credit to the US government for each dollar printed. Then the process is multiplied upon by commercial lending. Therefore, it is not the future of the US dollar that is in question; rather, it is the question of the US government’s ability to repay that debt.
If the US government were to default on debt, it would actually greatly reduce the supply of US dollars in the system. Instead of inflation, this would actually cause deflation. Since the government is not the entity that is actually printing the money, they are merely a borrower like a major corporation. If the US Government defaulted, a huge void of dollars would vanish. It is the same with what is going on in the markets today in the private sector. The default of debt by both individuals and corporations is reducing the money supply. Further, private lending, which “creates” the credit dollars is rather slow which is decreasing the velocity of money. The government’s printing of money, as big and vast as it may seem, is not keeping pace with the default in debt and slower velocity of money. All of these factors act as a deflationary force that the government and the FRB are trying to counter act by the “printing” of “credit money”. A question arises about the demand for dollars. Since most debt is denominated in dollars, people need dollars to repay that debt. With a huge void of dollars gone from the US dollar money supply, and consistent demand to have dollars for repayment of debt, the US dollar would become more dear with US government or private sector defaults.
So it is deflation that is more of a concern. It is the independence of the FRB, that prints the money lent to the US government that gives the US dollar its reserve status. This protects the value of the dollar that is in your pocket from a Zimbabwe type government meddling inflationary situation. Therefore, the question that needs to be asked is not about the independence of the fed; rather who is in control of that independence. This is not a duty that I would want to see the Congress entrusted with. If the Congress were to take control of, or oversee the FRB functions, it could possibly equate to a nationalization of the Fed, or excessive meddling and possible loss of independence. This would call into question the very factor that gives trust in the dollar. Could you imagine if Congress were entrusted with the printing of money? Maybe it’s not the independence that needs to be questioned but with whom that independence lies.
