Based on the early poll results, that seems to be the majority view. Let’s shut down all the banks and return to paying for our gas and food using gold coins. That’s becoming a very popular opinion among people who don’t know what the Federal Reserve System is or does, and why much of the progress of the United States is a result of it.
The Federal Reserve system was created as a result of the Financial Panic of 1907 – in which J.P. Morgan played the role of managing the liquidity and calming the fears that typically trigger a panic. People in power thought it probably wasn’t a good idea to have all that power controlled by one private bank.
So what is the Federal Reserve System and what does it actually do?
The Federal Reserve is the Central Banking system of the United States – responsible for coordinating the activities of the country’s banks and setting monetary policy. It is not directly a part of the United States government, although the President selects its chairman. The board oversees 12 district banks around the country, with the New York Fed Bank being the largest and most important. Each district branch has a board with 9 members – 3 of whom are bankers, and 6 of whom are businessmen and other non-bankers. The member banks of the Federal Reserve own stock in the Fed, but that stock carries no proportional voting rights.
To take the Dallas Fed as an example, the 9 members of the Board of Directors are:
– the CEO of Anadarko Petroleum
– The Founder of Southwest Airlines
– The CEO of the First National Bank of Alamogordo *
– A professor of finance from Sam Houston State University
– The chairman of a Financial Advisory firm
– A woman who appears to be a professional affirmative action board sitter (local non-profit hospital, McDonald’s Corp)
– CEO of Brady National Bank of Brady, TX *
– Chairman/CEO of J.C. Penney
– CEO of Texas Capital Bank *
First, what the Federal Reserve doesn’t do:
– it doesn’t print paper money – that’s the US mint (it is however, the conduit for putting money into circulation and replacing worn out bills)
– it doesn’t decide to how much US Debt to buy or sell- that’s the U.S. Treasury
– it doesn’t guarantee your bank deposits – that’s the FDIC
What it does do:
– It operates the Fed Wire/FedACH system, which is how most financial transactions occur each day. The daily volume of transfers is around $3 Trillion. If done in gold, that would be about 72,000 tons of gold per day. The total amount of gold ever mined is about 165,000 tons.
– it operates regional banks that provide services to member banks, like delivering currency and coins, running clearing house for paper checks (largely going away now)
– It handles the bank accounts for processing payments made by the Federal government (tax refunds, social security direct deposit, government pension checks) and accepting payments
– lends money overnight to member banks that have a temporary cash liquidity problem
– manages the auction process for selling U.S. Treasury securities
– it is one of three organizations that supervises bank operations, mainly focusing on bank stability – enforcement of reserve requirements, soundness of accounting practices, minimum capital requirements, proper processing of electronic payments
Beyond the mundane day to day banking business, the primary job of the Federal Reserve is to promote a stable monetary policy, to ensure that interest rates and dollar exchange rates don’t fluctuate wildly and that the U.S. dollar can be relied on as a stable currency for commerce in domestic and international trade.
Keep on dreaming the impossible dream Art.
You didn’t read any further than the title, did you?
I read it. Your point is, if the Fed was dissolved, the financial sector would collapse…correct?
Do you agree with Ron Paul, who believes the Federal Reserve should be subject to an audit?
Yes, and no :) [Politician answer]
The Federal Reserve already has audited financial statements.
2009 Financial Statements
So why does Ron Paul insist on doing an audit? Same reason Neal Boortz thinks that we need a “Flat Tax”.
The basic problem with the Federal Reserve (which is getting worse) is the financial statements alone don’t tell you much. One of the things banks have been caught doing is using “Repo agreements” to hide problems with their balance sheets by making undisclosed temporary trades of assets. Looking at the balance sheet on one specific day is very subject to deliberate misrepresentation.
Another problem is auditors and the whole audit process is not geared towards government entities (or pseudo government). If you’re auditing a for-profit restaurant, you have done it 1000 times before and know what to expect, and where the owner is likely to attempt to cover up a problem. There is only one Federal Reserve. It makes up its own rules, and has signficant legal power to say “I’m not going to tell you that”, as Bernanke did right to the Congress.
The next problem is – if you actually find out what they’ve been doing, you might be very unhappy with the answer and the consequences of that knowledge.
My suspicion is that the Federal Reserve and US Treasury are colluding with the primary dealers to hide a problem of over a $Trillion by doing what in the more mundane world is called “Kiting”. You write an IOU and put the money back in before the store opens tomorrow. The world’s financial system operates 24 hours a day, America doesn’t. I worked for a bank that basically passed off its assets from branch to branch. Once it settled with the Fed for the day, it would then transfer the excess funds to Hong Kong to lend out for a few hours, then on to London, and then transfer the money back to the States by the time the banks opened in the morning. To all three countries, it looked like the bank had a lot of money, but each one was only seeing the money during their part of the day.
The ACH system is passing around the kinds of dollars you would epect to see from the kinds of things you probably have used it for a few times in your life.
It’s the Fedwire that is bizarre – the dollar part of the Fed is moving about $1.3 Trillion per day around, with an average transfer of $13 million. That’s about $4k per person in the United States per day. A lot of that is probably large entities (banks, insurance companies, foreign governments) buying and selling large quantities of Treasury bonds and other financial instruments and transferring the cash through the Fed.
As I’ve described it, there are two diffferent main parts of the Fed – the “banking business” of facilitating the movement of money, and generally keeping the wheels greased, and then there is the monetary policy part.
It’s the monetary policy part that is more troubling, and that’s grown much bigger since Geithner has had his way. I think interest rates should be much more market driven by supply and demand, not mandated by Command and Control of government. Why does the CEO of J.C. Penney get a vote in what the interest rates should be next month, other than by his actual actions borrowing money in a competitive market place?
We’re getting this paradoxes of zero % interest rates, but nobody wants to borrow any money. My view is they are making the spring tighter and tigher so that if the interest rates are allowed to float, there would be catastrophic problems, and having variable rate debt you owed would be major problem. Bigger companies are refunding long term debt, but nobody will touch borrowing money short term for long tern needs.
I’m ranbling now, it’s late…
I’m not a student of the Federal Reserve, but it seems to me that the functions of the Fed. Res. would (or should) be independent of the nature of the money involved.
Most arguments about the nature of money either use “gold coins” (to make fun of actual exchanges) or fiat (paper – a more convenient form of) money. The intermediate choice of a gold backed currency, never seems to be given serious consideration. The intermediate choice, it seems to me, would eliminate most, if not all, of the citizenry’s complaints about the current fiat monetary system. Obviously, a rigidly enforced gold backed fiat currency would eliminate the opportunity for government (and private industry) to benefit from controlled inflation. A rigidly enforced gold backed currency would also stabilize international exchange rates, though from time to time it would force governments to confront political realities resulting from the government’s economic misbehavior. That would not be a bad consequence.
I somewhat agree with that.
One thing I’m sort of keeping an eye on is the ratio relationships between Gold vs Platinum and Gold Vs Silver…. Silver is less significant as it has fewer purposes now that Silver Nitrate photography is fading as a use of silver. Platinum has been relatively flat as Gold is going up. That basically says speculative bubble in gold.
In passing, I heard last night one of those the world is ending buy gold shows make the claim that “before we got off the gold standard, there were no inflationary spikes or financial panics”. Nothing could be further from the truth. There have been violent swings every few years since the country was created until the Fed was created.
What people usually are saying when they say “I want a gold backed currency” is they want an end to the fractional banking system, which basically can create new dollars out of nothing.
I like my example from a few weeks ago, because it is so simple and people know what it is. I walk into a store, and hand the store a $100 bill and buy a $100 gift card. The Store now has $100, and I have a $100 gift card. My transaction just created $100 that didn’t exist before. When I use the gift card later, that causes the extra $100 to “vanish”. The merchant has essentially done a transaction that isn’t even a fractional reserve transaction. They aren’t required to take that $100 and buy gold and store it until I use the gift card. They could take that $100 and buy a gift card at Home Depot. Home Depot could take that $100 and buy a $100 gift card at McDonalds, etc…
Our economy has been built on credit that isn’t backed by anything. Switching to a system when transactions can only be done by gold backed accounts holding 100% of the value of the stored value will make for a very slow movement of money. I’m not saying “don’t do that”, but understand it would be turning back the clock several hundred years from a practical standpoint. The compromise position would be a fractional gold system – that you would allow the multiplier effect of fractional banking, but require the reserve to be held in gold or gold equivalents, providing some tangible limits on fiat money.
I would see the issue of the Federal Reserve as the classic discussion of enumerated Federal powers versus State’s rights. Like most ideological debates, there is no clear win at either extreme. The Federal Reserve controlling the U.S. financial systems is no more pleasing than having each state print its own paper money (gold backed or not).
What the Fed does represent is the 800 pound gorilla in the room with its eye on attempting to influence or control economic factors that it does not have the tools or purview to control. That is the likely target of the aforementioned polling.
Does the Federal Reserve pass constitutionality muster?
“Does the Federal Reserve pass constitutionality muster?”
Certainly Alexander Hamilton thought it did.
Yes, Hamilton predates, the Fed. I’m referring to the idea of a central bank, which Hamilton favored.
Yet Jefferson did not.
Buf of course, the Federal Reserve is not owned by the U.S. Government – any more than you “own” your local bank because you have money in a checking account there.
From a practical standpoint, “The Fed” is the New York Fed – the other 11 are mostly just running the regional day to day busy work.
Who are the 9 members of the NY Fed Board?
Class A – selected by the banks in the region
CEO – Banco Popular de Puerto Rico
CEO – Adirondack Trust Co
CEO – JPMorgan Chase
Class B – represent the “Public”, selected by member banks
CEO – General Electric
CEO – Pfizer
CEO – Loews Corporation
Class C – represent the “Public”, selected by the main Fed Board, to represent the public
President – NY AFL-CIO (Chairman)
President – Columbia University
CEO – Partnership for New York City
The first thing we do, let’s kill all the lawyers … (couldn’t resist, sorry).