Help me understand... Central Banks, are quasi governmental? or does it vary?

The Federal Reserve is privately owned (like most central banks). It is as much a real part of the government as Federal Express. The name is an effective marketing ploy to enhance its credibility.

Loyalists who somehow believe that it is unpatriotic to challenge such "sacred" institutions will point out that it is subject to congressional oversight and the positions on its board of governors are appointed by the President. Of course, when Congress orders an audit and the Fed refuses to comply, you have to wonder exactly what congressional oversight means. And when you control the whole nation's money supply and earn interest on every dollar in existence, you have a great deal of influence over who can reach the office of of presidency to appoint your board members.

My personal opinion is that our system of national currencies range from corrupt to criminal. And too few people are aware of how our currency systems are designed to concentrate wealth and power.

The Money Masters movie should effectively awaken conspiracy fears in viewers. I think it would have been far more effective to feature other people (rather than the narrator) more centrally in its delivery.

Ama, I believe so much power and wealth is concentrated in the hands of those who have a strong interest in maintaining this structure of power, that direct opposition is unproductive and possibly suicidal.

Spreading awareness is certainly valuable, but even more so is fostering a rich ecology of healthier currency alternatives. As this alternative economy grows, it becomes feasible to adjust, abolish or replace the likes of the Fed. Come visit the targeted currencies group to explores some alternatives!

I realized spreading the word about FED can be valuable but seems never-ending, because still so many people do not dare to listen and understand (and many in other countries do not even know). It is interesting how FED as a group of 12 banks, and many of them from Europe, had the power to change or modify the American economy in times of Great Depression (and before the Depression as well). My fear is that with such a spreading globalization their power (as well as strength of other financial institutions like IMF) will grow like cancer.

You mentioned alternative economies, which is a good point. But I believe those who have power will keep it tight and difficult for others to change the system, which I believe is already at the edge.

Do you know which banks/stock markets/financial institutions create FED nowadays? What alternative economies you would suggest or how would you change FED position?

Ama Dablam said:

My fear is their power will grow like cancer.

Ummm... It's a bit late for that. The question for me is how do we empower ourselves to connect, share & exchange directly without their mediation (since they take a piece of the action every time they're involved).

I just heard Chris Cook speak about a number of elegant solutions to this problem that his group has been working on. The software platform we build is also for empowering this kind of direct connection & flow.

I don't think you can use their money against them. Before attempting to resist the Fed / IMF / World-Bank / Any-Country's-Central-Bank I would suggest that you have strong healthy alternatives in place, or they'll be able to end your resistance quickly.

Begin rant!

There is something of a cottage industry devoted to making hysterical and innacurate claims about the Federal Reserve Bank.

The shares of the Federal Reserve are owned by its member banks. These shares are not at all the same as the shares of a typical corporation, such as Federal Express. For example, they are never worth anything more than their book value. Unlike Federal Express, the government participates in the appointment of the Fed's Governors and otherwise exercises oversight over the Fed.

Those who think the Fed is such a great deal for the banks are invited to explain why most U.S. state chartered banks do NOT choose to become members of the Federal Reserve System. Perhaps because membership imposes on the members the obligation to meet the standards of the Federal Reserve? The Federal Reserve System survives only so long as banks choose to be members and so long as Congress maintains in effect the enabling legislation.

The Fed doesn't pay taxes because it returns nearly all its profits to the U.S. Treasury; and, it pays 6% dividends on its share capital to the member banks (who do pay taxes); and, it keeps a small amount for itself to finance its growth. It would be pretty silly for the Treasury to tax its own income.

While the member banks DO pay taxes, credit unions don't. If ordinary people put their money into a credit union instead of a bank, they get a higher deposit rate and/or a lower loan rate because their credit union doesn't have to pay taxes. Tax paying member banks compete with these credit unions. Banks also compete indirectly with other institutions, such as insurance companies who offer their policy holders products with tax avoidance advantages.

The breast beating over fractional reserve banking is also deeply misplaced. How about we correct this awful injustice by legislating a 100% reserve requirement instead? Attention all Americans! You are hereby required to repay nearly every dime of all your outstanding bank loans NOW! The same goes for any foreigner who has borrowed from a U.S. bank. You can kiss those OPIC $$ goodbye. By the way, since banks can no longer lend out any more than they have on deposit, you may now start paying the bank for the privilege of having them keep your money safe. The ensuing Global Depression would make the experience of 1929-32 look like a tiny run on a one-crop farmer's bank.

To anyone who thinks that you get to "rule the world" if you own a bank and become a member of the Fed, by all means, go ahead and try. Set up your own bank. Better yet, coin your own money, too! It happens all the time. New banks get formed and sometimes they grow until they make the formerly leading banks look like small players. Where are the Rothschilds, Warburgs, Barings, and Fuggers in the big scheme of things now? For people who are commonly thought to be controlling a New World Order so that they can rule the world, they've done a pretty crappy job of it given how many newer and smaller banks thrived and upstaged them. Just once, I'd love to see one of these tinfoil hatted cranks stop whining and actually do a better job than the existing banks do.

But given how seriously mistaken themoneymasters.com is about the nature of banking, I can hardly picture them doing a better job of attracting deposits, making loans or administering payments, regardless of whatever reserve requirement they need to meet. Better that they stick to selling their wacky DVDs.

End rant.

Hello All--

I suppose my thoughts about this question are somewhat tempered by the understanding which Charles has shared with us--thank you, Charles.

At the same time, I wonder at a non-elected, non-controlled entitity being able to manage and control the monetary system of any country, let alone ours.

Today it seems as if this entity, The Federal Reserve Board, has become mythical in its uttrances as well as in its view of what is or will or has occurred.

Is this a good thing for our country?

While Charles alludes that anyone can coin their own money and encourages them to do so, I believe that this is an exageration and that if anyone does so in today's world, it is limited to such things as coupons which can be exchanged for a discount or some other product or service. A friend of mine told me about his grandparents who coined their own money back in the 30s, during the Depression--however, that coinage could only be used within their company store and the money was called "Molton Money" so as to distinguish it from other legal currencies.

Whether or not 100% security requirements would be beneficial is a question of what is meant by "beneficial" not, about what occurs or would occur by imposing such a requirement or not having such a requirement. The ideas of Hamilton have certainly lead to much of the practices we take for granted today but, are there alternative structures which would allow for development and also encourage solutions to some of societies current and prior problems?

My reading of economic history indicates that throughout all of human history, when-ever there has arisen a monopoly, that the ultimate end result has been the collapse of that economic-political system.

In some other discussions within the economic topics of this virtual community, people have been positing ideas regarding an "economic hitman." If the thoughts and experiences shared in those discussions have validity, then do they apply to how the Fed works? If not, why? If so, then what are the implications?

Today we live in a world where the general consensus appears to be that our resource base is shrinking and disappearing. If policies of monetary management do nothing to make adjustments to improve this situation, then...is this perhaps an even greater underlying concern and issue than the points which have been raised in this discussion until now or by others in books or articles or arguments?

To blindly follow is what sheep do even as they take their last step into the abyss and fall to their certain death--

Hi Brian,

The control of the monetary system is vested in the Congress per the powers in Article I Section 8:

Clause 1: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Clause 2: To borrow Money on the credit of the United States;

Clause 3: To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

Clause 4: To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

Clause 5: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures...

While the Constitution is rather silent about any specific discussion of banking, the Commerce clause is a very big stick. Lawsuits respecting the legality of a central bank have been fought and won in favor of the interpretation of the Constitution that a central bank is legal in the U.S. Those who argue that the Fed is unconstitutional still bear the burden of winning their first case and overturning the longstanding precedents going back to McCulloch v Maryland where Chief Justice John Marshall's opinion relied upon I,8, clause 18 (the necessary and proper clause) to find:

"Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the constitution, are constitutional."

It's also worth noting that the U.S. is already on its third central bank. It's been a hallmark of our past experience that when Congress backs off from the Commerce clause to give the States a whiff of the Xth Amendment in the field of banking that the result is a system of weak local banks that go on to lose the people's money and create a series of panics.

The alternatives are:

1. Let the States run their own show (been there, done that, it doesn't work very well.)
2. Let a truly private but national money center bank do the job (imagine the howling if the gov't said to Citicorp, "OK, we've abolished the Fed, it's your dollar now." Obviously a non-starter in the U.S. although it's worked out in other places, such as Hong Kong).
3. Make it the People's Bank of the U.S. by allowing more obvious political control (a really bad idea where the source of the funding request, the approver, and the paymaster are one and the same. )
4. Clip the Fed's wings. (Hmmm...it's hard to know just where to draw the line, here. The Fed needs to be powerful enough to be a lender of last resort, yet, not so powerful as to exert an unchecked influence in the setting of rates, and etc.-- a Fed that has to pay attention to the credit price formation in the market rather than smoke its own exhaust at will.)
5. Try a different (but sane) set of choices. Currently, the Fed permits free flows of capital, and sets interest rates but lets the exchange rate float. For example, if you'd like to argue that capital shouldn't flow freely (in order to allow us to fix exchange rates); or, that the Bank should set exchange rates rather than interest rates, those are plausible arguments (although you'll have to explain how you'd handle the aftermath of that announcement). While these alternatives are technically viable, it would cause some pretty large dislocations in the process of policy conversion.

Can you explain briefly the relevance/meaning of the Rule of Naturalization?

Ha Ha Michael, in this the day of immigration squabbles and gay marriage issues...

This is about ceding to the federal government the power to determine of who can be a citizen. It's lumped in with these coinage and weights and measures clauses because the Framers considered all of these powers with a similar justification for placement under federal control.

Brief background:

Naturalization was formerly two different ways painful when, under the English, it was very difficult to become a citizen (and the colonies wanted labor). Whereas, under the Articles of Confederation, every State had its own rules.

Here's James Madison's not so brief commentary from Federalist No. 42:

"The dissimilarity in the rules of naturalization has long been remarked as a fault in our system, and as laying a foundation for intricate and delicate questions. In the fourth article of the Confederation, it is declared "that the FREE INHABITANTS of each of these States, paupers, vagabonds, and fugitives from justice, excepted, shall be entitled to all privileges and immunities of FREE CITIZENS in the several States; and THE PEOPLE of each State shall, in every other, enjoy all the privileges of trade and commerce," etc. There is a confusion of language here, which is remarkable. Why the terms FREE INHABITANTS are used in one part of the article, FREE CITIZENS in another, and PEOPLE in another; or what was meant by superadding to "all privileges and immunities of free citizens," "all the privileges of trade and commerce," cannot easily be determined. It seems to be a construction scarcely avoidable, however, that those who come under the denomination of FREE INHABITANTS of a State, although not citizens of such State, are entitled, in every other State, to all the privileges of FREE CITIZENS of the latter; that is, to greater privileges than they may be entitled to in their own State: so that it may be in the power of a particular State, or rather every State is laid under a necessity, not only to confer the rights of citizenship in other States upon any whom it may admit to such rights within itself, but upon any whom it may allow to become inhabitants within its jurisdiction. But were an exposition of the term "inhabitants" to be admitted which would confine the stipulated privileges to citizens alone, the difficulty is diminished only, not removed. The very improper power would still be retained by each State, of naturalizing aliens in every other State. In one State, residence for a short term confirms all the rights of citizenship: in another, qualifications of greater importance are required. An alien, therefore, legally incapacitated for certain rights in the latter, may, by previous residence only in the former, elude his incapacity; and thus the law of one State be preposterously rendered paramount to the law of another, within the jurisdiction of the other. We owe it to mere casualty, that very serious embarrassments on this subject have been hitherto escaped. By the laws of several States, certain descriptions of aliens, who had rendered themselves obnoxious, were laid under interdicts inconsistent not only with the rights of citizenship but with the privilege of residence. What would have been the consequence, if such persons, by residence or otherwise, had acquired the character of citizens under the laws of another State, and then asserted their rights as such, both to residence and citizenship, within the State proscribing them? Whatever the legal consequences might have been, other consequences would probably have resulted, of too serious a nature not to be provided against. The new Constitution has accordingly, with great propriety, made provision against them, and all others proceeding from the defect of the Confederation on this head, by authorizing the general government to establish a uniform rule of naturalization throughout the United States."

In the initial post made by Arthur, he wrote:

Loyalists who somehow believe that it is unpatriotic to challenge such "sacred" institutions will point out that it is subject to congressional oversight and the positions on its board of governors are appointed by the President. Of course, when Congress orders an audit and the Fed refuses to comply, you have to wonder exactly what congressional oversight means.

I suppose we can also ask about Congressional oversight if we have a President who has issued more Signing Statements than all other Presidents combined and where is the Congress in regard to this?

Another one would be to look back at Teddy Roosevelt, I think it was, who said that if the Supreme Court told him he couldn't do something but he wanted to do it, what would they do about it?

Is all of this then an illusion? or an allusion? or perhaps an allorgory?

Brian,

Follow this link to the Fed's audit processes. Note: There are some restrictions on what the GAO can audit (which sets the cranks turning, of course) and the idea of an independent Fed is to prevent it from being hassled by Congress.

Here’s a link that debunks a number of the audit myths.

So just which Bill requiring a Fed audit -- meaning the kind that actually passes and gets signed into law as opposed to the typical effort that is referred to a subcommittee hearing and then dies a peaceful death in committee in the public eye--did the Fed refuse? You need a double layer of tinfoil up on top to think that Congress passes laws and then the central bank just blows them off. LOL! The truth is certain Congressmen like to climb onto this shambolic Rosinante and lustily tilt at this windmill nearly every year.

But members of Congress eventually learn to watch what they say on this subject because the Fed Chairman and governors, mainstream economists, and other bankers make radical torch waving members of Congress look foolish if they spout off with the typical Fed bashing tripe.

Yes, the Judiciary has powers to check the Executive branch. For starters, it can declare the Executive’s activities to be illegal. The Legislature can also check an Executive several ways, including by censure. Trivia quiz: When is the only time that ever happened?

A: When Andrew Jackson, who abolished the Second Bank of the US, refused to turn over documents to Congress that related to that decision!

You have known me for a long time, Charles--you better than anyone in this discussion know that I seek out-of-the-box answers to issues--the more complex the more out-of-the-box I go.

I appreciate debating with you because I find you to be one of the most well-read and thoughtful individuals it has ever been my good fortune to meet.

Although you addressed some of my earlier post, I see left unanswered by you or anyone else in this discussion the thought about where history points is the ultimate result of a monopoly--that is the collapse of the structure.

I will raise another point and this point underlies all discussion of economic-political organization: Is this the best we can do in terms of social organization? That is, it organizing a social/political system based on economic principals in the human, or for that matter, the world's best interest?

I realize this is a little extended perhaps for the initial topic, and I apologize for that, but, if the organization and implementation of financial-economic activities as led by the Federal Reserve is worthy of critical analysis and debate, then in doing this are we only jumping from the frying pan into the fire if that is the extent of our analysis--and, if this is an accurate consideration and critique, then should we not seek the underlying issue to address and try to find a reasonable solution?

Brian,

As usual you are being too charitable to me. But thanks! And keep it up!

For the Americans on this board, I think the question is how is a monetary system to be organized so that it neither becomes a tyranny (or a monopoly if you will) or a mob (anarchy). More narrowly, the objective of a central bank is to ensure that money is neither too expensive (perhaps because a monopoly on the supply is exercising unreasonable restraint) nor too cheap (because my cat can get a credit card with a 0% APR).

While the Fed has everything to do with the supply of money, it doesn't control the supply of credit. That's up to banks and etc. True money is about 4% of the money supply, the rest is credit.

The money markets, including the credit markets, are some of the tools we can use to develop a more perfect system since a market for credit derivatives and such allows its participants to manage diverse risks far more specifically than the Fed can do with blunt force weapons such as changing the discount rate or the reserve requirement. Just lately, this is where the real action is happening as many exchanges have chosen to demutualize, become public companies and convert their open outcry markets to electronic systems. The explosion of demand for their newer products is quite breathtaking. Check out the last few years of trading in shares of the Chicago Mercantile Exchange (CME) as a case in point. However, in any market there are several complaints:

1. Only the "working half" of the market gets to play. The other half who bid low or offered high are shut out. I don't see a solution to that, other than public subsidy (itself a very debatable remedy).
2. Markets are sometimes susceptible to irrational behavior every once in a while (bubbles and panics). This is one of the arguments for why there should be a Federal Reserve Bank: it's supposed to protect us from moments of extreme collective stupidity.
3. Markets that trade forward contracts (futures) are susceptible to counterparty risk. This is very hard to account for even in the most transparent disclosure regime.
4. The markets and the Fed don't act in isolation; they are strongly influenced by the fiscal policy of the government. If the government didn't need any money, there might not be a Fed. Moreover, the interests of the Fed and the government are always in tension. Either wants the other to allow it to take the easy way out: the Fed wants the government to run a surplus so it doesn't have to raise rates and take heat for same while the government wants the Fed to keep rates low to encourage full employment, lower borrowing costs and enable Congress to fund every program it desires.

To me it seems that the Fed is often a victim of its most successful offspring, the U.S. dollar. It gets blamed for the fact that unlike most currencies, the dollar does a relatively good job of being worth almost as much tomorrow as it is today. Whereas, if we look at some other places in the world, we see that their central banks have often made an utter hash of their money. The example of the dollar and some of the few other sound currencies makes them look bad, so of course, it's the fault of the dollar, euro and yen, no? No. It's the fault of those who create imbecilic forms of money and force them on their people.

For example, although Robert Mugabe would like the world to believe that the shambles that is the Zimbabwean money is the result of colonialism and latter day oppression by the wealthy, I find it much more plausible that Mr. Mugabe is the real kleptocratic tyrant who has single handedly ruined his country's money and its economy.

This isn't just an economic issue. When countries screw up their money (usually, no surprise, by issuing too much of it) they invite all manner of ills, starting with high or hyper inflation. This ruin of the value of the local money rarely results in laying the blame at the local door where it often belongs. Instead somebody else is to blame and therefore, a war is required, which BTW takes a whole lot more money! Consider Weimar Germany, the Balkans, Zimbabwe, and etc. as examples of places where violence follows financial ruin.

To wit, the underlying issue is that it's very tempting for a country and/or its central bank to cheat the holders of its money and other debts to the rude experiences of devaluation, debt repudiation, inflation and other breaches of the social and economic contract. It's tempting for a government to coercively enforce this theft through the abuse of legal tender laws. It's also tempting for majorities to take away the value of the local minorities (usually justifying this by politically slamming them as tyrants, oppressors and races of evil people whether that's true or not).

Am I correct to understand that there is a ratio of 1:25 Charles that is acknowledged to exist as a result of Fed policies?

How long has it taken to develop this ratio?

ratio of what to what?

This is a statement from the most recent post of Charles above:

While the Fed has everything to do with the supply of money, it doesn't control the supply of credit. That's up to banks and etc. True money is about 4% of the money supply, the rest is credit.

So, I was asking about this---

duhhh....thanks for explaining what myeyes and brain weren't seeing :-)

Brian,

Yes, usually walking around money (as in cash and coins) is about 4% of the money . If you want to add in Federal Reserve deposits and other components of M0 in the money supply, you get more like 7%.

In turn if you add up M1 + M2 + M3 then there’s a little more than $10 trillion of that “money” in US$.

However a layman will also usually throw in all the credit and call that “money”, too because it buys the groceries just the same as cash. The credit debt is almost 4X the money supply. Lastly, if you added in the derivatives, that’s hard to measure but it’s at least 7 or 8X the money supply—maybe more--and climbing.

All in all, the Fed is a very big player and the only source of Federal Reserve Notes, but even so, the amount of Federal Reserve notes is a pretty small piece of the overall monetary pie. But Shhhh! Don’t tell that to the conspiracy theorists.

Interesting stuff, anf far from my domain of knowledge. (Banal statement, I know)

so, 10 trillion... and then credit debt is 4X that

(so, 50 trillion, with credit debt?)

and derivatives 7-8x Money supply, meaning the 10 T? right? (and not the 50T) so 70-80 T based on Derrivatives... lets split the difference to 75 T ...

Sounds like hyper-inflation already in place and we just tool merrily along----

From the following link on the derivatives market the numbers I’ve quoted for the notional value of derivatives at 7-8X the plain vanilla money supply may well be low or out of date. Several sources agree in their guesstimates that this market has been growing at nearly 20% a year in recent years; and, at a higher annual rate if looking back more than ten years. While the exchange traded portion can be analyzed pretty well, the majority of the contracts are in the Over the Counter market where the total notional value is not exactly known. The U.S. share of the market also takes some guessing. By some estimates, it could be ~$120 trillion (or more). Yes, that’s with a T!

Note: the “notional value” is the value of the number of units of the underlying asset in the contract multiplied by the spot price of a unit. The “gross market value” (what all these contracts are worth right now if you want to buy them off their owners) is about 1/30th of the notional value. Put another way, you can buy about $1.00 of protection from the risk of default for a loan you’ve made for $0.032; or, you could offer to guarantee some lender that they’ll collect that $1.00 and they’ll give you $0.032 to take the risk. Wanna play?

Here’s a quote from a recent Wall St. Journal article:

“The over-the-counter market is far larger than the exchange-traded one. Derivatives traded in this market had a total face value of about $285 trillion at the end of 2005, up from about $94 trillion five years before, according to the Bank for International Settlements, an association of central banks based in Switzerland. (The face value represents the value of the underlying instruments on which the derivative is written.) In comparison, exchange-traded derivatives had a total face value of about $58 trillion at year-end, according to the bank group.”

It’s plausible that the U.S share of this global market is about 35%. Anyway, the point is that the U.S. portion of the notional value of the global derivatives market is worth more than the U.S. money supply plus the value of all the stocks listed on U.S. markets, plus all the plain vanilla debts combined and it is still growing a lot faster than all these other markets. Even the gross market value of the global derivatives market is still bigger than the U.S. money supply.

Woohoo!

All of the above goes to show that the real security of the banking system is not really in the hands of (or under the thumbs of if that’s your POV) an oligopoly of central bankers but it’s based upon a series of widely distributed peer to peer futures contracts which, for the most part, don’t have a liquid secondary market (yet). Moreover, these markets are still growing a lot faster than the reserves of the central banks.

Therefore, the sort of concerns that gave birth to this thread (and the fellow traveler complaints about “Crosses of Gold” and other canards about conspiracies to make money scarce so that Illuminated Masters of the Universe will rule the world) are backwards enough to be labeled 19th century in their “currency”. The more interesting question is: given the difficulty of pricing these instruments, trading them, and measuring their outstanding contract value, the players in these markets may be taking on risks they cannot fully understand. In the event a financial Katrina were to occur, would the Fed and the rest of the world’s central bankers, acting in concert have enough power to avert a bubble or panic in the derivatives market? Nobody knows. Meanwhile, derivatives make it easier for banks to lend more money, so enjoy the low rates while they last.

Brian said:

"Sounds like hyper-inflation already in place and we just tool merrily along----"

Relax Brian, you can also buy a derivative that protects against inflation.

Now I feel happy--Charles.

Thank you very much for all the comments. Sorry, it took me so long to respond.

I do not know so much about the FED, but after reading the book 'A History of the Federal Reserve' from Allan Meltzer I am very suspicious about it, and do not really trust their control of the whole nation's money supply...

There is also one thing Charles said that I kind of ehh...about the Robert Mugabe...we could point the fingers on many corrupted politicians of many postcomunistic or postcolonial countries who became even more corrupted after the IMF imposed their regulations/rules which countries had to follow and ultimately they were a very cause of the economic slowdown.

Anyway, Brian raised a very good point...

"the thought about where history points is the ultimate result of a monopoly--that is the collapse of the structure...Is this the best we can do in terms of social organization? That is, it organizing a social/political system based on economic principals in the human, or for that matter, the world's best interest?"

These questions cruised in my head for quite a long time, and I am glad Brian raised them. I know such a collapse of the structure in other words: "If king is getting more and more powerful, his weaknesses also can get deeper, which his enemies can use in their advantage".

To me it is very sad that all these postcolonial/postcomunistic countries still struggle to adopt such a system, just because there is nothing better...

History will look back and shake its head that people let private financial interests create money instead of reserving that to their sovereign governments.