Some of the rhetoric against the Federal Reserve System

In the right wing anti-establishment alternative media, there’s a lot of focus on the Federal Reserve System as the alleged root of many of this country’s ills.

I’m inclined to agree that the Federal Reserve System puts too much power in the hands of bankers and that that’s probably a bad idea. However, some of the anti-Fed rhetoric I’ve been reading lately strikes me as greatly exaggerated.

It is alleged by some people that the Federal Reserve System is, in reality, nothing but a private banking cartel, “as federal as Federal Express.” (See, for example, JFK vs. The Federal Reserve by Anthony Wayne and Proof of the Banking Conspiracy: A Message from the Past by Randy Lavello.) Some have alleged, further, that the Fed’s sole real purpose is to make money for the banks by putting the government and all the rest of us deeper and deeper in debt. And it is alleged that at least some of the big bankers, in order to maintain their deadly grip via the Fed, are the main conspirators behind various crimes such as the JFK assassination, 9/11, etc.

The Federal Reserve System is actually an odd mixture of public and private, neither strictly a government agency nor strictly a private entity either, nor is it a for-profit entity. It has a Board of Governors who are appointed by the President and confirmed by the Senate. But it consists of 12 regional Federal Reserve Banks, each of which has “member banks,” which are private banks. It has been argued that even this is unconstitutional, because the Constitution says that Congress is supposed to have the power to coin money. However, the Federal Reserve system was created by an act of Congress, which, presumably, still retains the power to abolish or modify the system. Many critics would argue that Congress has abdicated its responsibility by not exercising sufficient oversight, and that the Federal Reserve System gives too much power to bankers to make decisions about the money supply.

Because the Fed is at least authorized by Congress, hence can be considered an agent of Congress, it’s not as blatantly unconstitutional as, say, a President making decisions about the money supply via executive order. The article JFK vs. The Federal Reserve by Anthony Wayne suggests that JFK may have been assassinated by someone connected with the Fed, or by someone connected with a big banker or two, because of Kennedy’s issuing of “silver certificates” via executive order. But, if the Fed was offended by Kennedy’s executive order, they didn’t need to assassinate him; they could have simply challenged Kennedy in court. Had they done so, they almost certainly would have won, it seems to me.

(P.S. 10/2/2007: I have not yet studied the Kennedy assassination and do not yet have an opinion on whether the U.S. government was involved in it. However, if indeed some part of the U.S. government was involved, then it seems to me that the most likely culprit wouldn’t have been the Federal Reserve System but rather the CIA, with its plentiful experience in overthrowing governments overseas. Hence it also seems to me that the most likely main motive would have something to do with with foreign policy. For example, Michael Green believes “that Kennedy was murdered because he pursued détente with the USSR, championed nuclear disarmament, decided not to back the invasion of the Bay of Pigs with US military might, made a peaceful resolution of the Cuban Missile Crisis when the Joint Chiefs wanted invasion and war, and decided to withdraw US troops from Vietnam rather than pursue by brute force an imperial venture in Southeast Asia.” This sounds more plausible to me than the idea that Kennedy was murdered solely or primarily because of silver certificates.)

Anyhow, many critics of the Fed claim that the private member banks make money off the Fed. Checking to see whether this is true, I found this Fed FAQ page and selected “Federal Reserve System” from the drop down menu next to “Search by Category.” The resulting list of questions says, in a pop-up answer to the question, “What institutions are members of the Federal Reserve System, and what does membership entail?”

National banks–those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury)–by law are members of the Federal Reserve System. State- chartered banks and trust companies may apply for membership. To be accepted as a member, an applicant must meet requirements set by the Board of Governors.

Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus, of which 3 percent must be paid in; the remaining 3 percent is subject to call by the Board of Governors. The holding of stock in a Federal Reserve Bank does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation that goes along with membership, and the stock may not be sold or pledged as collateral for loans. Member banks annually receive a 6 percent dividend on their stock, as specified by law, and vote for some of the directors (so-called class A and class B directors) of their Reserve Bank.

So indeed it does look like the banks make a profit from the Fed, in the form of those dividends. And indeed we might be better off if at least that particular aspect of the Fed were phased out. Why should it be necessary, or even allowed, for banks to own stock in the Fed, thereby giving the banks an automatic subsidy in the form of that 6% dividend?

But the private member banks also borrow money from the Fed and pay interest on it. So it would seem that the amount of profit that the private banks make via their dividend is at least partly counterbalanced, if not utterly swamped out, by the amount that they pay to the Fed in interest. I haven’t yet found exact figures telling me how much the Fed pays out in dividends vs. how much it earns as interest. I’ve found indications that the Fed makes a huge net profit, which, for the most part, is passed along NOT to the member banks but to the U.S. Treasury. But I haven’t yet found figures telling me how much of this profit comes from interest on loans to member banks, vs. how much of it comes from simply creating money, or from interest on loans to the federal government. This I’ll need to research further.

Regarding the Fed’s profit, the Fed’s own website has a page about the Federal Reserve Banks, which says:

Federal Reserve Banks generate their own income, primarily from interest earned on government securities that are acquired in the course of Federal Reserve monetary policy actions. A secondary source of income is derived from the provision of priced services to depository institutions, as required by the Monetary Control Act of 1980. Federal Reserve Banks are not, however, operated for a profit, and each year they return to the U.S. Treasury all earnings in excess of Federal Reserve operating and other expenses.

One critic of the Fed, Hillary Lister, has this to say:

The Fed makes money by, quite literally, making money. When the government or a bank (or in some cases a business or investors) needs money, and it is agreed by the Board that new money should be created, the government or bank purchases money from the Fed. The Fed prints the needed amount of money (at a cost of approximately $0.03 a bill), and loans the newly created money to the government or bank at face value plus interest, from which the Fed then profits.

The Fed differs from regular corporations in that profits are not its stated purpose; yet if the Fed were a single firm, it would qualify it as one of the most profitable companies in the world. In 1995 it made about $23.9 billion in profit.

The Fed does not get to keep most of the profit, though, and about 98% of its income is transferred to the U.S. Treasury, with the remaining profits divided between the Federal Reserve banks and stockholders.

So here we have even a fierce critic of the Fed admitting that the member banks get only a miniscule portion of the profits.

Critics of the Fed could argue that even a miniscule portion is still too much. Why should anyone at all, let alone the banks, get any kind of automatic government subsidy from the Federal Reserve System?

But, if Hillary Lister is correct, then it’s plainly an exaggeration to say, as some other Fed critics have claimed, that the Fed exists for the sole purpose of enabling the big private banks to bleed the rest of us dry.

Another issue I should research further is whether, on the whole, the Federal Reserve System has been better or worse than previous U.S. monetary systems. Certainly the Fed has lasted a lot longer than any previous system. Supporters of the Fed would probably say this means all the previous monetary systems were disastrous, whereas the Fed, though imperfect, has functioned relatively well. But some opponents of the Fed have claimed (1) that the Fed’s longevity means not that the Fed was an improvement over previous monetary systems, but only that, since 1913, the American public has been too dumbed down to revolt against a bad monetary system, and (2) that all previous monetary disasters were deliberately engineered by banks in order to manipulate the country into establishing a system like the Fed, to give the big bankers the power they wanted.

As evidence that the Fed is a bad system, opponents cite the Great Depression. Ben Bernanke, the current Chairman of the Board of Governors, admitted in a widely-quoted 2002 speech, “I would like to say to Milton [Friedman] and Anna [J. Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

And indeed, for the past 70 years, we haven’t yet had another monetary disaster like the Great Depression, although the right wing alternative media (funded to some extent by ads for survival gear, gold coins, etc.) have been predicting for at least the past few decades that such a disaster was just around the corner. The last major hullabaloo they managed to raise was in the late 1990’s, when they were predicting total chaos due to unfixed Y2K bugs. Well, it so happens that January 1, 2000 came and went without major incident, but then the U.S. economy did take a good wallop in the aftermath of September 11, 2001. So now the right wing alternative media seem to be using the 9/11 Truth movement as a way to scare people into supporting their larger agendas.

(Although there are indeed good reasons to believe that 9/11 was an inside job, I would hesitate to jump to the conclusion that the bankers are responsible, when there are plenty of other, more likely culprits. More about this in future posts.)

If indeed we do have a total monetary meltdown in the near future, then, it seems to me, a far more likely main culprit than the Fed would be Bush’s vast increases in military spending, which may have driven the national debt beyond the breaking point.

On the other hand, one valid criticism of the Fed might be that Bush’s vast increases in military spending would not have been possible without a fiat money system such as the Fed. A gold standard or a silver standard would have imposed harder limits.

Another relatively realistic criticism of the Fed is this one: Although we haven’t had another monetary disaster like the Great Depression, we’ve certainly had other monetary troubles such as inflation, which effectively robs everyone, including the banks. The Fed can to a large extent be blamed for inflation because the Fed controls the money supply.

But it should also be noted that, when deciding the money supply, the Fed faces a tradeoff between inflation and unemployment. (A too-high money supply results in inflation, whereas a too-low money supply results in a high unemployment rate. Determining the best middle ground is not a simple matter.) Also, before we conclude that the Fed should be abolished or even significantly reformed, we would need to compare, historically, the performance of the Fed with the performance of previous monetary systems. I have not yet studied this issue in anywhere near enough detail. But I would urge others to study it, from a variety of points of view, before jumping on the “Abolish the Fed!” bandwagon.

For me, as a person with left-leaning political views, it feels odd to be put in a position of defending banks. My aim here is not to defend the banks, but just to urge that criticisms thereof should be factually accurate.

(P.S., 11/13/2007: There is now some interesting discussion about the Federal Reserve System on page 3 of the thread We Are Change – September threads on right wing views in the Truth Action forum.)