New York City activist

September 26, 2007

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.)



  1. […] Some of the rhetoric against the Federal Reserve System […]

    Pingback by The 9/11 Truth movement needs a more visible, better organized left wing! « New York City activist — September 30, 2007 @ 3:21 pm | Reply

  2. A paper on fractional reserve banking (I’m no Rothbardian or libertarian, but this paper gives an independent description of the debt-money scam – made me realise that railing against the Fed wasn’t just a high school drop-out internet phenomenon):

    [Comment edited by blog owner Diane. Please note that my comment policy does not allow links to non-downloadble videos. – Diane]

    The Fed *looks* legitimate *of course*. Fractional reserve banking is the scam which no one sees. Under this system, all banks everywhere are the enemy of the people.

    Comment by infohoe — October 21, 2007 @ 11:15 pm | Reply

  3. To infohoe:

    You said you’re not a Rothbardian or libertarian. How would you describe your own political views?

    I’ve posted a response to Rothbard’s paper here: Fractional reserve banking: A response to some of the hullabaloo.

    Comment by Diane — November 1, 2007 @ 12:46 am | Reply

  4. In Finding Our Way Out of Oklahoma, Alternative Press Review, Volume 2, Number 3, Winter 1996, Adam Parfrey says the following, about perceptions of anti-semitism in the militia movement (with some obvious parallels to the 9/11 Truth movement):

    The ADL would love to do away with militias for perceived anti-Semitic overtones in militia conspiracy literature. This perception is at least partially due to Jewish oversensitivity. When a militia man talks about international bankers, the ADL believes he is using code words to describe Jewish control of the monetary system.

    Steven Jones once got in trouble for talking about “international bankers,” as reported in the news story BYU’s Jones denies bias by Tad Walch, Deseret Morning News, Thursday, Sept. 14, 2006. Indeed, Jones himself probably was not deliberately using Jew-hater codespeak. However, there is a real history of Jew-haters hiding behind anti-“banker” rhetoric and even seemingly scholarly analysis. An example is Eustace Mullins and his book Secrets of the Federal Reserve. So, it’s important to make sure our critiques of the banking system are based on facts and that we’re not blindly echoing the claims of Jew-haters about “the banking system.”

    Comment by Diane — November 1, 2007 @ 6:56 pm | Reply

  5. (This comment is an edited pingback.)

    The post linked below contains a brief summary and index to the information I’ve collected so far about the Federal Reserve System and various right wing populist allegations about it.

    – Diane

    Pingback by Please do NOT trust Eustace Mullins as an authority on the Federal Reserve System! « New York City activist — December 23, 2007 @ 1:01 am | Reply

  6. Lister’s 98% seems a bit of an overstatement, though it is true that the major portion of Federal Reserve earnings are transferred to the Treasury. Just to check on the income and expenses table for 2006, we have:

    Net income before payment to U.S. Treasury 34,194,762
    Payments to U.S. Treasury (interest on Federal Reserve notes) 29,051,678

    My calculator gives me about 85% as the percentage of return to the US Treasury for 2006. Certainly still a large majority, but not 98%.

    [Comment by Patrick S. McNally, edited by blog author Diane to HTML-ize and prettify links.]

    Comment by patricksmcnally — February 18, 2008 @ 10:22 pm | Reply

  7. Somewhat related, the total federal debt in millions for 2006 is given (on the U.S. Treasury Department site) as $8,530,366 while total assets in millions held by the Federal Reserve in 2006 (according to the Fed’s 2006 annual report) is listed as $778,915 or 9.13% of the federal debt.

    [Comment by Patrick S. McNally, edited by blog author Diane to HTML-ize and prettify links.]

    Comment by patricksmcnally — February 18, 2008 @ 11:42 pm | Reply

  8. Thanks very much for the info and especially the link to the Fed’s financial report, which, for some reason, I was unable to find earlier.

    However, in between the two lines you quoted from the income and expenses table for 2006, we also have the following line:

    Dividends paid 871,255

    So this doesn’t look like 15 % going into dividends to member banks. More like between 2 and 3 %, close to the 2% suggested by Lister’s figure.

    Anyhow, after the three lines we’ve just now looked at, there’s also the following mysterious line, which at some point I should look into further:

    Transferred to/from surplus 4,271,828

    Doesn’t say exactly where this money gets “Transferred to/from.”

    If it gets transferred to/from the Treasury, albeit in a form other than “interest on Federal Reserve notes,” then the 98% I mentioned earlier, from Lister, is approximately correct after all.

    In any case, it does seem that we have only between 2% and 3% of profits going into dividends to member banks. One could argue that even that is too much and a “scam,” but it falls far short of the rhetoric we’ve all heard about how “the Fed is as Federal as Federal Express.”

    Comment by Diane — February 19, 2008 @ 3:04 am | Reply

  9. Yes it is good to clarify the distinction between saying that money is paid to the Treasury, paid as dividends to member banks, and filed as surplus. They each show up as separate categories. Given the tendency of some ideologues to assume that whatever is not given to the Treasury must have been paid as a dividend that distinction is worth noting. You’ll notice that the chart ends with a listing of surpluses for each member bank and in total, but that these surpluses are not counted as having been paid out to member banks as private profit. The surplus account exists for banks to draw upon when attending to practical matters throughout the year, but cannot simply be paid out to private shareholders. That still isn’t, as far as I can tell, the same thing as reimbursing this to the Treasury. Not that I detect any special conspiracy in that wish to accumulate a surplus apart from dividends paid and money returned to the Treasury. But this distinction may be a cause for the more honest differences of interpretation as to how much is returned to the Treasury.

    Comment by patricksmcnally — February 19, 2008 @ 7:35 am | Reply

  10. It might be worth noting that 2006 was a bit higher than usual in terms of the amount filed as surplus. If we go back to 2005 (Income and Expenses of the Federal Reserve Banks, by Bank, 2005), the numbers listed as transerred to/from the surplus are smaller than they were in 2006. In this case the amounts listed in thousands of dollars are:

    Net income before payment to U.S. Treasury 23,520,080
    Dividends paid 780,863
    Payments to U.S. Treasury (interest on Federal Reserve notes) 21,467,545
    Transferred to/from surplus 1,271,672

    If you compare that with 2006 you’ll see that the major difference is in the surplus transfer which was larger in 2006. For 2005 if were to just focus on net income versus payments to the Treasury we’d get 91.27%. Still not 98%, but higher than 85%.

    [Comment by Patrick S. McNally, edited by blog author Diane to HTML-ize and prettify link.]

    Comment by patricksmcnally — February 19, 2008 @ 8:07 am | Reply

  11. Thanks very much for all the information and links you’ve posted here.

    I would be very interested to hear your opinion of the excerpts from Paul Krugman’s writings that I posted here in the Truth Action forum. I would also be very interested in your thoughts about infohoe’s reply and my reply to infohoe. I would also be interested in your comments on other aspects of this entire discussion in the Truth Action forum, including Nicholas Levis’s post here.

    P.S.: I would also be interested in your opinion of the economists recommended in this post by Kim.

    Comment by Diane — February 19, 2008 @ 4:58 pm | Reply

  12. If I were to pick out any viewpoint deserving of endorsement it would be the one given by Bill Van Auken and Jim Lawrence in their 2004 election platform for the Socialist Equality Party:

    To establish the economic foundation for the reorganization of economic life in the interests of the broad mass of the working people, we advocate the transformation of all privately owned industrial and manufacturing corporations valued at $10 billion or more—companies that, taken together, control the decisive share of the US economy—into publicly owned enterprises, with full compensation for small shareholders and the terms of compensation for large shareholders to be publicly negotiated. The SEP also proposes the nationalization of all large banking and insurance institutions. In addition, the SEP advocates the nationalization of the railroads, airlines, telecommunications and power utilities, and the placement of all critical natural resources under public ownership and control.

    That, to me, puts things nicely on an even line. Instead of pretending that every shift in a developing capitalist economy can be attributed to a bankers conspiracy, they place the issue of banks within a suitable context. Hyping the theme of bankers seems more to be a tactic for pushing through deregulations ala Ron Paul & Ron Reagan. Not something that I’d ever want to support.

    [Comment by Patrick S. McNally, edited by blog author Diane to HTML-ize and prettify link.]

    Comment by patricksmcnally — February 20, 2008 @ 3:16 am | Reply

  13. Most of the anti-Fed tirades which I’ve come across have usually come from libertarians or other conservatives who draw what, to me, is an overidealized picture of the 19th century USA. It’s more like what might evolve if tomorrow we discovered a way of settling human colonies on the moon and suddenly wide open areas of unsettled territory were available for settlement without any existing laws or regulations in place. The real world economy, restricted to the finite space of the planet earth, can’t operate that way forever. This doesn’t mean that I support every policy decision ever made by the Fed. But I have to say that the real world economy is more complex than the anti-Fed CTers would allow for.

    Comment by patricksmcnally — February 20, 2008 @ 3:21 am | Reply

  14. There are actually two possible interpretations which can be given to the various anti-Fed campaigns and the difference between these two is usually obfuscated by Right-wing rhetoric. The liberal interpretation would be to advocate that the member banks of the Federal Reserve System should be nationalized. While this isn’t inherently a bad idea, one shouldn’t overinflate the potential signiicance of such measures. The Bank of England was nationalized in 1946. The Bank of Canada was nationalized in 1938. None of this really translated into anything very significant. A bank which operates within the framework of the capitalist system follows the rules of that system, whether it is fully nationalized or not. There is no serious evidence put forward by anyone, anywhere to support the allegations that the Federal Reserve somehow functions as a secret command center controlling things from behind closed doors. The Federal Reserve was actually created as one of the early liberal reforms in 20th century capitalism because it introduced regulations on heretofore unregulated banking processes. From the beginning conservatives hated the idea of a Federal Reserve precisely because it introduced some degree of regulatory control.

    Comment by patricksmcnally — February 20, 2008 @ 3:27 am | Reply

  15. Now that leads to the second interpretation of the anti-Fed slogans. Traditionally the people who have invoked the charge that “the Federal Reserve is a private bank” have been privatization ideologues in every other respect. It’s hard to imagine such political leadership really carrying through the liberal interpretation of the anti-Fed slogan and nationalizing all member banks of the Federal Reserve. What’s more reasonable to expect of someone Ron Paul is a push for further deregulation of the Reaganite kind. That political difference between the liberal interpretation which might advocate nationalizing the member banks of the Federal Reserve versus the conservative interpretation which views deregulation under anti-government slogans as the answer is frequently obfuscated by rhetorical charges which assign the Federal Reserve System all-embracing powers which it does not possess. That type of rhetoric has a way of drawing many liberals in behind a Right-wing program without following conclusions to the their logical ends. Just consider how many traditional left-liberals have gone running behind Ron Paul who openly hails Ronald Reagan as his hero while, at the same time, many of these Paulistas are spending their time cursing at something which they call “neo-conservatism” and which first came into power through … the Reagan administration. That kind of logical disparity is typical of former liberals who get sucked in behind anti-Fed slogans which simultaneously advocate deregulation measures (very much in line with what neo-conservatives pushed for during the Reagan years) and yet attack the Federal Reserve a giant conspiracy threatening some long lost true American heritage that can only reached through an admirer of Ronald Reagan.

    Does the Fed really have the power to abolish unemployment simply increasing the money supply, as Krugman suggests? That view seems a bit dated. The classical notion of “legitimate profit” such as it was defined in early capitalism was always bound to the need to achieve steady economic “growth,” where “growth” is defined by the creation of new products and services. Growth as a concept rests on the concept of value, where the latter is defined stages starting from the land and natural resources, the body of value given to us by the natural world, extending to include human labor power as a force capable of working on and with the natural world, and finishing in the creation of really useful products and services derived from the natural world by the application of human labor. When we speak of a growing economy what is usually implied is an increase in the products and services available to people through the innovative application of human labor to the natural world. This increases the body of value in an economy and hence necessitates the increase in the money supply to prevent deflation.

    That is why fractional reserve banking has always been a necessary component of economic growth. To be able to start new businesses with new inventions in an already stabilized economy one must invest money, time and labor in a developmental process which takes away from the already equilibrated economy. For this to not have recessionary consequences the money which covers such an investment must come from outside of the already equilbrated economy and that can only mean credit loans which grant the money without worrying whether or not it exists in print anywhere. Once this is done the investor can go on and spend the money credited to them to create a new meaningful enterprise which increases the volume of value and hence justifies the printing of new money which can then retroactively seal the apparent hole in the economy created by the earlier credit loan. This was the way that the capitalist economy functioned more or less up until the 1970s. There is no evidence that the Federal Reserve ever conspired to alter this form of functioning in the capitalist economy, and plenty of evidence to show that the Fed sought to prolong it.

    Keynesianism was invented at a time when world capitalism was already developed enough to feel the strains on it, but still had many potentials for further development. Keynesianism carries the logic behind credit loans to its natural culmination point. Since credit loans can be justified with the anticipation of further economic growth eventually occurring, Keynesianism actually postulates that an economy can be stimulated by anticipating in advance that economic growth will occur and will require an increase in the money supply and hence raising the money supply in advance is seen as a way of accelerating this growth process. This worked well in the USA from the end of WWII into the sixties. Veterans returned from war in the 1940s and were granted GI Loans through a policy of easy credit which the Federal Reserve implemented. That allowed many to become part of what was defined as the “growing American middle-class.” Despite charges by conservative ideologues that the Fed is an enemy of the middle-class, the financial policies of the Fed did a lot to enable this spread of middle-class prosperity.

    But the Fed can only work with what exists in the real world. The Fed does not control economic reality. It responds to it and can attempt to encourage or disourage one or another facet of it, and no more. What has changed within the last 50 years is that the economy today is far more developed. Legitimate capitalist profit, defined as a significant increase in the wealth of one individual that doesn’t compromise the wealth of others to any extreme degree, can only occur when the economy creates new products and services which seriously aid human welfare. 200 years ago as the Industrial Revolution was taking off there was a huge area of undeveloped productive potential. Although many brutalities occurred in the early factories, it was then possible to argue that the leading cause of human misery was simply the undeveloped economy. Higher development, better industry, would lead to the removal of human misery. Under those conditions it was legitimate to award a profit to someone who invested in a business which seemed to be working in this direction.

    But today the world’s industrial capacity is so enormous that there really shouldn’t be any unmet basic human needs in the world. With our current capacity everyone should be able to work for a comfortable living and still have free time for individual development as they see fit. If our economy today has not achieved this it is because it is not considered sufficently profitable to warrant an investment towards this goal. In that case, I don’t see how increasing the money supply could really affect these trends. For a profit-seeking enterprise to respond to an increase in the money supply by raising employment that enterrpise must first see the potential for more workers to produce more goods of real value that will meaningfully increase the body of value within the economy. But if a huge developed capacity for meeting human needs is not be used at the present, then why should we anticipate that producing a bit more will really increase the body of true value available to humans. Maybe that it will do is illustrate the failure of humans to use their productive capacity towards servicing real needs. If that is the case, then there isn’t so much of an incentive for private business to respond to an increase in the money supply by raising employment. They might just as well respond to it by raising prices while producing the same quantity as before.

    That basic inability of Federal Reserve economic policies to motivate business to attend to public servicing when it is not clearly profitable is something which lies outside of the control of the Fed.

    Comment by patricksmcnally — February 20, 2008 @ 3:28 am | Reply

  16. The problem with all of these various banking conspiracy theories, apart from the fact that they repeatedly get details wrong about such issues as what does the Fed do with its profits, is that they are designed as a distraction to steer people back into the search for the good anti-union capitalist manufacturers like Henry Ford who may then stand up to the bankers conspiracy and take us back to the 19th century. That’s a swindle and someone like Griffin is promoting the swindle when he misuses words like “freedom,” “capitalism” to relabel specific stages in the development of capitalism.

    What we’ve seen more of in recent years has been not so much people out-and-out adopting wholehog the views of Right-wing hoaxers like Griffin but rather introducing elements of that type of reasoning into their dialogue in a search for something “critical” of “the system” which seems like it may be able to adapt to the apparent “victory” of Reaganism. Again, the root cause of this type of pattern is simply demoralization among people who have in the past thought of themselves as somehow “Left of Center.” The type of program put forward by the Socialist Equality Party in 2004 and 2006

    transcends the false boundaries maintained by anti-banker ideologies of the Right. That is the type of direction which any progressive future would go in.

    Comment by patricksmcnally — February 20, 2008 @ 3:32 am | Reply

  17. Thanks very much for all your comments. To respond to some of what you said in your next-to-last comment:

    Does the Fed really have the power to abolish unemployment simply increasing the money supply, as Krugman suggests? That view seems a bit dated.

    First, I’m not sure whether Krugman believes that the Fed has the ability to abolish unemployment totally, but apparently he does believe that the Fed has the ability to reduce unemployment significantly more than it now does.

    You then go on to talk about the notion of a “legitimate profit.” I don’t see what that has to do with the Fed’s power to reduce unemployment.

    As I understand it, the way that increasing the money supply is supposed to reduce unemployment is that, if people have more money to spend, they’ll buy more, hence there will be more demand, hence sellers can sell more, hence they’ll hire people to produce and sell it.

    I don’t see how the above is affected by any changes since 1970. You wrote:

    For a profit-seeking enterprise to respond to an increase in the money supply by raising employment that enterrpise must first see the potential for more workers to produce more goods of real value that will meaningfully increase the body of value within the economy.

    What? It seems to me that all the enterprise needs to see is an opportunity to make a profit. What does an individual business care about the total “body of value within the economy”?

    As for hiring more workers vs. just raising prices: That would depend on the particular business, I suppose.

    Remember too that Krugman is talking here about fighting recessions. Recessions are caused by a drop in people’s willingness to spend money. Krugman says the remedy for that is to (temporarily) put more money into the economy.

    Perhaps I’m misunderstanding your objections? If so, could you please clarify?

    Comment by Diane — February 20, 2008 @ 4:34 am | Reply

  18. Krugman is describing short-term cycles in the economy when he speaks of reducing recessions by raising the money supply. I’d view the long-term trends in the global economy as having an importance which Krugman seems to downplay. Nick Beams gives a fair overview of the long-term trends in a 5-part series starting with the first part:

    Comment by patricksmcnally — February 20, 2008 @ 12:17 pm | Reply

  19. In this post in the Truth Action forum, Nicholas Levis has called attention to the following:

    The Naked Hegemon, Part 1: Why the emperor has no clothes by Andre Gunder Frank, Asia Times, Jan 6, 2005
    The Naked Hegemon, Part 1: The center of the doughnut by Andre Gunder Frank, Asia Times, Jan 6, 2005

    What do you think of these articles?

    Comment by Diane — February 21, 2008 @ 6:33 pm | Reply

  20. Those articles seemed to mainly be describing the way that US imperialism has forced the rest of the world into relying on the dollar, particularly for oil purchases, and therefore has made the world at large support unlimited “debt” spending which can never be called for collection by foreign “lenders.” It’s a case of military power being used to enforce a subsidies from abroad for the same military power while US interventionism creates conditions whereby foreign lenders can never call for a debt collection in the usual manner. Very much like a protection racket where the Syndicate extorts paymnets from shopowners who are never able to attach conditions to their payments. These facts are very far removed from the traditional bankers conspiracy meme ala G. Edward Griffin and others. I’m inclined to doubt that the person referring you to these articles really meant it that way, though perhaps they weren’t clear in their mind what they meant.

    The traditional genre of the international bankers conspiracy literature posits several axioms that are basic and very counterproductive to real forward-thinking politics.

    First, it rests heavily on counterposing finance capitalists, or perhaps even some very small subset thereof, to manufacturing capitalists such as Henry Ford. Ford himself promoted a variant which accented Jewish financiers as the special coterie among finance capitalists, though it isn’t always necessary for the form. Perhaps a more recent example of this is with the focus on the Grace Report by J. Peter Grace. Grace was a Democrat who took out a full-page ad in the New York Times supporting Reagan’s tax cut. But the Grace Commission Report is often cited by people attempting to argue that the Federal Reserve should be able to cancel the national debt (though in fairness to Grace, he makes no such claim). A person’s eyebrows should begin rising skyhigh when a commission under Ronald Reagan begins speaking of national debt. It was certainly intended as an ideological diversion of some sort. To the extent that one can pick out any single valid point it would be the assertion that the national debt entails interest charges which make it difficult to pay off the primary loans. That’s quite believable. But it doesn’t tell us anything about how the Federal Reserve or any other monetary system which might take its place could simply abolish the debt while the US government goes on with the same types of spending and tax-cutting patterns followed by Reagan. The Grace Report is typical of diversionary tactics practiced by Grace who set up the Citizens Against Government Waste which has been accused of acting as a corporate lobbying front behind an appearance of grassroots support.

    Second, and in line with the first point, the group of finance capitalists centered on are characterized as foreigners in some way whereas the alternate group of capitalist manufacturers are seen as nativists, real Americans, and the like. Although Henry Ford was anti-union and his influence did a lot to derail the development of public transit such as is well-advanced in Europe, Ford’s coterie of admirers often characterized him as a sort of man of the people. Often the group of finance capitalists centered on are presented as working on behalf of foreign banks in some way or other rather than for “national goals” of some type or other. I should note that the Asia Times pieces which you cited point in the opposite direction. These articles discuss how foreign banks have been pressured by US imperialism’s extortionist racket into subsidizing the US war machine without any hope of really calling in their loans. The fact that they need US dollars to be able to make puchases in a world dominated by the US empire has forced them to hold the US dollar up when any other nation’s currency would be allowed to collapse. That represents extortion from foreign “lenders,” rather than evidence that foreign bankers control the USA.

    Another feature is that the earlier era of developing capitalism is often characterized in a eulogistic way as a kind of great long lost era to be returned to somehow. G. Edward Griffin even misuses terminology by describing as “liberty” and “capitalism” what might better be referenced as “early entrepreneurial capitalism” and “late monopoly capitalism.” The difference in terminology here represents a very basic divergence of viewpoints. Griffin’s view presents the departure from “liberty” to “capitalism” as brought about by a bankers conspiracy, whereas many of the changes in the socio-economic structure of American capitalism that Griffin focuses upon were really just a logical consequence of the high development of productive forces. The early entrepreneurial capitalist economy of 19th century North America was a developing economy growing in and across undeveloped regions. The modern-day late monopoly capitalist economy of the 21st century is a highly developed economy with more capacity than it comes close to really using. A very bad effect of theories of this type is that they lead people into scrounging through the 19th century for clues as to how to return to an earlier era by perhaps restoring the gold standard or some such thing.

    These are some of the more basic problems with the traditional bankers conspiracy meme. Letting capitalist imperialism practiced by one’s own nation off the hook, covering up for the fact that capitalism is increasingly out of date, idealizing an outgrown era from long ago and fancying that certain good capitalist exploiters can take us back to it, etcetera. Nothing like that was present in the piece you referred to.

    One thing which has definitely influenced the way people talk is simply the demoralization which infected the various Left-wing groups with the end of the Cold War. That has led many into attempting to further adapt to segments of the Right, at least rhetorically. Consequently sometimes verbiage which comes from the traditional version of Right-wing bankers conspiacy literature can get mixed in with discussions that start from something like the Asia Times pieces which you listed, although the arguments in those articles actually go against the view of foreign bankers controlling the USA and present the US military-industrial complex as a force able to extort from foreign banks. To the extent that confused ideas get mixed in with rhetorical flourishes starting from such an article, it mainly represents the crisis of confidence which has afflicted many one-time “Leftists” since 1991. The SEP’s efforts certainly represent one of the better attempts

    to try formulating issues which can be taken to a practical political level such as they did in the elections of 2006. Something along such lines is required for people to begin stepping beyond the demoralization which grew out of the alleged “death of communism” and “end of history.”

    Comment by patricksmcnally — February 22, 2008 @ 12:52 am | Reply

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