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Just what is the Fed
By Melvin J. Howard
The birthplace of the Federal Reserve System was not Wall Street or Washington as people might think. Public scrutiny and transparency was never an option for the fed in the past. The Fed was started in a state with a proven track record of loyalty to wealth accumulation as a priority over the rights of the people. This was evident from the states long history of slavery, coupled with such a remarkable devotion to gold that it uprooted its indigenous inhabitants and marched them off to Oklahoma at the first smell of gold. This state was Georgia, and in 1910, a special meeting took on Jekyll Island. Duck-hunting was the excuse given for having to go there. But numerous historical accounts of this event reveal that the duck population remained fully in tact and, instead, the Federal Reserve System was designed. In Frank Vanderlips Autobiography. Mr Vanderlip attended the secret meeting and was President of National City Bank, which is now known as Citigroup today. Another account was written by Bertie Forbes, in a publication called Current Opinion in 1916. He went on to found Forbes Magazine. Interestingly today the Federal Reserve Bank of Minneapolis also has this same account on its web site, so it is "Official History").
Three years later, during the week before Christmas 1913 when several representatives were already on vacation, the US Congress passed the Federal Reserve Act, thereby giving birth to the Federal Reserve System. Today, though the gold standard is "no more", we still live with the legacy of that Jekyll Island. Mr. Warburg was also one of the designers. There was no public input. It has survived fairly well, with the exception of the 1929 crash and subsequent depression, because the general public trusts it. However, they do so mostly without understanding it. SO, How is money created, and what role does the Federal Reserve and its member banks play? Lets start with some common misconceptions about money, and why they are not true:
Misconception 1: You make money by going to work, or by selling something.
FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry for a purpose for which they saw fit to create (or really lend) money. When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank-money. However many non-bank types of so-called "money" raising instruments are increasingly being used by non-bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependant on, and rely on the confidence that they can be liquidated for, "bank money". We might call this other stuff "near money". Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will focus just on bank money.
Misconception 2: Money has something to do with gold and Fort Knox.
FALSE: The monetary system USED to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the "floating" of most national currencies, which were no longer pegged to a gold conversion standard. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits, which has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. Today's money is not backed by gold that is no secrete now it is backed by our trust in the monetary system. This is ultimately a trust in those that create and control the money supply. The commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes "In God we Trust", is perhaps the most telling statement of this trust.
Misconception 3: Money is Created by the Government Printing it.
FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government.
SO HOW DOES MONEY GET CREATED?
Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, it prints it". The Federal Reserve has no budget, quite simply because it doesn’t need one. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve has printed at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes. The Federal Reserve then creates a spurious "liability" on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of work.
Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan.
BANK SUPERVISION
One of the best means of prevention of financial crises (and therefore IMF bailouts) is stricter supervision of banks and other financial services companies, so that they don’t make too many risky bets that destabilize the markets. This is in the best public interests of a public that depends on stability of the banking system, and doesn’t have an alternative monetary system to fall back on. One would think that bank supervision would be done under the guise of a government body so that there could be some democratic accountability of the supervisor, and some representation of the public’s interests. But under the Gramm-Leach-Bliley Financial Services Reform Act of 1999 the regulator of all bank holding companies in the US is the Federal Reserve. They are also the supervisory body, which will monitor banks risk taking activities and their associated capital buffers under the new Basel Capital Accord.
Apart from the issue of ownership, the conflicts of interest with respect to the "central bank" are two fold. In most other countries the central bank the driver of monetary policy - and the bank supervisor - trying to make sure the financial system is safe - are two entirely different bodies. Alan Greenspan, the former Governor of the Federal Reserve Board, that overseas all the Federal Reserve Banks, said in his bid for being the bank regulator of choice, that regulation by a separate government body (such as the Office of the Comptroller of the Currency) devoted only to managing safety and soundness of the banking system would "inevitably have a long term bias against risk taking and innovation". Bur he left out that these risks are usually born by the public. Often banking officials forget that there is a public to worry about. That is, until a public bailout is needed. Studying the Fed, Bretton Woods and The Basel Accords is fascinating and it would take up much more space in this entry to explain.
By Melvin J. Howard
The birthplace of the Federal Reserve System was not Wall Street or Washington as people might think. Public scrutiny and transparency was never an option for the fed in the past. The Fed was started in a state with a proven track record of loyalty to wealth accumulation as a priority over the rights of the people. This was evident from the states long history of slavery, coupled with such a remarkable devotion to gold that it uprooted its indigenous inhabitants and marched them off to Oklahoma at the first smell of gold. This state was Georgia, and in 1910, a special meeting took on Jekyll Island. Duck-hunting was the excuse given for having to go there. But numerous historical accounts of this event reveal that the duck population remained fully in tact and, instead, the Federal Reserve System was designed. In Frank Vanderlips Autobiography. Mr Vanderlip attended the secret meeting and was President of National City Bank, which is now known as Citigroup today. Another account was written by Bertie Forbes, in a publication called Current Opinion in 1916. He went on to found Forbes Magazine. Interestingly today the Federal Reserve Bank of Minneapolis also has this same account on its web site, so it is "Official History").
Three years later, during the week before Christmas 1913 when several representatives were already on vacation, the US Congress passed the Federal Reserve Act, thereby giving birth to the Federal Reserve System. Today, though the gold standard is "no more", we still live with the legacy of that Jekyll Island. Mr. Warburg was also one of the designers. There was no public input. It has survived fairly well, with the exception of the 1929 crash and subsequent depression, because the general public trusts it. However, they do so mostly without understanding it. SO, How is money created, and what role does the Federal Reserve and its member banks play? Lets start with some common misconceptions about money, and why they are not true:
Misconception 1: You make money by going to work, or by selling something.
FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry for a purpose for which they saw fit to create (or really lend) money. When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank-money. However many non-bank types of so-called "money" raising instruments are increasingly being used by non-bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependant on, and rely on the confidence that they can be liquidated for, "bank money". We might call this other stuff "near money". Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will focus just on bank money.
Misconception 2: Money has something to do with gold and Fort Knox.
FALSE: The monetary system USED to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the "floating" of most national currencies, which were no longer pegged to a gold conversion standard. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits, which has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. Today's money is not backed by gold that is no secrete now it is backed by our trust in the monetary system. This is ultimately a trust in those that create and control the money supply. The commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes "In God we Trust", is perhaps the most telling statement of this trust.
Misconception 3: Money is Created by the Government Printing it.
FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government.
SO HOW DOES MONEY GET CREATED?
Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, it prints it". The Federal Reserve has no budget, quite simply because it doesn’t need one. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve has printed at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes. The Federal Reserve then creates a spurious "liability" on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of work.
Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan.
BANK SUPERVISION
One of the best means of prevention of financial crises (and therefore IMF bailouts) is stricter supervision of banks and other financial services companies, so that they don’t make too many risky bets that destabilize the markets. This is in the best public interests of a public that depends on stability of the banking system, and doesn’t have an alternative monetary system to fall back on. One would think that bank supervision would be done under the guise of a government body so that there could be some democratic accountability of the supervisor, and some representation of the public’s interests. But under the Gramm-Leach-Bliley Financial Services Reform Act of 1999 the regulator of all bank holding companies in the US is the Federal Reserve. They are also the supervisory body, which will monitor banks risk taking activities and their associated capital buffers under the new Basel Capital Accord.
Apart from the issue of ownership, the conflicts of interest with respect to the "central bank" are two fold. In most other countries the central bank the driver of monetary policy - and the bank supervisor - trying to make sure the financial system is safe - are two entirely different bodies. Alan Greenspan, the former Governor of the Federal Reserve Board, that overseas all the Federal Reserve Banks, said in his bid for being the bank regulator of choice, that regulation by a separate government body (such as the Office of the Comptroller of the Currency) devoted only to managing safety and soundness of the banking system would "inevitably have a long term bias against risk taking and innovation". Bur he left out that these risks are usually born by the public. Often banking officials forget that there is a public to worry about. That is, until a public bailout is needed. Studying the Fed, Bretton Woods and The Basel Accords is fascinating and it would take up much more space in this entry to explain.
