The Federal Reserve Act of 1913 was primarily passed both to prevent banking panics like the Great Panic of 1907 and to remove the stock markets’ and banks’ heavy influence on the economy. Originally conceived by representatives of major banks and industry leaders as being almost entirely privately owned, the Federal Reserve Act was presented to Congress in 1912 by Republican majority leader Nelson Aldrich. House Democrats next proposed an entirely public centralized bank, and some conservative Democrats proposed a private, but de-centralized, banking system. The Federal Reserve System was eventually decided upon as a hybrid of public and private sections.
The current Federal Reserve System is composed of 12 institutions, and remains a hybrid of public and private ownership. The majority shareholders are large private banking institutions who each receive a 6% dividend share of revenue per year. This group of private banks is able to elect each of the members of the board of directors, and five of the twelve members of the Federal Open Market Committee, which is the ultimate authority on regulating the money supply and setting interest rates. While the President of the United States appoints the remaining seven (majority vote) members of the Federal Open Market Commitee, it is clear that the Federal Reserve is still
considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.[1]
The only accountability for the system began in 1978 with the Federal Banking Agency Audit Act, the Government Office of Accountability (GOA) was given permission to periodically audit the Federal Reserve, and the ability to alter it’s responsibilities by statute. It is important to note, however, that the auditing abilities may not include:
1. Transactions for or with a foreign central bank or government, or non-private international financing organization
2. Deliberations, decisions, or actions on monetary policy matters
3. Transactions made under the direction of the Federal Open Market Committee
4. Any part of a discussion or communication among or between members of the board of Governors and officers and employees of the Federal Reserve System Related to items (1), (2), or (3)
With the advent of a centralized banking system, the Federal Reserve could theoretically calm the waters of the economic ocean by tightening and loosening the money supply in response to the economic climate. For such a system to work, complete transparency and close monitor is necessary. When put into practice, however, it is far too easy to simply print more money when it is perceived as necessary, such as wartime or recession (in extreme cases, leading to hyperinflation, as happened in Germany after World War II).
A standard of monetary trade acquires its exchange value from the labor expended to acquire it. Gold has traditionally been a standard backing to currency, considering the reduction in difficulty of acquiring it roughly mirrors the total expansion of commodities in a society. An ounce of gold today is approximately equivalent in purchasing power to an ounce of gold at another time history (when converted to use-value, the natural reduction of the intrinsic value of gold, or any other monetary standard).[2] With the elimination of the gold standard for currency in 1971, the United States system completed its transition from a representative money system to a fiat money system. A representative money system uses intrinsically valueless money, such as paper notes, that represent a quantity of something of known value, such as gold, silk, or silver. A fiat monetary system gives value to currency by fiat, or by an arbitrary statute, without actual physical backing. Fiat money systems have been shown throughout history to be subject to unreasonable inflation, and subsequently abandoned. In the early days of the United States, a fiat money system known as “continental currency” was put into practice, but abandoned because of the high inflation rates (leading to the colloquial phrase “not worth a continental”). In response to this failure, the constitution was written with the clause that
The Congress shall have Power To coin Money, regulate the Value thereof, and of foreign coin and fix the Standard of Weights and Measures; no state shall make anything but gold and silver coin a Tender in payment of debts.
This scenario has played out numerous times throughout history, from fiat systems in early China to the “bills of credit” used in England’s American colonies. Indeed, The United States has gone through several cycles of inflationary fiat money, followed by effectively deflationary “hard” money.
The bulk of money used by Congress is borrowed from the Federal Reserve, at interest. [3] Taxes and other sources of revenue simply do not fully cover congressional spending. If the resultant debt cannot be paid for by revenue gains (such as taxes), more money must once again be borrowed, still at interest, creating a cycle of debt. Inflation is the natural result, due to the devaluing of currency, not the increase of the value of commodities.[4]
Wages and commodity prices are determined by the perceived total amount of currency in the system. Should the total amount of currency suddenly increase, there is a time gap before the market would become “aware” of this influx and appropriately raise the prices of commodities. In this way, the first obtainers of the newly created currency are benefactors and are able to purchase goods at prices that under-estimate the amount of money in the system, in effect under-paying for the commodities purchased.
The result of inflation is that, on average, money earned one day through labor will have less value the next. Since the purpose of currency is that it should be a constant exchange medium to facilitate the free trade of commodities, inflation, and the system that creates it, under-values and exploits the labor of the earner. In this system, the value lost to the earner goes to the creator of the newly made currency- namely, the shareholders of the Federal Reserve.
What is the result of this system? As T. Smeedng wrote,
Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be... the majority of large gains are indeed at the top of the distribution.[5]
The definite trend since the institution of the Federal Reserve is greater discrepancy between the upper and lower income classes, most dramatically since the elimination of the gold standard in 1971.[6]When the Federal Reserve System was put into place, the Gini coefficient (a measure of income inequality) began to fluctuate wildly, in a steep upwards trend. [7] Heavy government spending in the Post-Depression era mitigated this trend, leading to a lower Gini coefficient, but resulting in a skyrocketing national debt.8Once the gold standard was fully eliminated in 1971, the Gini coefficient once again began to climb, this time at a predictably constant rate, as money was steadily channeled away from society and into the pockets of a select few.
The final view is one that does not necessarily points to a solution, but instead highlights a problem.Twenty-two years after the Federal Reserve System was created, the great depression hit, showing that centralized banking had not fulfilled its primary goal in calming the economic debt fluctuations. In fact, not only did the debt fluctuations begin to occur at a nearly identical frequency, but they began to fluctuate with much greater intensity.[8] Much as Marx showed the instability of the capitalist system by the underpayment and exploitation of labor, the creation of non-labor backed currency is essentially creating value from nothing, and is contrary to the nature of an economy where wages and prices are still dictated by labor, leading to instability and exploitation. Since the interest rate of banks almost always outstrips the inflation rate, those with the most money in savings (the upper earning percentiles) do not feel the effects as much as those whose money supply is much more variable (lower and middle earning percentiles). With technological progression, the total amount of labor to create a product tends to decrease with time, which consequently leads to a decrease in the value of commodities. The fact that prices are increasing highlights the contrary nature of the fiat monetary system to a stable system. If there is to be a stable economic system, the fiat money system, and the current Federal Reserve System that perpetuates it, must be eliminated.
[1] Board of Governors of the Federal Reserve System. "Frequently Asked Questions: Who Owns The Federal Reserve"
[5] Smeeding, T. (2005). Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective. Social Science Quarterly, 86, 956-983.
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