Federal Reserve

From TinWiki.org

The Federal Reserve System, also known as The Fed, is the central bank of the United States. The Federal Reserve System is a quasi-governmental/quasi-private banking system.

The Federal Reserve System was created during the administration of Woodrow Wilson, through the Federal Reserve Act of December 23rd, 1913. (Act of December 23, 1913, ch. 6, 38 Stat. 251, codified in part at Chapter 3 of title 12 of the United States Code). The Reserve Banks opened for business on November 16th, 1914. Federal Reserve Notes were created as the foundation of the legislation, to provide a supply of fiat currency whose value could be manipulated.

Contents 1 Composition 2 Control of the money supply 2.1 Repurchase agreements 2.2 Outright Transactions 3 Implementation of monetary policy 4 Discount rates 5 The Federal Reserve Banks and the member banks 6 Criticisms 6.1 Opacity 6.2 Business cycles, libertarian philosophy and free markets 6.3 Hidden role of central banking 7 See also 8 Notes 9 Bibliography 9.1 Recent 9.2 Historical 10 External links 11 Relevant Discussion Threads

Composition

• A presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.
• A Federal Open Market Committee
• Twelve regional Federal Reserve Banks located in major cities, each with its own nine-member board of directors
• Numerous private U.S. member banks, with non-transferable stock in their regional Federal Reserve Bank
• Various advisory councils.

Each privately owned Federal Reserve Bank and each member bank of the Federal Reserve System is subject to oversight by a Board of Governors. The seven members of the board are appointed by the President of the United States and confirmed by the United States Senate. Members are selected to terms of 14 years (unless removed by the President).

Control of the money supply

The Federal Reserve System controls the size of the money supply by conducting open market operations, in which the Federal Reserve lends or purchases specific types of securities with authorized participants, known as primary dealers. All open market operations in the United States are conducted by the Open Market Desk at the Federal Reserve Bank of New York, with an aim to making the federal funds rate as close to the target rate as possible.

The Open Market Desk has two main tools to adjust the monetary supply: repurchase agreements and outright transactions.

Repurchase agreements

Repurchase agreements (repos) are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer’s reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer’s reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days, though the Fed will most commonly conduct overnight and 14-day repos.

Since there is an increase of bank reserves during the term of the repo, repos temporarily increase the money supply. The effect is temporary since all repo transactions unwind, with the only lasting net effect being a slight depletion of reserves caused by the accrued interest (think one day of interest at a 4.5% annual yield, which is 0.0121% per day). The Fed has conducted repos almost daily in 2004-05, but can also conduct reverse repos to temporarily shrink the money supply.

In a reverse repo, the Fed will borrow money from the reserve accounts of primary dealers in exchange for Treasury securities as collateral. At maturity, the Fed will return the money to the reserve accounts with the accrued interest, and collect the collateral.

Outright Transactions

The other main tool available to the Open Market Desk is the outright transaction. In an outright purchase, the Fed buys Treasury securities from primary dealers and finances the purchases by depositing newly created money in the dealer’s reserve account at the Fed. Since this operation does not unwind at the end of a set period, the resulting growth in the monetary supply is permanent. That is to say that the principal growth is permanent but a yield on maturity of the security is still charged this is usually at 12 - 18 months on outright transaction.

The Fed also has the authority to sell Treasuries outright, but this has been exceedingly rare since the 1980s. The sale of Treasury securities results in a permanent decrease in the money supply, as the money used as payment for the securities from the primary dealers is removed from their reserve accounts, thus working the money multiplier process in reverse.

Implementation of monetary policy

Buying and selling federal government securities.
When the Federal Reserve System buys government securities, it puts money into circulation. With more money around, interest rates tend to drop, and more money is borrowed and spent. When the Fed sells government securities, it in effect takes money out of circulation, causing interest rates to rise and making borrowing more difficult.}}

Regulating the amount of money that a member bank must keep in hand as reserves.
A member bank lends out most of the money deposited with it. If the Federal Reserve System says that a member bank must keep in reserve a larger fraction of its deposits, then the amount that the member bank can lend drops, loans become harder to obtain, and interest rates rise.

Changing the interest charged to banks that want to borrow money from the federal reserve system.
Member banks borrow from the Federal Reserve System to cover short-term needs. The interest that the Fed charges for this is called the discount rate; this will have an effect, though usually rather small, on how much money the member banks will borrow.

Discount rates

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The late economist Milton Friedman consistently criticized this reverse method of controlling inflation by seeking an ideal interest rate and enforcing it through affecting the money supply since nowhere in the widely accepted money supply equation are interest rates found.

The Federal Reserve System also directly sets the discount rate, which is the interest rate that banks pay the Fed to borrow directly from it. However, banks usually prefer borrowing fed funds from other banks, even at a higher interest rate, rather than directly from the Fed, because that might suggest problems with the bank's credit-worthiness or solvency.

Both of these rates influence the prime rate which is usually about 3 percentage points higher than the federal funds rate. The prime rate is the rate at which most banks price their loans for their best customers.

Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing.

The Federal Reserve System usually adjusts the federal funds rate by 0.25% or 0.50% at a time. From early 2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times, from 6.25 to 1.00%, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. (This is known as a negative real interest rate, because money paid back from a loan with an interest rate less than inflation has lower purchasing power than it had before the loan.) On June 25, 2003, the federal funds rate was lowered to 1.00%, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68%. Starting at the end of June, 2004, the Federal Reserve System started to raise the target interest rate 17 straight times. The rate was 5.25% as of August 8, 2006; the Fed elected to keep the rate steady on its August 8 meeting after seventeen straight 0.25% increases. Rates also remained unchanged after the September 20, 2006 and October 25, 2006 FOMC meetings. In June 2007 the rate was still at 5.25%.

The Federal Reserve System might also attempt to use open market operations to change long-term interest rates, but its "buying power" on the market is significantly smaller than that of private institutions. The Fed can also attempt to "jawbone" the markets into moving towards the Fed's desired rates, but this is not always effective.

The Federal Reserve Banks and the member banks

The 12 regional Federal Reserve Banks were established by Congress as the operating arms of the nation's central banking system. The Reserve Banks issue shares of stock to member banks.

The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Federal Reserve Banks. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Fed. The Federal Reserve does not pay interest on these funds.

The basic structure of the Federal Reserve System includes:

• The Board of Governors
• The Federal Open Market Committee
• The Federal Reserve Banks
• The member banks.

Each Federal Reserve Bank and each member bank of the Federal Reserve System is subject to oversight by the Board of Governors. The seven members of the board are appointed by the President of the United States and confirmed by the United States Senate. Members are selected to terms of 14 years (unless removed by the President).

Criticisms

• The Federal Reserve is an unnecessary and counterproductive interference in the economy.[1]
• Incompatibility with the gold standard[2]
• The Fed lacks accountability and transparency and maintains a culture of secrecy within the Reserve.[3]
• The Federal Reserve System should be abolished for allowing misallocations of capital resources, support of a massive stock price bubble, and politically motivated expansions or tightening of currency (i.e. the 1970s and 1980s).[4]

Milton Friedman, leader of the Chicago School, demonstrated that the Federal Reserve System did not cause the Great Depression, but made it worse by contracting the money supply at the very moment that markets needed liquidity. Since its entire existence was predicated on its mission to prevent events like the Great Depression, it had failed in what the 1913 bill tried to enact.[5] Both Ben Bernanke and other economists such as the late John Kenneth Galbraith--the latter being an ardent Keynesian--have concurred. Friedman also said that ideally he would "prefer to abolish the federal reserve system altogether" rather than try to reform it, because it was a flawed system in the first place.[6]

Ben Bernanke, the current Chairman of the Board of Governors, apparently agrees with Friedman's assessment, saying in a 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." [7][8]

Friedman also demonstrated that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve. Congressman Ron Paul of Texas has introduced bills to abolish the Fed.[9]

Opacity

The Federal Reserve System is shrouded in excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released with a lag of five years.[10] Even expert policy analysts are unsure as to the logic behind Fed decisions.[11] Critics argue that such opacity leads to greater market volatility, as the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under Chairman Alan Greenspan, is often called "Fed speak."

It has also been known to be standoffish in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this notion. For example, Maria Bartiromo reported on CNBC that during a conversation at the White House Correspondents’ Dinner in April 2006, Fed Chairman Ben Bernanke stated investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. This triggered a drop in stock prices just as the market was about to close.[12][13][14]

Furthermore, the lag in the release of FOMC transcripts, as well as the extremely limited and carefully worded minutes and statement, leads to the public being unaware of the issues of major concern to the Fed, and leaves it with an inadequate understanding of the logic and rationale behind the decisions. Some argue that this is a concerted attempt to keep Congress and the public at arm’s length. The Fed did not help this public attitude with their prior actions-- they did not release transcripts of meetings until 1994. Before that time, they refused to give transcripts out on requests, even under the Freedom of Information Act. When a judge ordered the transcripts released in the 1970s, the Fed said they had stopped taking transcripts at all. In 1993, Rep. Henry Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress.[15] After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. However, they have extended the time period, for example not releasing 1992's transcripts until 1998.

The Fed decided to stop publishing the M3 aggregate of financial data, which details the total amount of money in circulation at a time. The Fed said that economists did not need M3 when they had M2. However, a staff writer from the Connecticut Journal-Inquirer disagreed and saw no reason (according to his own views) to stop posting the numbers other than to keep the amount of America's debt or a pending stock market crash or worsening economy hidden.[http://www.journalinquirer.com/site/news.cfm?newsid=15671763&BRD=985&PAG=461&dept_id=161556&rfi=6

Business cycles, libertarian philosophy and free markets

Economists of the Austrian School such as Ludwig von Mises contend that the Federal Reserve's artificial manipulation of the money supply leads to the boom/bust business cycle that has occurred over the last century. Many economic libertarians, such as Austrian School economist Murray Rothbard, believe that the Federal Reserve's manipulation of the money supply to stop "gold flight" from England caused, or was instrumental in causing, the Great Depression. In general, there is no better judge of the proper interest rate and money supply than the market.[16]

Hidden role of central banking

• In his book, The Creature from Jekyll Island: A Second Look at the Federal Reserve, author G. Edward Griffin argues that "the Federal Reserve Bank" was organized in secret at a conspiracy of financiers.

• Masters of the Universe: The Secret Birth of the Federal Reserve is a 1999 documentary featuring authors Michael Collins Piper, William Gill, and Eustace Mullins, all of whom contend that "The Fed" is illegal and is the source of America's multi-trillion dollar national debt.

• The Money Masters: (video/DVD) A detailed economic-historic documentary DVD that goes into the historical background for banking, the history and multiple attempts at creating central banks throughout the north-atlantic communities of Europe and the United States.

• America: Freedom to Fascism is a 2006 motion picture of a similar nature. It was produced and directed by Aaron Russo, who shows how the Federal Reserve enslaves Americans through the process of loaning money from private banks to the US government at interest when the government itself already possesses the right to coin money on its own behalf without interest. The film claims that the interest owed to the Federal Reserve is paid via the US income tax, forcing Americans into a form of economic enslavement, paying off an ever increasing debt to the Federal Reserve when such a debt is unnecessary. The Federal Reserve is a system of privately held, for-profit corporations, and was commissioned to print fiat money on behalf of the federal government, at a fee ultimately paid for by the personal income tax. The U.S. Congress has never enacted a statute authorizing the collection of the income tax, and that any laws cited as the authority for the income tax are actually regulations adopted under an unspecified statute. The U.S. Congress has no control or oversight over the Federal Reserve, and hence has no control over the value of U.S. money. Only Congress possesses the Constitutional right to create and regulate the value of money as outlined in Article 1, Section 8 of the United States Constitution, and it calls for action to abolish the Federal Reserve.

• Karl Steinhauser shows how the Federal Reserve System prints Federal Reserve Notes and "lends" them to the government of United States at high interest rates, and that this is the sole purpose and function of the Federal Reserve. The Federal Reserve does not produce any products or provide any services in exchange for charging interest. He describes this as a theft from "honest and hard working laborers". He documents the total amount of interest so collected from 1913 to 1964 totalling $310 billion. Karl Steinhauser: EU - huomispäivän super-Neuvostoliitto, ISBN 951-97105-0-7

The federal reserve system is responsible for the history of the falling value of the dollar, in spite of claims that the system is in place to protect the dollar's purchasing power. Relative to its value in 1913, the dollar today is worth only four cents.[17]

See also

• Conspiracy
• Liberty Dollar
• Occult Technology of Power

Notes

Template:Reflist

Bibliography

Recent

• Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0-02-864323-2.
• Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker

Historical

• J. Lawrence Broz; The International Origins of the Federal Reserve System Cornell University Press. 1997.
• Vincent P. Carosso, "The Wall Street Trust from Pujo through Medina," Business History Review (1973) 47:421-37
• Chandler, Lester V. American Monetary Policy, 1928-41. (1971).
• Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932." Journal of Economic History 44 (December 1984): 957-84. in JSTOR
• Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (1963)
• G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (1994) ISBN 0-912986-21-2; Says Fed was created by a conspiracy of bankers; his other books charge Franklin Roosevelt intentionally brought about Pearl Harbor.
• Paul J. Kubik, "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit." Journal of Economic Issues . Volume: 30. Issue: 3. Publication Year: 1996. pp 829+.
• Link, Arthur. Wilson: The New Freedom (1956) pp 199-240. Explains how Woodrow Wilson managed to pass the legislation.
• Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
• Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." Journal of Economic Issues 17 (June 1983): 353-60.
• Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history
• Roberts, Priscilla. "'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War," Business History Review (1998) 72: 585-603
• Rothbard, Murray N. A History of Money and Banking in the United States: The Colonial Era to World War II (2002) libertarian who wants no Fed
• Rothbard, Murray N. (1994). The Case Against the Fed. Ludwig Von Mises Institute. ISBN 0-945466-17-X. libertarian who wants no Fed
• Bernard Shull, "The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence" (2005) ISBN 1-56720-624-7
• Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
• Temin, Peter. Did Monetary Forces Cause the Great Depression? (1976).
• West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
• Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression," Journal of Economic History (1966) 26: 223-238, in JSTOR
• Wicker, Elmus. Federal Reserve Monetary Policy, 1917-33. (1966).
• Wells, Donald R. The Federal Reserve System: A History (2004)
• Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed Ohio State University Press, 2005.
• Wood, John H. A History of Central Banking in Great Britain and the United States (2005)
• Wueschner; Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927 Greenwood Press. (1999)
• Mullins, Eustace C. "Secrets of the Federal Reserve," 1952. John McLaughlin. ISBN 0-9656492-1-0

External links

• Fiat Currency - Dan Sewell Ward
• Fiat Paper Money - by Ron Paul, September 12, 2003
• The Occult Technology of Power the secret mechanics of social control - webbed
• Board of Governors of the Federal Reserve — Official website
• "America: Freedom to Fascism" — Aaron Russo's web site, promoting his film, America: Freedom to Fascism.
  • "America: From Freedom to Fascism" (video) — Online video of the film.
• "Ownership of Federal Reserve" — Web page at The Lawful Path.com purporting to show how the Bank of England and the Rothschilds own the Federal Reserve.
• "On the Federal Reserve" — Web page at the Populist Party of America with a collection of articles giving various arguments against the Federal Reserve
• Sites providing text of Eustace Mullins' "Secrets of the Federal Reserve":
  • "Secrets of the Federal Reserve" — Text of the work, plus other videos and links.
  • Secrets of the Federal Reserve by Eustace Mullins
• Demopedia - Federal Reserve System<ref>Demopedia</ref>
• "The Money Masters"
• Ludwig von Mises Institute:
  • "The Founding of The Federal Reserve" (video)
  • "Money, Banking and the Federal Reserve" (video) — According to the Mises Institute, this video shows "what the [Federal Reserve] does to the economy . . . how and why it was founded . . . [and explains] the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates."
• save-a-patriot.org; tax protester web site contending that the Federal Reserve System is owned by banking family, Bank of England, and London banking houses
• The Federal Reserve Monopoly Over Money

Relevant Discussion Threads

• We need to abolish the federal reserve

• FED refuses to identify $2 Trillion bank loans!!

• The Illuminati and Federal Reserve NWO Economic Kaos Conspiracy

• H.R. 2755: Federal Reserve Board Abolition Act

• 8th Circuit Court of Appeals Admits Federal Reserve is Privately Owned

This article or section has been marked to be fixed. It may have issues regarding formatting, supporting links, or factuality. Refer to the tinWiki tutorial for help.