The Federal Reserve Bank of the United States was created to achieve several goals. The Fed is to “keep inflation in check, maintain full employment, moderate the business cycle and contribute two achieving long-term growth.”1 While these objectives are clearly impossible to achieve, a need to provide economic stability in a world of rapid economic transition remains a realistic challenge through direct intervention verses a hands off approach. Even though the need for a central US Bank was apparent during the nations founding, the controversy of this bank can be found from the earliest times in the creation of the United States even to the present. The national founding that Thomas Jefferson foresaw, was a nation of loosely confederated yeomen farmers, while Alexander Hamilton envisioned the need of a strong federal government for mutual protection and cooperation. Because of these two differing views, this debate has continued in the national sphere of Jeffersonian verses Hamiltonian politics. The Fed has proved to be a controversial subject by many people from it’s founding, even up to today.
Modern central banking theory began to evolve in the eighteenth and nineteenth centuries under the gold standard.2 The Federal Reserve was developed by people who based many of their ideas on the dominant position of the Bank of England before World War I.3 It should be understood that the foundations on the Federal Reserve were based on economic practicalities not on the political or administrative framework. The actualization of the Fed combined the unique American Experience using a blend of public and private, or centralized and decentralized, banking techniques in one organization. With the beginnings of the foundlings of the Federal Reserve cloaked in secrecy, and the Glass-Owen Bill being passed through the House of Representatives on December 22, 19134 and passed through the US Senate on December 23, 19135 only to be signed an hour later by President, Woodrow Wilson6 has been a subject of speculation since. Adding to the fuel of speculation was a seemingly glamorized account by Bertie Charles Forbes, of the secret meeting at J.P Morgan’s estate on Jekyll Island in 1910. This account was published three years after the Federal Reserve Act had been signed into law and published by the periodical called Current Opinion in 1916.
Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily hiding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. . . . I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written. . . . The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. . . .Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System. . . . 7
Private or is that public centralized banking?
The Fed is a “decentralized central bank” governed by a seven-member board of Governors, called the Federal Open Market Committee (FOMC), consisting of the chairman and six other members of the Board of Governors appointed by the president of the United States and confirmed by the US Senate. The FOMC is made up of the President of the Federal Reserve Bank of New York, and the presidents of the other regional banks. Meeting every six weeks to review the economy and determine what actions need to be taken by the New York Fed.8 While this structure may leave the impression that the Board of Governors holds power within the Fed, it is the Chairmen of the board who has the largest influence on the Fed’s monetary policy. “The Board represents the public sector, or governmental side of the Fed.”9 The decentralized portion of this central bank is in the design or make up of 12 regional Reserve Banks; each regional bank is also made up of a board of directors representing the private sector.10 One unique aspect of the Federal Reserve System is that the Federal Reserve is a “privately held” corporation backed by the United States government. Like any corporation the Fed has stockholders with whom the presidential appointed board of directors are accountable to. “All nationally chartered banks may choose to join the Fed and likewise own stock.”11 On the other hand, unlike stockholders in a publicly held company, banks cannot sell or trade their Fed stock. What this means, in essence, is that while the Fed has privately held aspects it is not a privately held corporation. However, “The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.”12 However, “The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.”13
An example of this private corporation and Federal Government hybrid is the confusion wrought by such a contraption. An example of this is the structure of the Federal Reserve, which combines the public and private sectors in a complicated mesh of bureaucracy. An example of one such confusing episode in the life of the Fed can be told in the story of the Federal Reserves newly completed Washington D.C. headquarters, which opened in 1937. In a congressional hearing it had been observed that the Federal Reserve Bank’s headquarters had been sold to the privately held Federal Reserve Bank by the US government and therefore was not tax exempt. Since this publicly held land was sold to a privately held corporation it should be required to pay property taxes. However, when the District of Columbia sent a tax bill to the Federal Reserve headquarters the Fed exercised its governmental exemption status.14 To be sure the Federal Reserve is a centralized bank and a Government appendage, the most striking difference and the one that leads to the most confusion is that other central banks take their orders from their governmental official wither elected or not. For instance the central bank of the People’s Republic of China takes its orders from the National People’s Congress and the Bank of England from its elected officials. The United States Federal Reserve Bank take their cues from the financial markets in conjunction with the US President and the Secretary of the Treasury. One system could be said to be more democratized, because they take their orders from people directly accountable to the masses while the other is an autonomous, even autocratic, association accountable only to themselves.15
Controversy
From the founding of the Federal Reserve, controversy has surrounded this organization continuing to this day. One organization begins its grassroots movement to dismantle the Fed on November 22, 2009. The rational in ending the Fed is the belief that,
the Federal Reserve is a cartel of private banking corporations which lend money to the United States. It is touted as if it were a Government Agency. IT IS NOT. The Federal Reserve Bank, through its inflation of the money supply and the distortion of free markets resulting from its intervention, is responsible for the current financial and economic crisis. The current round of “bailouts” and federal government nationalization of large segments of the financial sector further inflates the US dollar and disrupts the proper funtioning of the markets and will ultimately serve to plunge the nation into an even more severe crisis, quite possibly even into a serious depression. Our goal is to educate Americans so we can have a sound monetary system in this country, and not be held at gunpoint by a private banking cartel who pretends to be a government entity.16
Because one of the goals of the Fed is to smooth transitions within the financial markets, something that is virtually impossible, people will see an organization that they believe benefits from times of economic prosperity as well as crises. Continuing this path of proclaimed banking and governmental subversion in 2007 a viral Internet film took root. It was to be combined with activation and public showings. This film, done in three parts, attempts to show how people are enslaved to those in power. The movie called Zeitgeist, third part is called “Don’t Mind the Men Behind the Curtain” and attempts to show that American citizens are enslaved to our Government and banks by quoting President Franklin D. Roosevelt, “The real truth of the matter is that a financial element in the large centers has owned the government since the days of Andrew Jackson”–Franklin D. Roosevelt, US President, 193317 While this quote seems incriminating finding the exact source has prove elusive not only for myself but others. One such person seeking to find this quote has said,
It is apparently a letter sent from Roosevelt to Colonel Edward M House, and apparently can be received from Sterling Library at Yale University or from Radio Liberty. After hours of searching, I could not find a single location on the Internet that references this letter that is not a conspiracy site or is from a post on a forum written by someone who is promoting a conspiracy theory. More so, searching Yale’s library database yielded nothing. I found plenty of letters, but not this one.18
No cohesive framework within the financial policy community
Contributing to these difficulties is the fact that there is no cohesive framework within the financial community, that provides a well developed, articulated, or widely excepted and consistent whole on the development of financial policies as many article show.19 “One important conclusion of the analysis, and a lesson for the many less developed financial systems around the world, is that an effective (if not efficient) process of finance requires extensive private-collective and public policy involvement, to internalize and capture social economic benefits and public goods associated with finance.”20
The lack of a consistent framework within the policy making community and the addition of the “magic” of fiat money, such as our Federal Reserve Notes that have no intrinsic value because it is not backed by specie (gold or silver) giving it anonymity and liquidity by people at large. The wide acceptance of fiat money allows for smoothed economic transactions, allowing for a unit of account and as a medium of exchange.21 This fait money allows for the “The Fed” to achieve its main mission, establishing and maintaining confidence in the US dollar and in the US banking system.22
Today there is a tremendous need for a US Central Bank even though it is often surrounded by controversy. To achieve this goal of a Central Bank, Hamilton desired to create the Bank of the United States, modeled after the Bank of England.23
A national bank would collect taxes, hold government funds, and make loans to the government and borrowers. One criticism directed against the bank was “unrepublican”--it would encourage speculation and corruption. The bank was also opposed on constitutional grounds. Adopting a position known as “strict constructionism,” Thomas Jefferson and James Madison charged that a national bank was unconstitutional since the Constitution did not specifically give Congress the power to create a bank.24
Hamilton responded to the charge that a bank was unconstitutional by formulating the doctrine of “implied powers.” He argued that Congress had the power to create a bank because the Constitution granted the federal government authority to do anything “necessary and proper” to carry out its constitutional functions (in this case its fiscal duties).25
Because of the continued national debate of Jeffersonian verses Hamiltonian politics the Fed has proved to be a controversial subject by many people from its founding, even up to today, often leading to conspiracy theories showing that in the land of some of the freest people in the world we are oppressed by corrupt government and evil bankers.
Citations
1 Parkin, Michael. Economics seventh edition.
New York: Pearson Education, 2005. p.616
2 Meltzer, Alan H. A History of the Federal Reserve.
Chicago: The University of Chicgo Press, Ltd., 2003. p. 19
3 Ibid
4 Congressional Record–House December 22, 1913 p.1464
5 Congressional Record –Senate 1913 p. 1487
6 “28. Woodrow Wilson 1913-1921.” the White House. Available from http://www.whitehouse.gov/about/presidents/woodrowwilson. Internet; accessed 20 November 2009.
7 Wheeler, Edward J. “How the Federal Reserve Bank was evolved by five men on Jekyll Island.” Current Opinion. December 1916, 382.
8 Parkin, Michael. Economics seventh edition.
New York: Pearson Education, 2005. p.616
9 Ibid
10 Ibid
11 “The Fed Today: History, Structure, Monetary Policy, Banking Supervision, Financial Services and More!” Federal Reserve Bank of Philadelphia. Available from http://www.philadelphiafed.org/publications/order-form/fed-today.cfm. Internet; accessed 14 October 2009. p.3
12 “The Federal Reserve Board Frequently Asked Questions Federal Reserve System.” Board of Governors of the Federal Reserve System: The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.. Available from http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm. Internet; accessed 22 November 2009.
13 “The Federal Reserve Board Frequently Asked Questions Federal Reserve System.” Board of Governors of the Federal Reserve System: The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.. Available from http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm. Internet; accessed 22 November 2009.
14 Greider, William. Secrets of the Temple: How the Federal Reserve Runs the Country. New York: Simon and Schuster, 1987. p.48–50
15 Ibid p. 50
16 “End the Fed: sound money for America.” End the Fed Network. Available from http://endthefedusa.ning.com/. Internet; accessed 18 November 2009.
17 Joseph, Peter. “Zeitgeist, The Movie - Transcript -.” Zeitgeist The Movie. Available from http://www.zeitgeistmovie.com/transcript.htm. Internet; accessed 12 October 2009.
18 “A “debunking” of the movie Zeitgeist.” We Can Change the World a better world is possible if we work together. Available from http://wecanchangetheworld.wordpress.com/2008/05/06/a-debunking-of-the-movie-zeitgeist/. Internet; accessed 20 November 2009.
19 Schinasi, Garry J. Safeguarding Financial Stability Theory and Practice.
Washington D.C.: International Monetary Fund, 2006. p. 23
20 Ibid
21 Ibid p.29
22 “The Fed Today: History, Structure, Monetary Policy, Banking Supervision, Financial Services and More!” Federal Reserve Bank of Philadelphia. Available from http://www.philadelphiafed.org/publications/order-form/fed-today.cfm. Internet; accessed 14 October 2009. p.3
23 ( http://www.digitalhistory.uh.edu/database/article_display.cfm?HHID=6)
24 Historical Content Steven Mintz John and Rebecca Moores Professor of History University of Houston Site Design and Curriculum Development Sara McNeil Associate Professor of Curriculum and Instruction University of Houston Engines of Our Ingenuity John Lienhard M.D. Anderson Professor of Mechanical Engineering University of Houston Database Development and Image Processing Kai-Ju Hsieh Meng-Fen (Grace) Lin Flash Movie Design and Development You-Mei Lui Sam Hanlon University of Houston Technical Support Jerry Price Michael Rapp University of Houston , “Alexander Hamilton’s Financial Program.” Digital History: using new technology to enhance teaching and research. Available from http://www.digitalhistory.uh.edu/database/article_display.cfm?HHID=6. Internet; accessed 14 October 2009.
25 Ibid