Federal Government
Federal Reserve System
Est. 1913

Stabilizing America's economy

The central banking system in the U.S. is the Federal Reserve System, commonly known as "The Fed".*

The Fed's creation was controversial. The Owen-Glass Federal Reserve Act of 1913 created an institutionalized monopoly of special-purpose banks located in major cities throughout the country. 12 Federal Reserve Banks are led by the Bank of New York, which is a publicly traded corporation started by New York businessmen and Alexander Hamilton on June 9, 1784.

As America's central banking system, the Fed is a system of banks for bankers. The Federal Reserve Board (board of governors) members are appointed by the U.S. president. The Regional Federal Reserve Banks are corporations whose stock is owned by member banks located within the region of each branch Fed bank. The Fed is highly regulated and thus has great credibility.

There was great resistance in Congress and the press to the Fed's inception. Conspiracy theories, and predictions of America becomming a slave state to the European bankers, were popular topics in the papers. William Jennings Bryan's eloquent speech before congress, the Cross of Gold Speech dramatically illuminated the situation.

In 1916, three years after its inception, President Woodrow Wilson denounced the Federal Reserve System:

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world, no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."

The main tasks of the Federal Reserve are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds (T-bills), and steer interest rates. Alan Greenspan, whose term ended January 31, 2006, served as the Chairman of the Board of Governors of the Federal Reserve.

Greenspan embodied gravitas. Statements by the chairman exerted great influence on the stock market and the American economy. Numerous investors watched Greenspan with the utmost attention. As chairman of the Fed, he guided U.S. monetary policy, making him an extremely powerful man. Few could make the markets respond like Greenspan. When he spoke, he carried the weight of the Federal Reserve, compelling professional investors to analyze his every word. He was designated chairman by presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush.

The Fed bears a wide range of responsibilities, from overseeing monetary policy to implementing such specific goals as currency stability, low inflation and full employment. The Fed issues American currency and functions as the bank of the federal government. The Fed regulates the credit system, oversees commercial banks, manages exchange reserves and acts as a "lender of last resort." The Fed clearly has a unique and critical mandate as a core entity of America's federal government. While the Fed is organized under the administrative arm of government, it is largely independent of politics. The Fed reports regularly to the Congress and represents the United States within such international financial non-governmental organizations as the Bank for International Settlements (BIS).

A monetary policy is the means by which the Fed influences the demand, supply, and price of money and credit, in order to direct the nation's economic objectives. The Fed was given the authority to formulate U.S. monetary policy. Within the Federal Reserve, the Federal Open Market Committee is responsible for implementing open-market operations, while the board of governors looks after the discount rate and reserve requirements.

As a prerequisite of official membership and participation in the American banking system (the Fed), all commercial banks are required by the Federal Reserve Act to own shares in the local regional branch of the Fed, proportional to assets and deposits in each member commercial bank. The regional Fed banks harvest "profits" of hundreds of millions of dollars per year, from the daily fluctuations of the American economy and the interest generated by interbank loans among themselves and the commercial banks. Ninety-seven percent of the "profit" is returned to the U.S. Treasury. The remaining three percent is used to maintain the system and pay interest on securities and bonds.

The WTO, trade and fiscal deficits

Globalization is the liberalization of international trade barriers. That is what the World Trade Organization (WTO) is all about. International trade agreements (treaties) signed under the umbrella of the WTO since 1948, such as GATT, NAFTA, and CAFTA, have tended to check isolationism and protectionism, thus fostering national economies in many nations since World War II.

Nevertheless, improved national economies do not tell the entire story. The liberalization of world trade has contributed to an immense U.S. trade deficit, the largest in its history. A trade deficit occurs when a nation imports more than it exports, which generates an unsustainable imbalance of debt. WTO treaties often steamroll over the poor. The status of established family farmers, local craftsmen and poor people is usually under the radar or simply ignored by the negotiators. Furthermore, signing WTO agreements compromises the sovereignty of numerous signing nations.

American governmental deficit spending also has reached new records, also unsustainable over the long haul. Deficit spending requires the government to borrow money from foreign lenders who charge interest on the loan. The insidious element of deficit spending is the interest incurred on the debt. More than 47 percent of the personal income (not total tax revenue) collected in 2003 was spent on paying interest on the debt. While previous decades have seen the cost of interest on the deficit reach four percent of the Gross Domestic Product, the Fed currently projects the possibility of the interest reaching as much as 25 percent of the GDP — a sum that could have disastrous consequences for America. Congressional and presidential policies drive up deficit spending and exacerbate trade imbalances. The Fed is not responsible for trade imbalances or deficit spending.

The Bank for International Settlements (BIS)

The BIS fosters cooperation among national central banks and other agencies in pursuit of monetary and financial stability. Its banking services are provided exclusively to central banks and international organizations. The BIS currently has 55 member central banks, all of which are entitled to be represented and vote in general meetings. Voting power is proportionate to the number of BIS shares issued in the country of each member represented at the meeting.

The BIS Board of Directors. As of 2005, the BIS board was chaired by Nout Wellink, president of the Netherlands Bank, and has 17 members. The board has six ex officio directors: the governors of the central banks of Belgium, France, Germany, Italy, United Kingdom, and the United States (Greenspan). Each ex officio member appoints another member of the same nationality. The statutes also provide for the election to the board of not more than nine governors of other member central banks. The governors of the central banks of Canada, Japan, the Netherlands, Sweden and Switzerland are currently elected members of the board.

Conspiracy theories

The significance of mentioning the WTO, American deficits and the BIS in the context of the Fed is that the Fed is represented in the BIS at its core. The U.S. economy is no longer confined to the united states. The American economy is becoming the world economy. The Fed is the backbone of the American economy, but also is critical to and interlocked with the world economy. Globalization is beginning to blur national boundaries. Multinational corporations have become less loyal to any one nation, race, creed or code of ethics. With national integrity thus threatened — and the advent of the Internet — old conspiracy theories have found new life.

International banking began in feudal Europe when there were no legal financial structures and no laws regulating banking or business. Economies were still based upon gold and silver coinage, and bartering. At that time there were grave abuses and double dealings at the monarchal level. Stories describing convoluted, devious, secret schemes that catapulted ingenious individuals and families into great wealth and power lie at the root of many of the modern conspiracy theories. They implicate the Fed, BIS, WTO, Trilateral Commission, World Bank, International Monetary Fund, United Nations, Council on foreign Relations, Masonic Lodge, Skull and Crossbones Society, and the Rothschild dynasty.

The Fed has acknowledged the shifting paradigm of world finance. The WTO is working to break down traditional trade barriers based upon nationalism. Due to the vast complexity of the modern American and world economies, and the immense wealth and power of multinational corporations, many conspiracy theories have been published in print and on the Internet. Most conspiracy theories draw conclusions and describe evil and diabolical plots from guilt by association, coincidence and flawed interpretation, then add ignorance and racism. None of those conspiracy theories holds up to critical analysis.

Conclusion

The Federal Reserve System is the legitimate legal fiscal entity with a congressionally delegated mandate to coin and print money, manage credit and the banking industry, to ensure the American economy maintains stability and health.

The laws, rules, checks and balances accrued to the Fed since its inception in 1913 have, through two world wars and innumerable other disturbances, coincided with the greatest social, scientific and technological advances over any previous century. A purely human and American trait — innovation — trumps predictability.

The Fed is pro-active and reactive. When it intuits a problem ahead, it responds by reporting and recommending solutions. But the Fed is no tiger without claws and teeth. It is in the driver's seat with powerful tools to drive the economy. Picture the Fed as a bus driver, peering ahead, seeking truth in all quarters simultaneously and ready to apply the brakes or shift gears at a moment's notice.

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