33. The Federal Reserve Bank:
The fundamental promise of a central bank like the Federal
Reserve is economic stability. The theory is that manipulating the value of the
currency allows financial booms to go higher, and crashes to be more mild. If
growth becomes speculative and unsustainable, the central bank can make the
price of money go up and force some deleveraging of risky investments – again,
promising to make the crashes more mild.
The period leading up to the American revolution was
characterized by increasingly authoritarian legislation from England. Acts
passed in 1764 had a particularly harsh effect on the previously robust
colonial economy. The Sugar Act was in effect a tax cut on easily smuggled
molasses, and a new tax on commodities that England more directly controlled
trade over. The navy would be used in increased capacity to enforce trade laws
and collect duties. Perhaps even more significant than the militarization and
expansion of taxes was the Currency Act passed later in the year 1764.
“The colonies suffered a constant shortage of currency with
which to conduct trade. There were no gold or silver mines and currency could
only be obtained through trade as regulated by Great Britain. Many of the
colonies felt no alternative to printing their own paper money in the form of
Bills of Credit.”
The result was a true free market of currency – each bank
competed, exchange rates fluctuated wildly, and merchants were hesitant to
accept these notes as payment. Of course, they didn’t have 24-hour digital
Forex markets, but I’ll hold off opinions on the viability of unregulated
currency for another time. England’s response was to seize control of the
colonial money supply – forbidding banks, cities, and colony governments from
printing their own.
This law, passed so soon after the Sugar Act, started to
really bring revolutionary tension inside the colonies to a higher level.
American bankers had learned early on that debasing a currency through
inflation is a helpful way to pay off perpetual trade deficits – but Britain
proved that the buyer of the currency would only take the deal for so long…
Following the (first) American Revolution, the “First Bank of the United
States” was chartered to pay off collective war debts, and effectively
distribute the cost of the revolution proportionately throughout all of the
states. Although the bank had vocal and harsh skeptics, it only controlled
about 20% of the nation’s money supply.
Compared to today’s central bank, it was nothing. Thomas
Jefferson argued vocally against the institution of the bank, mostly citing
constitutional concerns and the limitations of government found in the 10th
amendment. There was one additional quote that hints at the deeper structural
flaw of a central bank in a supposedly free capitalist economy. “the existing
banks will, without a doubt, enter into arrangements for lending their agency,
and the more favorable, as there will be a competition among them for it;
whereas the bill delivers us up bound to the national bank, who are free to
refuse all arrangement, but on their own terms, and the public not free, on
such refusal, to employ any other bank” –Thomas Jefferson. Basically, the
existing banks will fight over gaining favor with the central bank – rather
than improving their performance relative to a free market. The profit margins
associated with collusion would obviously outweigh the potential profits gained
from legitimate business. The Second Bank of the United States was passed five
years after the first bank’s charter expired. An early enemy of central
banking, President James Madison, was looking for a way to stabilize the
currency in 1816. This bank was also quite temporary – it would only stay in
operation until 1833 when President Andrew Jackson would end federal deposits
at the institution.
The charter expired in 1836 and the private corporation was
bankrupt and liquidated by 1841. While the South had been the major opponent of
central banking systems, the end of the Civil War allowed for (and also made
necessary) the system of national banks that would dominate the next fifty
years. The Office of the Comptroller of the Currency (OCC) says that this
post-war period of a unified national currency and system of national banks
“worked well.” [3] Taxes on state banks were imposed to encourage people to use
the national banks – but liquidity problems persisted as the money supply did
not match the economic cycles. Overall, the American economy continued to grow
faster than Europe, but the period did not bring economic stability by any
stretch of the imagination. Several panics and runs on the bank – and it became
a fact of life under this system of competing nationalized banks. In 1873,
1893, 1901, and 1907 significant panics caused a series of bank failures.
The new system wasn’t stable at all, in fact, many suspected
it was wraught with fraud and manipulation. The Federal Reserve Bank of
Minneapolis is not shy about attributing the causes of the Panic of 1907 to
financial manipulation from the existing banking establishment. “If
Knickerbocker Trust would falter, then Congress and the public would lose faith
in all trust companies and banks would stand to gain, the bankers
reasoned.”
In timing with natural economic cycles, major banks
including J.P. Morgan and Chase launched an all-out assault on Heinze’s
Knickerbocker Trust. Financial institutions on the inside started silently
selling off assets in the competitor, and headlines about a few bad loans
started making top spots in the newspapers. The run on Knickerbocker turned
into a general panic – and the Federal Government would come to the rescue of
its privately owned “National Banks.”
During the Panic of 1907, “Depositors ‘run’ on the
Knickerbocker Bank. J.P. Morgan and James Stillman of First National City Bank
(Citibank) act as a “central bank,” providing liquidity … [to stop the bank
run] President Theodore Roosevelt provides Morgan with $25 million in
government funds … to control the panic. Morgan, acting as a one-man central
bank, decides which firms will fail and which firms will survive.” How did JP
Morgan get so powerful that the government would provide them with funding to
increase their power? They had key influence with positions inside the
Administrations.
They had senators, congressmen, lobbyists, media moguls all
working for them. In 1886, a group of millionaires purchased Jekyll Island and
converted it into a winter retreat and hunting ground, the USA’s most exclusive
club. By 1900, the club’s roster represented 1/6th of the world’s wealth. Names
like Astor, Vanderbilt, Morgan, Pulitzer and Gould filled the club’s
register.
Non- members, regardless of stature, were not allowed.
Dignitaries like Winston Churchill and President McKinley were refused
admission. In 1908, the year after a national money panic purportedly created
by J. P. Morgan, Congress established, in 1908, a National Monetary Authority.
In 1910 another, more secretive, group was formed consisting of the chiefs of
major corporations and banks in this country. The group left secretly by rail
from Hoboken, New Jersey, and traveled anonymously to the hunting lodge on
Jekyll Island. In fact, the Clubhouse/hotel on the island has two conference
rooms named for the “Federal Reserve.” The meeting was so secret that none
referred to the other by his last name. Why the need for secrecy?
Frank Vanderlip wrote later in the Saturday Evening Post,
“…it would have been fatal to Senator Aldrich’s plan to have it known that he
was calling on anybody from Wall Street to help him in preparing his bill…I do
not feel it is any exaggeration to speak of our secret expedition to Jekyll
Island as the occasion of the actual conception of what eventually became the
Federal Reserve System.” At Jekyll Island, the true draftsman for the Federal
Reserve was Paul Warburg. The plan was simple.
The new central bank could not be called a central bank
because America did not want one, so it had to be given a deceptive name.
Ostensibly, the bank was to be controlled by Congress, but a majority of its
members were to be selected by the private banks that would own its stock. To
keep the public from thinking that the Federal Reserve would be controlled from
New York, a system of twelve regional banks was designed. Given the
concentration of money and credit in New York, the Federal Reserve Bank of New
York controlled the system, making the regional concept initially nothing but a
ruse.
The board and chairman were to be selected by the President,
but in the words of Colonel Edward House, the board would serve such a term as
to “put them out of the power of the President.” The power over the creation of
money was to be taken from the people and placed in the hands of private
bankers who could expand or contract credit as they felt best suited their
needs.
Why the opposition to a central bank? Americans at the time
knew of the destruction to the economy the European central banks had caused to
their respective countries and to countries who became their debtors. They saw
the large- scale government deficit spending and debt creation that occurred in
Europe. But European financial moguls didn’t rest until the New World was
within their orbit. In 1902, Paul Warburg, a friend and associate of the
Rothschilds and an expert on European central banking, came to this country as
a partner in Kuhn, Loeb and Company.
He married the daughter of Solomon Loeb, one of the founders
of the firm. The head of Kuhn, Loeb was Jacob Schiff, whose gift of $20 million
in gold to the struggling Russian communists in 1917 no doubt saved their
revolution. The Fed controls the banking system in the USA, not the Congress
nor the people indirectly (as the Constitution dictates). The U.S. central bank
strategy is a product of European banking interests. Government
interventionists got their wish in 1913 with the Federal Reserve (and income
tax amendment).
Just in time, too, because the nation needed a new source of
unlimited cash to finance both sides of WW1 and eventually our own entry to the
war. After the war, with both sides owing us debt through the federal reserve backed
banks, the center of finance moved from London to New York. But did the Federal
Reserve reign in the money trusts and interlocking directorates? Not by a long
shot. If anything, the Federal Reserve granted new powers to the National Banks
by permitting overseas branches and new types of banking services. The greatest
gift to the bankers, was a virtually unlimited supply of loans when they
experience liquidity problems.
From the early 1920s to 1929, the monetary supply expanded
at a rapid pace and the nation experienced wild economic growth. Curiously,
however, the number of banks started to decline for the first time in American
history. Toward the end of the period, speculation and loose money had
propelled asset and equity prices to unreal levels.
The stock market crashed, and as the banks struggled with
liquidity problems, the Federal Reserve actually cut the money supply. Without
a doubt, this is the greatest financial panic and economic collapse in American
history – and it never could have happened on this scale without the Fed’s
intervention. The number of banks crashed and a few of the old robber barons’
banks managed to swoop in and grab up thousands of competitors for pennies on
the dollar.
---------------
The 12 Federal Reserve Banks form a major part of
the Federal Reserve System, the central banking system of the
United States. The 12 federal reserve banks together divide the nation into
12 Federal Reserve Districts, the 12 banking districts created by
theFederal Reserve Act of 1913.
The twelve Federal Reserve Banks are jointly responsible for
implementing the monetary policy set by theFederal Open Market
Committee. Each federal reserve bank is also responsible for the regulation of
the commercial banks within its own particular district.
History
This article needs additional citations for
verification. Please help improve this article byadding
citations to reliable sources. Unsourced material may
be challenged and removed.(January 2011)
Alexander Hamilton, the first Secretary of Treasury,
started a movement advocating the creation of a central bank. The Bank Bill
created by Alexander Hamilton was a proposal to institute a National Bank, in
order to improve the economic stability of the nation after its independence
from Britain. Although the national bank was to be used as a tool for the
government, it was to be privately owned. Hamilton wrote several articles
providing information regarding his national bank idea. The articles expressed
the validity and "would be" success of the national bank based upon:
incentives for the rich to invest, ownerships of bonds and shares, rooted in
fiscal management, and stable monetary system.
In response to this, the First Bank of the United States was
established in 1791, its charter signed by George Washington.
The First Bank of the United States was headquartered in
Philadelphia, but had branches in other major cities. The Bank performed the
basic banking functions of accepting deposits, issuing bank notes, making loans
and purchasing securities.
When its charter expired 20 years later, the US was without
a central bank for a few years, during which it suffered an unusual inflation.
In 1816, James Madison signed the Second Bank of the United
States into existence. When that bank's charter expired, the United States
went without a central bank for 40 years.
Then, in 1873, Congress nationalized money for the first
time, imposing what was effectively a gold standard, in the place of
thebimetallic standard set in place by the Founders. A financial crisis
known as the Panic of 1907 was headed off by a private conglomerate,
who set themselves up as "lenders of last resort" to banks in
trouble. This effort succeeded in stopping the panic, and led to calls for
a Federal agency to do the same thing.
In response to this, the Federal Reserve
System was created by the Federal Reserve Act of December 23,
1913, establishing a new central bank intended to serve as a formal
"lender of last resort" to banks in times of liquidity
crisis—panics where depositors tried to withdraw their money faster than a bank
could pay it out.
The legislation provided for a system that included a number
of regional Federal Reserve Banks and a seven-member governing board. All
national banks were required to join the system and other banks could join. The
Federal Reserve Banks opened for business in November 1914. Congress created
Federal Reserve notes to provide the nation with a flexible supply of currency.
The notes were to be issued to Federal Reserve Banks for subsequent transmittal
to banking institutions in accordance with the needs of the public.
Legal status
The twelve regional Federal Reserve Banks were established
as the operating arms of the nation's central banking system. They are
organized much like private corporations—possibly leading to some
confusion about ownership.
The Federal Reserve Banks have an intermediate legal status,
with some features of private corporations and some features of public federal
agencies. The United States has an interest in the Federal Reserve Banks as
tax-exempt federally created instrumentalities whose profits belong to the
federal government, but this interest is not proprietary.In Lewis v.
United States, the United States Court of Appeals for the Ninth
Circuit stated that: "The Reserve Banks are not federal
instrumentalities for purposes of the FTCA [theFederal Tort Claims Act], but
are independent, privately owned and locally controlled corporations." The
opinion went on to say, however, that: "The Reserve Banks have properly
been held to be federal instrumentalities for some purposes." Another
relevant decision is Scott v. Federal Reserve Bank of Kansas City, in
which the distinction is made between Federal Reserve Banks, which are
federally created instrumentalities, and the Board of Governors, which is a
federal agency.
Regarding the structural relationship between the twelve
Federal Reserve banks and the various commercial (member) banks, political
science professor Michael D. Reagan has written that:
... the "ownership" of the Reserve Banks by the
commercial banks is symbolic; they do not exercise the proprietary control
associated with the concept of ownership nor share, beyond the statutory
dividend, in Reserve Bank "profits." ... Bank ownership and election
at the base are therefore devoid of substantive significance, despite the
superficial appearance of private bank control that the formal arrangement
creates.
Function
The Federal Reserve System provides the government
with a ready source of loans and serves as the safe depository for federal
monies. The Federal Reserve is also a low-cost mechanism for transferring funds
and is an inexpensive agent for meeting payments on the national debt and
government salaries. The Federal Reserve Banks were created as
instrumentalities to carry out the policies of the Federal Reserve System.
The Federal Reserve Banks issue shares of stock to
member banks. However, owning Federal Reserve Bank stock is quite different
from owning stock in a private company. The Federal Reserve Banks are not
operated for profit, and ownership of a certain amount of stock is, by law, a
condition of membership in the system. The stock may not be sold or traded or
pledged as security for a loan; dividends are, by law, limited to 6% per
year.
The dividends paid to member banks are considered partial
compensation for the lack of interest paid on member banks' required reserves
held at the Federal Reserve. By law, banks in the United States must maintain
fractional reserves, most of which are kept on account at the Federal Reserve.
Historically, the Federal Reserve did not pay interest on these funds. The
Federal Reserve now has authority, granted by Congress in the Emergency
Economic Stabilization Act (EESA) of 2008, to pay interest on these funds.
A major responsibility of The Federal Reserve is to oversee
their banking and financial systems. Overseeing the banking and financial
systems of a bank is crucial in a society.
Confidence in the soundness of the banking and financial
systems is what mobilizes a society's savings, allows the savings to be
channeled into productive investments, and encourages economic growth.
Finances
Each Federal Reserve Bank funds its own operations,
primarily from interest on its loans and on the securities it holds. Expenses
and dividends paid are typically a small fraction of a Federal Reserve Bank's
revenue each year. By law the remainder must be transferred to the Board of
Governors, which then deposits the full amount to the Treasury as interest on outstanding
Federal Reserve Notes.
The Federal Reserve Banks conduct ongoing
internal audits of their operations to ensure that their accounts are
accurate and comply with the Federal Reserve System's accounting principles.
The banks are also subject to two types of external auditing. Since 1978
theGovernment Accountability Office (GAO) has conducted regular audits of
the banks' operations. The GAO audits are reported to the public, but they may
not review a bank's monetary policy decisions or disclose them to the public.
Since 1999 each bank has also been required to submit to an
annual audit by an external accounting firm,
which produces a confidential report to the bank and a
summary statement for the bank's annual report. Some members of Congress continue
to advocate a more public and intrusive GAO audit of the Federal Reserve
System, but Federal Reserve representatives support the existing restrictions
to prevent political influence over long-range economic decisions.
See also
Business and economics portal
Federal Reserve Act
List of regions of the United States#Federal Reserve banks
Federal Reserve Branches
Federal Reserve System
0 komentar:
Posting Komentar