February 07, 2011
The secretive fourth branch of government
As every child learns in their social studies class, there are three branches of the US government, the executive, legislative, and the judiciary. But there is another quasi-government agency that operates behind a veil of secrecy and yet wields enormous influence over the US economy (and thus indirectly the world economy) and deserves to be considered as a fourth branch. This is the Federal Reserve system of the US, commonly referred to as the Fed.
The way the Fed works is by controlling the money supply and setting interest rates. It currently does so independently of the executive and legislative branches of the government.
Before the Fed came into being in 1913, each bank printed its own money and the system was unstable with crash after crash. Legislation was passed to create the Federal Reserve Board of Governors and twelve regional Federal Reserve Banks. The Fed was created to function fairly autonomously so that monetary policy would not be dictated by political whims. After all, when political leaders have the power to print money, we have seen in history how that has been abused to cover reckless expenditures resulting in runaway inflation and the eventual downfall of governments, not to mention immense hardship for people as the value of their savings disappear.
Although the US president appoints (subject to Congressional approval) the seven members of the Federal Reserve Board and also who serve as chair and vice-chair, they are usually people from or friendly to the commercial banking sector. Ben Bernanke is the current chair. The twelve regional Federal Reserve Banks across the country have nine-member boards and a president appointed by the banking sector, which results in the current quasi-public, quasi-private system. The body that sets monetary policy is the Federal Open Markets Committee that consists of the full seven members of the Federal Reserve Board of Governors and the twelve regional bank presidents, although only five of the latter twelve are voting members of this committee at any given time.
While an argument can be made for insulating the Fed at least partially from political pressure, there is little reason for allowing its workings to be secret. There is no reason why the Fed, an agency that is ultimately responsible to the people, should be allowed to do what it wants without public scrutiny. In fact, the Fed was created by an act of Congress and Congress only delegated to it the right to make these kinds of financial decisions. The Fed is an agency of Congress and thus subject to oversight but over time, Congress has abdicated that oversight role and left the Fed to pretty much serve the interests of the financial sector. This should not be surprising considering that the financial sector pours money into the coffers of congressional members to make sure they are friendly to it.
Congressman Ron Paul (R-Texas) has long been a critic of the Fed and would like to see it eliminated. He believes that despite its relative autonomy, the Fed's ability to print money still leads to reckless spending. As part of his efforts at fiscal reform, he wants to return the US to a time when its currency was based on the gold and silver standard, where those precious metals would be the ultimate currency and the US dollar would have a fixed value with respect to an ounce of those metals. This would restrict the amount of dollars in circulation to the amount of gold and silver that the US government owns, since anyone would have the right to demand that the government exchange their dollars for gold or silver at that fixed rate.
The US, as part of the Bretton Woods international system of currency rates created after World War II, used to have such a system where gold had the fixed value of $35 per ounce, but in 1971 President Nixon abandoned the system. At that time, the Vietnam war was creating huge budget deficits that were financed by government borrowing substantially funded by foreign governments, which meant that the US no longer had enough gold to cover its obligations. As other countries sensed this deficiency, they demanded gold for their dollars and US gold reserves dropped to dangerously low levels so Nixon abruptly announced that the US was leaving the gold standard. (The plot of the 1964 James Bond film Goldfinger, based on Ian Fleming's 1959 novel, centered on the villain trying to irradiate the US gold reserves in Fort Knox thus making them useless as currency.)
Ever since the de-linking of the US dollar to the gold standard, the price of gold has fluctuated with the current price being around $1350 per ounce.
Ron Paul thinks that the Fed should be abolished and Stephen Colbert comments on this idea.
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
Stephen Colbert also has Ron Paul debate Davis Leonhardt on whether going back to the gold standard iis a good idea. The 'debate' is not very informative, though.
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
|Gold Faithful - Ron Paul & David Leonhardt<a>|
The idea of whether the US should go back to the gold standard is a little too much into the economic weeds for me. My initial reaction is to be skeptical of it although I really do not have the expertise to judge. The idea of a monetary system being based on the supply of mineral ores that are scattered unevenly across the globe and unrelated to any economic system seems a bit weird to me.
Next: Efforts to increase oversight of the Fed.