Happy 100th Birthday to Our Federal Reserve System

Today is the 100^th anniversary of the Federal Reserve System, affectionately and reverently known as the, “Fed.”  Since the creation of our country, we have created two documents that show real and enduring genius.  One is the Northwest Ordinance and the other is the Federal Reserve System.   

            I do realize that many members of the lunatic fringe think the Fed is part of some nefarious system of world dominance.  They are paranoid, ignorant and, yup, I’ve double checked this—wrong.  The Fed is a central, independent governmental agency.  Its Board of Governors oversees the work of 12 regional Federal Reserve Banks in districts across the country.  The Fed sets the nation’s monetary policy, supervises and regulates banks, and helps to maintain the stability of our financial system. 

            You need only look at the difference between the financial stability of our country, and those without an independent central bank to see the value of the Fed. The steady, modest and intelligent work of the Fed is conducted by the 7 man governing board.  The Fed’s Chair (arguably one of the most powerful humans on the planet) is appointed to a 4 year term.  He (or now, she) is appointed by the President and approved by the Senate.  The members of the seven man board each serve a 14 year term.  These long and staggered terms make them impervious to political manipulation or expediency.

            Unfortunately, economics is an area of general ignorance on the part of the public, and ignorance frequently attracts crackpots instead of education.  If your only knowledge of the Fed comes from a poorly researched book about Jekyll Island (the Georgia resort where the makeup of the Fed was ironed out by Carter Glass et.al.) then you really don’t know Jack about our Federal Reserve System.  

            Probably the most enduring myth about the Fed is that it prints money.

It is not the Fed but the Treasury Department that prints our currency.  These two agencies are in no way related.  They share neither funding, responsibility nor personnel.   The Fed routinely destroys old, mangled, dirty or otherwise corrupted bills.  They then request the U. S. Treasury to replace that currency by printing it in the denomination needed.  The Fed must also hold as collateral securities (usually government bonds or gold certificates) equal to the amount of currency it has put in circulation.  This number is finite and relatively stable.

Neither does the Fed finance governmental deficit spending by printing more money.  The Fed can purchase U. S. Treasury securities, but only from open market operations.  It is prohibited, by law, from purchasing these directly from the government.  When the Fed buys securities, it creates a reserve of cash in the banks.  Those banks can use (or not!) that cash for the purpose of lending.  It is when banks (not the Fed) lend money that revenue is generated. 

            Most of the securities the Fed buys are old ones—preowned if you will.  The price is determined by supply and demand.  It is you, the bank, and individual investors who choose whether or not to buy or sell securities, to borrow or lend, to create or inhibit demand for money.  It is in loaning you money that a bank, “creates” wealth.  And, yes, when you pay off your loan that same wealth is annihilated.  It isn’t the Fed that creates or destroys money, it is you. 

            The Fed is part of the genius and success of this country.

            Learn! And keep the faith.