What’s wrong with the anti-Fed crankery?
While one can find many legitimate criticisms of the Fed (incompetence, cronyism, etc.), much of the opposition to the Fed comes from a basic misunderstanding of how it operates or a conspiratorial view.
Conspiracy theories
The Fed has been a frequent subject of conspiracy theories alleging the Fed deliberately creates inflation, recessions, and even the Great Depression, through manipulation of the money supply.[10] Father Coughlin, the John Birch Society, Liberty Lobby, Eustace Mullins, Pat Robertson, Alex Jones, Texe Marrs and several others have frequently expressed such conspiracy theories. Many of the popular claims made today are recycled from G. Edward Griffin’s The Creature from Jekyll Island.[11][12] In some (but not all) cases these conspiracy theories have an anti-Semitic component, alleging “Jews” secretly or openly control the Fed. These theories are furthermore sometimes tied in to other conspiracy theories about the Trilateral Commission or the New World Order, or manipulation of the U.S. economy by the Rockefeller and Rothschild banking families.[13]
It seems like many of Ron Paul’s followers have come up with a new completely insane theory in 2011 about the Federal Reserve, borrowing some points from Lyndon LaRouche. Apparently the Federal Reserve is now a foreign banking institution controlled by the British, and Britain is now firmly in control of (who else?) the Rothschild family. Through their control of the Federal Reserve, they are making the national debt increase (apparently the Federal Reserve controls fiscal policy) to the point where they can take their former colony back (apparently being heavily indebted means England wins you). The only person who can save the US is now Ron Paul,[14] who is above the influence.[15]
Ownership
Critics of the Fed make a big deal out of the fact that the Federal Reserve is a private corporation partially governed by the same banks it is supposed to regulate rather than a federal government agency. So what? This is similar to the status of Amtrak, Fannie Mae, Freddie Mac, the Tennessee Valley Authority, and the United States Postal Service, all examples of other major clusterfucks. Of course, being a major clusterfuck is not synonymous with being a conspiracy controlling the world — indeed, they are almost complete opposites.
There is also the misconception that the Fed is completely independent or private. This is false as it is a quasi-public entity. The Fed, like most central banks in the world, is considered “independent,” which is basically a term of art meaning that its day-to-day operations are not overseen by the federal government. However, its chairman and board of governors are appointed by the president, it is subject to Congressional oversight,[16] and its mission of maintaining price levels and full employment is determined by Congress.[17] It is also subject to certain types of audits by the Government Accountability Office (GAO), and any profits the Fed earns go straight to the Treasury Department.
The extent to which banks “control” the Federal Reserve is that they technically “own” it, but not in the way that shareholders own Microsoft. Since the Federal Reserve was created by Congressional charter, they are not organized like a normal corporation. Shareholder banks have no voting power, and all decisions are made by aforementioned government-appointed policy wonks. Shareholder banks elect 6 out of the 9 members of each regional Federal Reserve Bank’s directors, but these regional directors have no power over monetary policy; that power lies solely in the hands of the central Board of Governors. In fact, compared to the Postal Service, the Fed seems like a marvel of reasonable bureaucratic design.
Trouble with accounting identities
At the simplest level of anti-Fed crankery is the idea that the Fed “owns” the government. This is due to a misconception of how the Fed operates. Monetary cranks claim that the Fed lends money to the government at interest, thereby stealing “the people’s” money and selling us into debt slavery or some similar nefarious scheme to take over the US government. The way this works, however, is not quite the same as your regular commercial bank. The interest on debt held by the Fed actually goes to two places: One, the Fed pays itself out of this interest to cover its own operating costs, and two, the rest of the interest is rebated to the treasury. So, no, the Fed does not own the government or sell us into debt slavery.[18]
Pseudolaw
This usually ties into the above point. The basic idea is the the Constitution gives Congress the power to coin money, so the Fed is unconstitutional because it is not the Congress. This is a pseudolegal argument because the Congress may delegate its powers. This is similar to pseudolegal arguments made by gold bugs.[19]
Congressional involvement
Sometimes a big deal is made of the fact the law bringing the Fed into existence was passed December 23, 1913, implying that most of the Congress was away for Christmas. Here again the reality is quite different–the House passed the law 298-60 with 76 not voting but with 34 announced pairs, while the Senate passed it 43-25 with 27 not voting but with 12 announced pairs[20]
For those not aware an announced pair is where a Member of the House or Senate who will be absent arranges with another Member who who will be present and is on the opposite side of the issue to form a “pair” with the absent Member, thus allowing the absent Member to have recorded how he would have voted had he been present.[21] This means that at best only 42 more House members and 12 more Senate members could have said no to the creation of the Fed–way too few to have changed anything.
Austrian school and free banking proponents
Much of the opposition to the Fed in non-conspiratorial circles (though there is some overlap) comes from the Austrian school, who are free banking proponents and generally draw on Ludwig von Mises’ arguments against central banking. Ron Paul is particularly known for his multi-decadal anti-Fed crusade in Congress. In short, they claim that the Fed creates the business cycle[22] through the expansion of the money supply which leads to “malinvestment” due to easy money.
Ignoring Lessons from the US Free Banking Era (1837 to 1864)
The biggest flaw with the free banking proponents is they either are ignorant or ignore the many problems seen in the Free Banking Era of the US.
The first problem was that during this era banks issued bank notes based on the gold and silver in their vaults effectively printing money. Since these bank notes could only be redeemed at face value at the bank that issued them the result was the actual value of the note decreasing the further from the bank it got. Then there was the issue if the bank failed these bank notes became worthless. This made any form of long distance commerce difficult if not impossible.
The second problem was since the laws were set up by the individual states there was no consistency with regard to reserve requirements, interest rates for loans and deposits, capital ratios, or anything else. Worse enforcement of what laws there were was highly variable within a state. This resulted in some states what was later called wildcat banking where the bank notes were not backed by precious metal at all but by mortgages or bonds.[23] In other words the exact same problems as are claimed regarding the Fed but with even less oversight.
Ignoring the original Great Depression (1873–79 or 96)
Before the Crash of 1929, the term “Great Depression” referred to the period of 1873–96 which was marked by deflation (largely because the US shifted from a bimetallic standard to a de facto gold standard in 1873) and the rapid industrialization of the country. The term Gilded Age is also applied to this period and sometimes in a pejorative manner – a shiny golden cover hiding a rotting or rotted core. The deflation that marked this period is why some wanted to return to a bimetallic standard as, hammered home in William Jennings Bryan’s famous Cross of Gold speech in 1896. Even the shorter range of 1873–79 stated by the NBER is longer than the 1930’s Great Depression by 22 months. This era is now called “the Long Depression”; the lesson it gives us is that switching over from a bimetallic standard to a gold standard (which the Coinage Act of 1873 effectively did) triggers off deflation for extended periods of time.
After the establishment of the Fed
The US only saw three major banking crises after the establishment of the Fed (Great Depression, S&L crisis, 2008 financial crisis) and only two since the creation of federal deposit insurance compared to one about every decade prior to that.[24] The business cycle had also seen shorter and smaller contractions.
Essentially, what this demonstrates is that certain libertarians[25] and Austrian schoolers like Ron Paul seem to love the idea of going back to the 19th century and having us all stuff gold bricks under our mattresses every time it looks like there’s going to be a run on the bank.
