Federal Reserve Bank
Ask Dr. Dollar
Dollars and Sense magazine, Spring
The Federal Reserve is a very powerful
institution, and the people who run the world's large banks are
a very powerful group of people. No one would claim otherwise.
Also, the bankers have common interests, and, like any other group
of people with common interests, they do what they can to bring
about government policies that favor those interests.
Because the Federal Reserve (the "Fed"),
as the central bank of the United States, implements policies
that most directly affect the bankers, they of course are quite
concerned with what the Fed does, how it is structured, and who
runs it. And, like other elite groups, bankers certainly meet
in private-in "secret," if one prefers-to figure out
how best to get what they want.
With all that said, however, the idea
that a small cabal of bankers runs the world through the operations
of the Fed is wrong on several counts.
First of all, financial operatives are
not the only powerful economic group. There are, for example,
the people who run the large oil companies, the Silicon Valley
operations, and the pharmaceutical firms, to name a few of the
currently important capitalist clusters. These other groups have
some common interests with the bankers, and they often all work
together, both in private and in public, to achieve their common
ends; they do not call in the press every time a few of them meet.
(A recent example: when Vice President
Cheney held a meeting to formulate the
Bush administration's energy policy, the list of attendees-widely
assumed to be top energy sector executives-was kept secret.) But
to boil down this large class of people to a few bankers both
distorts reality and obscures the conflicts that sometimes exist
Second, not only are there often differences
among these groups, but there are often contradictions between
different things that they want. For example, they want a well-trained
work force, but they do not want the high taxes that would be
needed to pay for that training; they want freedom from government
regulations, but they want the economic stability that often depends
on government regulation; they want free access to international
markets, but they want special preferences (as compared to foreign
companies) within the United States; they want to pay low wages,
but they want a populace with enough income to buy their products.
Third, while this set of people is undoubtedly
very powerful in affecting the operation of our economic lives
and in shaping history, they do not shape history just as they
please. They simply can't control everything-as the problem that
the Fed has with long-term interest rates illustrates (see below).
They cannot control the economy just as they would like and they
cannot control the rest of us just as they would like. Formal
democracy, however limited, is a useful device. The power that
the rest of us have can be a substantial constraint on the actions
of big business-bankers, energy executives, and all the others.
But let's return to the Fed. What does
it do, and how? The Fed has a variety of functions involving regulation
of the banking system, including influencing the amount of money
in circulation and interest rates (the price people pay to use
other people's money). Of special importance, the Fed can influence
the amount of loans that banks issue. When a bank issues a loan,
this creates more spending power. This spending power (usually
in the form of increasing the amount in the borrower's checking
account) is the same thing as more money in circulation. So by
influencing banks' loan actions, the Fed influences the money
Right-wingers who view the Fed and the
banks as an evil cabal tend to claim that by allowing banks to
increase the money supply, the Fed is debasing our currency. The
increased money supply lowers the value of money in relation to
other goods, and the money prices of other goods rise-i.e., inflation.
Moreover, they view this as a way of allowing the government to
engage in excessive spending: the government can borrow from the
public, but then, because of inflation, can repay in dollars that
have less worth.
This fascination of some right-wingers
with inflation and the debasement of the currency is ironic because,
in fact, the Fed often (although not always) acts in exactly the
opposite manner-limiting the growth of the money supply and restricting
inflation. Banks, and businesses generally, like stable prices
and stable interest rates. One reason is that a low-inflation
policy keeps unemployment rates higher than they otherwise would
be, weakening the bargaining power of workers and shifting the
distribution of income in favor of capitalists.
A further irony: the Fed is not as powerful
as either its proponents or its critics think. The Fed really
has control only over short-term interest rates. Long-term interest
rates, however, are more important (as they affect major investment
decisions) and are influenced by many forces beyond the Fed's
control. The expectations of business about future ups and downs
of the economy-and about the myriad events that affect those fluctuations-are
the central factors determining long-term interest rates. Neither
capitalists' behavior nor capitalist economies are so easily controlled.
If they were, then there would never be any stock market crashes,
burst financial bubbles, or other serious disruptions.
By the way, the Fed was not formed in
secret. The Fed was created by legislative action, formally and
publicly. But there were certainly private (secret) meetings that
laid the groundwork for it. Of course, the same is true of legislative
actions affecting the pharmaceutical industry, Silicon Valley,
insurance firms, and the list goes on. Nothing that special about
the creation of the Fed.
Finally, while I am sure that there are
many decent people who see the Fed and the bankers as the source
of the world's problems, this view is often part of a larger anti-Semitism.
The focus on "Jewish financiers" (the Rothschilds, for
example) as the source of our economic and other problems is as
old as it is wrong and offensive.
This issue's Dr. Dollar, Arthur MacEwan,
teaches economics at the University of Massachusetts Boston and
was a founder of Dollars & Sense.