The Federal Reserve, arguably the most significant central bank in the world, is a source of controversy and critique internationally — its history of establishment and its system of accountability is one of question: does the accountability structure provide an adequate and acceptable solution to an exploitable problem?

Those highly critical of the Federal Reserve often cite the Great Depression as being caused by the System. Current chairman Ben Bernanke acknowledged this claim in 2002, saying “[he] would like to say to [Milton Friedman]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

The responsibilities of the Federal Reserve, are, especially in times of crisis, possibly the most important economic variables controlled by the government. Or… almost the government. The Federal Reserve is only quasi-public, with a dependency on the Act under which it is established; but little in terms of direct accountability and auditing potential. The System has no mandated budget, has no system of proper audit, and has limited and internally determined Congressional availability of supervision — many believe that this system, combined with a wide-spread misunderstanding of economic variables, has created a scenario where middle class citizens consistently sacrifice their standards of living in exchange for the written responsibilities of the Federal Reserve.

To some, this veil of secrecy is intentional: weak answers to the “why” question are often shrouded with suggestions that in fact, the people should not know what is going on with their dollar. As the value of the dollar dwindles towards nothing, macroeconomists sometimes suggest that anything but the most soft-spoken, rational and censored output from a body entrusted with so much could easily create panic. To none, at least none effected, are the costs to living standards acceptable: inflationary policies at the Federal Reserve (and other central banks worldwide) generally encourage a two per cent reduction in the value of money, per year; often rationalized under the guise of “keeping labour markets fluid.”

Inflation is a complicated issue; strictly, it is created by the increase of the money supply, which can happen at a number of places. In the current system, the Federal Reserve and U.S. Treasury create money: often with the goal of driving down the Fed Funds Rate or general interest rates, and the fractional reserve banks can create money by loaning it through what is called the money multiplier. In a central bank-free economy, the economy’s condition and productivity determines the interest rate, which in turn determines how the supply-and-demand factors come together to determine the amount of lent money; which would, in theory, shift the inflation rate to settle near zero (assuming a unit of account that did not change whatsoever; a clear impossibility). In a nutshell, the central banks allow the money multiplier to have effects on inflation that slowly eat away at savings for those who are not positioned to take advantage of the boom-and-bust nature of cyclical inflation.

The responsibilities of the Federal Reserve are, primarily, the management of monetary policy, maintaining stability and handling systemic risk in financial markets, and the regulation of banking institutions; a goal that the International Monetary Fund says is not being fulfilled. Finally, the Federal Reserve provides “certain financial services to the U.S. government.” Combined, these goals are intended to provide a “safer and more stable monetary and financial system,” according to the Federal Reserve’s online publication.

These goals are lofty, yet respectable. As an institution that was created shortly before the Great Depression, in 1913, it often takes blame for that particular systemic shock, as well as changes in the monetary climate which followed. In reality, central banking was in effect long before 1913 in the United States: First Bank of the United States, chartered in 1791 — and later, in 1816, the Second Bank of the United States — both assumed many of the same responsibilities of the Federal Reserve: the establishment of “financial order,” to resolve and cleanse the numerous currencies in circulation at the time; to collect, store and account for taxes on behalf of the U.S. government; and to manage national credit, both at home and abroad.

The establishment of the First Bank of the United States marked the beginning of monetary inflation — the Bank, which needed to secure funding to begin operations, petitioned the First Congress for a purchase of $2 million in stock; the U.S. government did not have $2 million, so rather, a plan was established where the Bank would loan the United States $2 million — to be paid back in 10 annual installments — which would in turn be used to purchase the stock.

The First Bank lost public support in 1811, when its original twenty-year charter came up, only to be followed by the Second Bank of the United States in 1816. Andrew Jackson, vehemently opposed to the creation of such a bank, was reelected in following years and removed all public funding from the Second Bank. Finally, the renewal of the charter was denied in 1836.

This, clearly, did not mark the end of centralized banking for the United States. The aptly-named Free Banking Era which followed the end of the Second Bank, allowed states to regulate and manage their own charters and banking systems; regulating reserve requirements and interest rates much like today’s banking establishment. 1863 marked the end of yet another historical era of U.S. banking, when Free Banking came to an end with the passing of the National Banking Act: an act which provided loans to the Union and appointed a Comptroller of the Currency to manage the new system of national banking. This system imposed a 10 per cent tax on state-issued bills, effectively destroying the state banking establishment in favor of the national banks, who were mandated to fund Treasury spending and in turn, the side of the Union, by holding T-bills to back private loans.

1907 brought an end to this, when the Panic of 1907 — a bank run caused by a cyclical monetary aggregate and a number of traumatic natural disasters — and an international move towards central banking systems encouraged the public on similar motifs. A rise of fiscal power had established itself over the recent years in a number of families and financiers, but this was not of great concern to the community: of greater concern was the instability seen in recessions and bank runs like that of 1907 and the inability of a disconnected financial system to regulate itself — at least, this is how it is seen today; this is where things become a little murky.

This collective concern raised support for the Federal Reserve Act, but a number of conspiracy theorists and intellectuals have since questioned whether the centralized system of banking was one of deceit. Infamous anti-Semite, Eustace Mullins, author of the book “Secrets of the Federal Reserve” commissioned by political prisoner Ezra Pound, was told by publishers in New York that his book simply “could not be published [by anyone in New York.]” The prisoner who commissioned the book, Ezra Pound, was released after 13 years of imprisonment in 1958 when charges were suddenly dropped.

“I have sounded the toxin that the Federal Reserve System is not Federal; it has no reserves; and it is not a system at all, but rather, a criminal syndicate,” starts Mr. Mullins, in his book which reads rather like a lofty conspiracy theory. Mullins’ book speaks of a meeting shortly prior to the establishment of the Federal Reserve Act — the Act which started it all — on a private island off the coast of Georgia; Jekyll Island, an island owned by a club of America’s richest people. In attendance were chief staff associated with JP Morgan, a number of other major financial institutions, and prominent Republican senator, Nelson Aldrich.

“Here are the simple facts of the great betrayal. Wilson and House knew that they were doing something momentous. One cannot fathom mens’ motives and this pair probably believed in what they were up to. What they did not believe in was representative government. They believed in government by an uncontrolled oligarchy whose acts would only become apparent after an interval so long that the electorate would be forever incapable of doing [anything] efficient to remedy depredations.” said Dr. Ezra Pound, the commissioner for the book.

Mullins’ claims have since been written off as anti-Semitic, suggesting that Jewish control of much of the banking industry is the true source of his appeals against it. One wonders though, if there’s not more to it; rejections of Mullins’ claims are generally attacks on his character, rather than his words, words which he has backed up with a whirlwind list of sources derived from newspapers, the Library of Congress and a whole host of other destinations. His story talks about secret meetings that have been grazed upon by others historically, and questioned by a select few American historians and economists: how did the Federal Reserve Act come to be?

How is the Federal Reserve System truly structured then? Authorized by the Federal Reserve Act, it starts, by being divided in to twelve Federal Reserve banks, positioned strategically across the country to assure the masses of equal representation. Each bank has shareholders, which are private banks, each of whom is issued stock, which may not be sold or traded and receives a 6 per cent dividend per year by law. Holding stock in the banks gives members absolutely no voting or controlling interest; members do, however, elect six of the nine directors to their positions within the regional banks. Congress provides absolutely no direct funding to the System, and its decisions are not ratified or monitored by anyone within the executive or legislative branches; the Federal Reserve is mandated by law, as most central banks are, to uphold the “overall objectives of economic and financial policy established by the government.”

The chairman and seven governors of the Federal Reserve Board are appointed by the President of the United States for a maximum term of 14 years, and are confirmed by the Senate. By law, these governors must represent a “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country,” and they must originate from different areas of the twelve Federal Reserve districts (determined based on the locations of the banks). These appointments cannot be revoked due to policy disputes, and are staggered such that a President who serves two terms will not have appointed a majority until late in his second term, under ideal conditions; in reality, governors often do not serve their full terms. The chairman and vice chairman are decided upon every four years by the President, and serve as a spokesperson of the entire board.

The Chairman reports twice a year to Congress on the Federal Reserve’s “monetary policy objectives,” and receives a wage of just under $200,000. These reports contain some level of accountability information — at least to the extent of appeasement, though they are subject to no formal review and cannot be subjected to mandatory reviews from the Government Accountability Office.

These seven members of the established board, combined with five of the twelve presidents of the regional Federal Reserve Banks (rotated, with exception of the largest regional bank, the Federal Reserve Bank of New York) formulate the voting members of the Federal Open Market Committee. All Federal Reserve Bank presidents are expected to attend the meetings, even when they are not voting members. This Committee meets eight times a year to formulate predictions and strategies for dealing with economic policy — during periods of crisis, emergency meetings of the FOMC are not unheard of. Minutes of these meetings are made publicly available, delayed based on a number of factors; a number of critics suggest that these minutes are stripped to their bare minimums, and full of what the public calls “Fed speak,” economic terminology that includes a number of derivative terms that are left entirely unexplained. Before 1994, the Federal Reserve did not release transcripts of their meetings whatsoever — even when presented with Freedom of Information Act requests the Federal Reserve testified to the belief that the Reserve Banks were not federal agencies.

As of recently, the transparency of the Federal Reserve has come back in to question. With $2.2 trillion in loans to banks which current Chairman Bernanke says cannot be disclosed in the interests of the “effectiveness” of the system, a number of politicians, including the libertarian advocate from Texas, Ron Paul, have introduced legislation which would bring forth a new level of accountability for the Federal Reserve, one which may be entirely unprecedented.

“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, where as the currency pays nobody but those who contribute directly in some useful way. Is it absurd to say that our country can issue $30 million in bonds and not $30 million in currency? Both are promises to pay, but one promise fattens the usurers and the other helps the people.” — Thomas A. Edison.

1. Criticisms of the Fed
2. Eustace Mullins and Ezra Pound's Conspiracy
3. Structure of the Fed
4. View all pages.

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