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Are Fed Board Employees "Essential" Government Workers?

by Bradley Jansen September 30th, 2013 9:02 pm

All the news in DC right now is focused on whether there will be a (partial) Federal government shutdown. (In the spirit of full disclosure, I live here, and many of my neighbors are the ones that would potentially be affected so there's no escaping it.)  Should the political impasse continue, all "non-essential" Federal employees stay home tomorrow.

So my question is: are Federal Reserve Board employees "essential" government workers?  First of all, let's clarify that they are, in fact, federal government employees.  But are they "essential" ones?

Despite lots of baseless perceptions among some of our fellow anti-Fed rabble rousers, no, the Fed is not a private bank.  The Federal Reserve Board is a Federal government agency. The regional Reserve Banks are private. The Federal Reserve System is a hybrid.  One popular page circulating around "10 Things That Every American Should Know About The Federal Reserve" says:

#1 The Federal Reserve System Is A Privately Owned Banking Cartel

The Federal Reserve is not a government agency.

The truth is that it is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system. We do not know how much of the system each bank owns, because that has never been disclosed to the American people.

The Federal Reserve openly admits that it is privately owned. When it was defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated unequivocally in court that it was "not an agency" of the federal government and therefore not subject to the Freedom of Information Act.

To back up his claim, Michael Snyder cites a link to a reputable source.  His source says:

"The Federal Reserve System serves as the Central Bank of the United States, and is comprised of the Federal Reserve Board — a federal agency located in Washington, D.C — and 12 regional Federal Reserve Banks. Congress has oversight over the entire system."

So, um, well, if you make a claim that the Fed is not a federal government agency you probably shouldn't cite a reputable source disproving your point.  The Federal Reserve Board is a federal agency.  The Federal Reserve Board website itself explains the same thing:

The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate. The full term of a Board member is fourteen years, and the appointments are staggered so that one term expires on January 31 of each even-numbered year. After serving a full term, a Board member may not be reappointed. If a member leaves the Board before his or her term expires, however, the person appointed and confirmed to serve the remainder of the term may later be reappointed to a full term.

[One Facebook poster in an anti-Fed group argued that the Fed is a private banking cartel as she understood it from G. Edward Griffin's Creature from Jekyll Island.  So, I pulled my copy off of my shelf (May 1988 edition), but I couldn't find anything backing up her baseless assertion:  p. 69 says Federal Reserve Board required banks to offer loans at less than S&Ls (private banks can't require other banks to change their rates); p. 71 Gov Celeste flew to DC to request Federal assistance from the Fed Board; etc. Nothing saying that the Federal Reserve Board is not a federal government agency.]

Which brings me back to my original thought: since the employees of the Federal Reserve Board are federal government employees, are they "essential" ones?  Obviously, all of us here at freebanking.org don't think the Federal Reserve Board employees are essential which is, I guess, honestly, subjective.  But does the government itself consider them essential?

Today I went straight to the source and called the Federal Reserve Board itself and posed the question to them: Would a partial federal government shutdown affecting "non-essential" federal government employees apply to Federal Reserve Board employees.  The poor guy who answered the phone wasn't prepared for my question (and I suspect alarmed that he might be laid off without pay the next day for an indeterminate amount of time) so he put me on hold.

When he returned, he explained that since the Federal Reserve Board employees are not paid from the Congressional appropriations process that they are immune from the effects of a potential government shutdown.  Of course I knew this as I explained in a Daily Caller column:

The Federal Reserve’s funding process is little understood, and therefore little scrutinized. That needs to end. Here’s how it works: The Fed buys Treasury securities with money it creates out of thin air. The major source of the Fed’s revenue is taxpayer-funded interest on those bonds. The Fed spends however much it wants and rebates the remainder to the Treasury. This end-run around the Congressional budget process violates the spirit of the Constitution, which grants all budget power to Congress.

Hopefully the talk of a shutdown and its potential effects on the economy will focus minds on the real culprit causing havoc on the economy: the Federal Reserve.  (Not that I don't think that we're lacking requisite leadership from all of the responsible players: the President, Senate Majority and Minority Leaders, House Speaker and Minority Leader.)  I stand now by my call then:

The Federal Reserve, which has the power to print money, also sets its own operating budget. That’s the wrong kind of independence. Unfortunately, recent proposals to audit the Fed do not address this issue.

Putting the Federal Reserve on a Congressional budget would bring much-needed accountability and fairness, instill a culture of efficiency, and increase effectiveness. An annual Congressional appropriation process would do more to bring long-term accountability to the Fed than the popular audit proposal.

Let's use this government budgeting failure as an opportunity to make needed systemic changes and put the Fed on a budget.


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"Can the Monetary System Regulate Itself?"

by Larry White September 28th, 2013 10:44 pm

Here's audio of a talk I gave at CEVRO Institute in Prague earlier this month.

https://www.youtube.com/watch?v=rQTaqOFh-bA


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Indian Gold as Alternative Currency

by Bradley Jansen September 24th, 2013 10:44 pm

Recent events unfolding in India illustrate that Indians and others use gold as an alternative currency.  Several years ago, I made this point when I opened up my talk at the Mises Institute on a panel on how to transition to sound money.

Briefly, many Indians and others throughout the world still use gold as money for savings, etc.  Millions, likely billions, of people around the world are "unbanked" and lack established relationships with formal financial institutions.  I've ranted before on how technology is reaching these people faster than decades of central bank failures: look at financial apps on phones and other mobile technologies that allow people far from an ATM--much less a brick and mortar bank--give people access to financial services.  In far too many places in the world, regulatory hurdles limit consumer choice and protect endemic corruption.

Which brings us to India which earlier this month inaugurated a new governor, Raghuram Rajan whom the New York Times explains is described in terms usually reserved for Bollywood stars.  It gets worse, the NYTs continues, " [The] Reserve Bank of India [has] tried and failed to stop the steep decline of the rupee against the dollar. India’s chronic inflation is almost certain to move higher in the coming months, given the country’s heavy dependence on imported oil priced in dollars."  No mention of the growth of the Indian money supply. Wikipedia provides a good historical graph:

 

Tradingeconomics.com provides a good chart for the more recent M3 Indian money supply growth:

Or as the Times explains in another article, "The rupee fell further and faster in August against the dollar than any of the world’s 77 other internationally traded currencies as investors in affluent countries took their money home for higher returns. It was down 20 percent since May, a period in which the stock market followed suit and fell almost 8 percent."

The new Indian central bank governor does not seem to be the best one to sympathize with everyday Indians and respect their flight to gold.  Says the Times:

Mr. Rajan also has a history of skepticism about financial innovations, having warned in a paper in 2005 that they had made credit markets more risky and could prompt a financial crisis.

That was not a popular view at the time. Lawrence H. Summers, the former Treasury secretary, now said to be the chief candidate to lead the Fed, publicly described Mr. Rajan’s paper then as “slightly Luddite” and “largely misguided.”

Is this really the right time for a misguided Luddite to run the central bank?  Is there really any time for it?  No, of course not.  Alas, bureaucracies are not known for changing quickly with the times anyway.

Dr Subroto Roy, in the Cayman Financial Review, provides a good historical review of the Indian currency and concludes:

To move towards a currency of integrity today that befits the real growth requires comprehensive candid study of the structure of government liabilities and expenditures, systematic cleaning of government accounts at their roots, seeking to raise productivity of government investments and expenditures by better use of the audit function, as well as bringing coherence to fiscal and monetary policy through institutional changes in the processes of public decision-making, specifically, separating the banking and central banking functions from the Treasury function, while bringing the planning function to be one serving the Treasury function rather than pretending to be above it.

Waste or ostentation in public expenditure itself creates incentives for evasion of taxes; indeed, the untaxed economy may even have caused an underestimation of real growth being made. The road exists to be taken though it may be one that demands excessive political courage.

So what have the Indian people done in response to the inflation (the loss of rupee value)?  Done what any other right-thinking people would do: vote with their feet from rupees to a better store of value (in this case, gold).  Kevin Lees at suffragio explains it well:

As the rupee has fallen, the higher cost of imports has accelerated India’s current account imbalance.  Much of the problem lies in Indian demand  for gold imports, which constitute nearly three-fourths of India’s current account deficit.  But it’s not about bling as much as it’s about the fact that hundreds of millions of rural Indians lack formal access to banking, so gold represents the safest and easiest means of saving.  That’s why the Indian government is encouraging Indians to stop buying gold from abroad.  Although India raised the tariff on gold imports from 4% to 6% and although the RBI is toying with the idea of instituting gold-backed savings funds for Indians (the idea is to reduce imports by creating a kind of domestic gold exchange), demand for gold has remained steady.  That’s intuitive enough — even if you have access to a bank account, if you’re a farmer in Bihar state and the rupee keeps on losing purchasing power, of course you would rather invest your savings in a hard metal like gold instead of a drooping currency.

What do central planners do when real people in the real world don't do what the planners told them to do?  Try to force them to do it.  In this case, India then banned gold imports (because, you know, that's how you show you care about the poor desperately trying to escape from your bad policies and impoverish them).  Falsifying price signals is a tried and true form of deception after all.

India has recently (in a limited and bureaucratic way that Indian bureaucrats do best) allowed the resumption of gold imports.  Don't think though that the Indian bureaucrats are now suddenly keen to let the poor people vote no confidence in the Indian monetary policies--it's gotten so comical now that the bureaucrats are going after the gold in the Hindu temples!  Apparently nothing is sacred.


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What the others have been doing (links)

by Kurt Schuler September 23rd, 2013 9:47 pm

Here is what some of the other bloggers on the site have been doing lately:

Kevin Dowd has a Web site back up: http://www.kevindowd.org. Kevin has written several books about or relevant to free banking and numerous articles. The site has links. Anybody who wishes to be really knowledgeable about free banking has to read some of Kevin's writings. My favorites are his books Competition and Finance and The Experience of Free Banking. (I have a couple of chapters in The Experience of Free Banking. Kevin both edited and contributed to the book, but I would have the same high opinion of it were my chapters absent.)  Kevin has also written both easier and harder books and articles; he moves easily from more popular writing to highly technical material.  Whatever level you are at, he has written something you can learn from.

Larry White testified to the House of Representatives Committee on Financial Services on "The Federal Reserve and the Rule of Law."

George Selgin favorably reviewed John Allson's book The Financial Crisis and the Free Market Solution. Good opening line: "A busy reader wanting to understand the subprime crisis now has dozens of books to choose from, even counting only the ones by authors who know what they’re talking about."

And here are a couple of other links of interest:

Will Luther on why digital currencies aren't more widely used.

A British government report from earlier this year that I just got around to looking at on monetary options for Scotland if it becomes independent. The report does not discuss free banking as an option. It does, however, have some interesting tidbits on Scottish note issue on pages 47-48. Scottish banks hold Bank of England notes in denominations of £1 million and £100 million as reserves against their note issues. They must be the highest-value notes in the world.


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Ankle deep in methodology

by Kurt Schuler September 19th, 2013 11:31 pm

On his blog Free Advice Robert Murphy has written a number of posts on thinking like an economist, or, as economists like to call it, methodology. (There are several posts from this back to September 3.)  The post I linked to is an excerpt from Ludwig von Mises in Human Action. Mises wrote, "In the concept of money all the theorems of monetary theory are already implied."  Er, no. I understand where Mises was coming from, addressing problems raised by Immanuel Kant in the Critique of Pure Reason and addressed by Kant and subsequent generations of German-language philosophers he influenced, but I don't think Mises's approach is of much help to a practicing economist trying to make the world a little better.

Mises compares economic reasoning to geometry, declaring "All geometrical theorems are already implied in the axioms." But there are multiple axioms, leading to quite different results depending on which ones you adopt. (Given a straight line and a point, can you draw more than one straight line through the point parallel to the first line? Under some geometrical systems, yes, under others, no.) Why are some axioms more valuable than others? Because they help us confront the world as we find it. Economists are emphatically not simply working out a system of a priori reasoning. We are going back and forth between abstract reasoning and the confusion of the world around us to develop patterns of explanation that are useful for our actions. The Austrians in particular distrust reasoning carried out for its own sake, or even for the sake of addressing pressing problems, from premises that seem ludicrous (infinitely lived agents, perfect information, a central auctioneer for the economy, "banks" modeled as having no shareholders' capital, etc.).

Mises's approach also runs the danger of leaving out the people from the theory-building. It's not knowledge unless somebody knows it. The theorems are not just out there waiting patiently to be discovered. As far as we are concerned they do not exist until somebody has developed them, and once developed, they cease to exist if not transmitted to other people. There is not one ("the") concept of money, there are multiple concepts and there are multiple possible monetary theories, which helps explain why different schools of economic thought have such different ideas about money and monetary policy. It is notable to me that, as I remarked in a post about Mises's 1912 Theory of Money and Credit, he does not cover the  great variety of monetary arrangements that existed in his day, some of which have since become extinct. He limits himself to those existing within a day's train ride from Vienna.

In the practice of economics there is a back-and-forth between the world as we experience it and the ideas we use trying to make sense of it. Money is a field of economics in which it is particularly the case that without the experience of various kinds of monetary arrangements it is hard to imagine that somebody would ever have thought of them. The theory has come after the experience, both chronologically and logically.


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What is a Bitcoin?

by George Selgin September 19th, 2013 10:50 am

That's the title of a live radio program I took part in this Tuesday on KCUR, Kansas City's NPR radio station. Josh Zerlan, COO of Butterfly Labs (which manufactures Bitcoin mining hardware) also took part in the segment, as did several persons who called in with questions. The program was very ably hosted by Brian Ellison.

When I first took a good look at Bitcoin about a year ago, it could claim only about 1000 registered bitcoin-accepting merchants. Today the figure is 10,000. I wouldn't be surprised if it reached 100,000 in another year.


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Not as original as I thought

by Kurt Schuler September 8th, 2013 2:37 pm

François Velde of the Federal Reserve Bank of Chicago has pointed out in e-mail that my 2001 Cato Journal article was not the first to observe that note issue by banks in the United States was legal again. Though I made no claim to originality in the article, until now I thought nobody else had stumbled across the fact before. Jeffrey Lacker, then an economist at the Federal Reserve Bank of Richmond and now the president of the bank, had however published an article in the bank’s quarterly bulletin in 1996, “Stored Value Cards: Costly Private Substitutes for Government Currency.” In it he observed that that note issue was apparently legal both for state and federally chartered banks.

Where did he make his observation? Twenty pages into the article, in one sentence plus a footnote! He buried his most important finding in one sentence deep into the article and did nothing to publicize it. I missed Lacker’s paper in my search of the literature, or, if I saw it, the title put me off the trail. When researching the article I contacted some other economists, lawyers at the Federal Reserve Board of Governors, and persons knowledgeable about bank regulation, and none of them were aware either that note issue by banks was legal, or of the finding in Lacker’s article.

So, humility in claiming priority of discovery is always in order. And if you make a discovery, you need to make other people aware of it!


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Ronald Coase, the lighthouse, and free banking

by Kurt Schuler September 6th, 2013 7:12 am

Ronald Coase died earlier this week at age 102. Not only was he the longest-lived major economist I know of, but he was the most pithy.  His major writings could easily fit in a small book, they are accessible to an educated general reader, and they also repay deeper study. Would that we could all be like that.

One of Coase's articles was "The Lighthouse in Economics." Coase pointed out that, contrary to textbook assertions that lighthouses were an example of a public good that could not be privately provided, private lighthouses had existed and thrived in England. Coase's method--if it is true in practice, it must be possible in theory--is an excellent one to apply across all branches of economics. Those of us who blog on this site who have written about the history of free banking in Britain (Larry White), the history of private coinage in Britain (George Selgin), the history of free banking around the world (me), or the history of free banking and regulation in the United States (Steve Horwitz) have all drawn some inspiration from Coase's essay. What Coase scorned as "blackboard economics" persists in monetary theory, though, where free banking generally receives little or no attention in standard textbooks and treatises.


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Booms, etc.: Addendum

by George Selgin September 3rd, 2013 9:33 am

In case anyone might otherwise miss it, I have added an addendum to my last post, responding to Scott Sumnner's reply to it.


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A Few Thoughts on Recent Fed Policy at the LSE Blog

by Steve Horwitz September 3rd, 2013 8:53 am

The LSE has a new blog on American politics and policy and they kindly asked me to be one of the first set of contributors.  I shared a few thoughts on recent US monetary policy, many of which I've discussed before in various places, including my recent Mercatus paper.

So while wrapping up QE is a necessary start to avoiding the problem of inflation, figuring out how to reduce the Fed’s balance sheet, which has more than tripled since 2008, is the bigger challenge.

In addition, more attention will have to be paid to the real economy and the various factors that are creating the uncertainty that is making banks hesitant to lend and firms unwilling to borrow and invest.Publish

More at the LSE site.