A Word on the Federal Reserve Bank

This background report is about central banks and specifically about the U.S. central bank, the Federal Reserve. The report was inspired by valuable insights provided by a Nine-County Coalition participant. The objective of the report is to remind readers of the tremendous power of the Federal Reserve and its potential to bring about by policy alone broad societal changes. A similar version of this report is posted on Just Vote No Blog.

Mission of the Federal Reserve

The core mission of the Federal Reserve, since its establishment in 1913, is to maintain the fiscal stability of the United States through monetary policy. As time passed, this mission evolved into very specific functions: conducting monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates; promoting the soundness of individual banks; fostering payment and settlement systems; and promoting consumer protections.

Today, pressure exits to expand the function of central banks into areas of environmental sustainability and social equity.

Here are remarks delivered in 2016 by Mark Carney, Governor of the Bank of England. The Sustainable Development Goals to which Mr. Carney refers are the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development adopted by world leaders at the September 2015 United Nations Summit.

The Sustainable Development Goals are a moral imperative, with objectives that include nothing less than ending poverty, fighting inequality and injustice, and tackling climate change. The SDGs are also an economic imperative. Their achievement would mean greater productivity, increased labour supply and ultimately stronger growth. In short, they could pull the global economy out of its current malaise of secular stagnation…

While they are important catalysts, private niches, like social impact investing, or public sources, like Multilateral Development Banks won't be sufficient. Achieving the SDGs will require mainstream finance. To get enough finance in the right places will require more than just fixing the fault lines that caused the last crisis. We need to build a new system - one that delivers sustainable investment flows, based on both resilient market-based, and robust bank-based, finance. We need finance for the long term. We need a financial system that is Fair, Aligned, Inclusive and Resilient.

In his remarks, Mr. Carney mentions “The Tragedy of the Horizon,” an extension of the tragedy of the commons. The term refers to the idea that policies need to address climate change now, because “once climate change becomes a defining issue for financial stability, it may already be too late.”

With these preliminaries in mind, let’s go on to more specifics.

Money 101

Fiat Money:

Fiat money, that is money without intrinsic value, is the Fed’s key product. Only money backed by a commodity that has intrinsic value, such as gold and silver, can be said to be of value. Such money is redeemable in gold or silver, and the quantity of such money is limited by the amount of gold of silver available.

The money we use today has only government’s say so that it is of “value.” It is not redeemable in anything. Its quantity in circulation is at the will of the Federal Reserve Bank, who has control of the money supply through its power to create credit with interest rates and reserve requirements.

Money in the U.S. Constitution

The U.S. Constitution has two authorities on "money" (Article 1, Section 8):

* To coin money and regulate the value thereof.

During the colonial days gold and silver was considered "money". Money was a commodity. “Setting the value thereof” is like making sure a pound is a pound so people can buy the same pound of coffee, for example. A dollar is a dollar is a dollar. This is not the case today. As Consumer Price Index fluctuations show, a dollar today may not buy the same amount of goods as a dollar tomorrow.

* To borrow money on the credit of the United States.

This is the arrangement under which we operate today. There is no actual “money” with intrinsic value in circulation. We are operating under a credit/debit system which is a system of accounts. Under this system, money and debt can be created at will to finance government operations, provide for public assistance, maintain the armed forces, and pay for any other function government decides to undertake. Near-zero interest rates allow for repayment of the debt.


All actions, including implementation of government policies, have outcomes or consequences – good and bad. The U.S. monetary/financial model characterized by liberal use of borrowing and the existence of a central bank is no different. Let’s pick some outcomes at random:

* The Federal Reserve System through debt-issued currency, manipulation of interest rates and steady inflation allows our wealth to be eroded without us even realizing. When government increases money in circulation, consumers will likely use it to purchase additional items they would not have normally bought. Often the supply of goods does not keep up with the increased demand, resulting in a rise in prices. So, if you needed $20 to buy your lunch, now you need $25 or $30. If you were confident your bank savings would help you through a financial setback, you might not be now.

* A central bank’s control of interest rates and bank reserve requirements allow for manipulation of people’s behavior. Near-zero interest rates form the habit of living on credit – why worry about saving or having any cash to pay one’s living expenses or obligations? Cash is anonymous, but credit is not. When you buy with credit, businesses inventory and catalog you, not only so they can stay in touch and collect the debt, but also so that they can try to sell you even more stuff.

* The current U.S. debt was about $21 trillion in March 2018 -- the largest sovereign debt in the world for a single country. Debt is necessary to run a country when revenues such as taxes and fees are not sufficient to cover expenses. As debt approaches unsustainable limits, it is logical for government to ensure that every citizen pays his/her “fair share” of taxes. That includes encouraging traceable payments systems. So, it is not only businesses that want you to move towards a “cashless society” so you can be watched.

Our Vanishing Purchasing Power: Pictures Worth a Thousand Words

Picture #1: 1907 Double Eagle 90% gold/10% copper. Picture #2: Bank Note redeemable in gold until 1971. Picture #3 Federal Reserve Note not redeemable in anything.

Our Fading Liberty

We cannot preserve our liberty if we fail to remain vigilant, especially toward centers of power capable to issue policy without our input.

We cannot preserve our liberty if we cannot maintain our purchasing power and stay solvent as people, as a state and as a nation.