Though it’s taken a
full century in its transformation, the agency instituted in 1913, to regulate
the nation’s volume of credit and the money supply—the Federal Reserve System—finally
completed its metamorphosis into a purely political arm of the executive
branch.
How the need for
this regulatory body developed is a story unto itself. In America’s earlier years regular financial
upheavals were common, with the Panic of 1819 as our first boom-to-bust
economic cycle. Less than twenty years
later, the Rescission of 1837 resulted in numerous bank failures, followed by a
5-year depression. Similar crises
occurred in both 1873 and 1893, with the Panic of 1901 ending in a fight for
financial control of major railways. But
the Panic of 1907, known as the Bankers’ Panic, truly demonstrated the
fragility of the nation’s economic system and the need for some sort of
consorted action by an overriding authority.
For a three week
period starting in mid-October of that year, as values on the New York Stock
Exchange fell almost 50% from their peak of the previous year, a number of
financial institutions, along with several large brokerage houses, hovered on
the verge of failure. There followed a
run on New York banks, with both the City of New York and the New York Stock
Exchange becoming temporarily insolvent.
The entire economic structure of the nation then seemed threatened; something
drastic became necessary.
With the advent of
the twentieth century, the world’s financial landscape no longer resembled its
past. The time-honored expression, “As
safe as if it were in the Bank of England,” became a relic of a bygone era, and
by 1907 the United States reigned as the world’s financial powerhouse. But with the banking industry on the verge of
collapse, someone or something, with an overpowering presence, had to
materialize if the nation’s economy were to survive. Fortunately, just such a presence appeared: J.
Pierpont Morgan, unquestionably the nation’s most influential entrepreneur,
with a dominant position in the fields of both domestic and international
finance. He warranted the title as The World’s Banker.
With the fate of
the economy at stake, Morgan took charge.
Although seventy years of age, and in uncertain health, he put in
twelve- to fifteen-hour days, working at times until three in the morning. No one refused his calls as he summoned trust
company presidents, brokerage chairmen and bank executives, all the while he
banged heads and twisted arms to get the cooperation necessary to shore up the
faltering system. And when the crisis
passed with a mostly favorable outcome, due solely to Morgan’s sheer personal
authority, the nation realized, if nothing else, that something needed to be
done to empower the U.S. government to take necessary action in any future
cataclysms. The result: consensus for
the creation of the Federal Reserve System.
With this as our
background, and following extensive legislative negotiations and maneuvering,
the central banking system of the United States was established by the Federal
Reserve Act, and signed into law by President Woodrow Wilson on December 23,
1913. At its creation, it enumerated
four primary functions: 1) purchase and sale of government securities 2)
establishing the rate of interest banks must pay when borrowing from Federal
Reserve banks 3) establishing the amount of money commercial member banks must
maintain on deposit with the Federal Reserve 4) Regulation of allowable credit
levels for stock market transactions. As
you see, it came into being to function as a non-political agency for a sole
purpose: as a bulwark for the nation’s banking and financial stability.
An important factor
in any organization is its structure. With
the probable scope of its functions, together with overriding congressional
interest in its likely financial undertakings, a remarkably complex entity formed. The system is divided into twelve districts,
each serving a fixed geographical region of the U.S. through a Federal Reserve
hierarchy. There is also a Board of
Governors consisting of seven members appointed by the President of the U.S.
with the approval of the Senate. Add to
this a Federal Advisory Council comprised of twelve members, each representing
a Federal Reserve district, with its members elected by the board of directors
of the Federal Reserve banks. Finely,
there is the Federal Open-Market Committee consisting of the seven-man Board of
Governors and the presidents of five Reserve banks. As you see, despite a professed apolitical
intent, the full set of political ingredients are built into the structure.
Many years have
passed since the Federal Reserve assumed its limited obligations. It’s a fact of human nature that as an
organization ages, it strives to grow in size and functionality. And why not?
Growth can promote its more aggressive members into positions which
offer greater authority and reward. So
with over one hundred years of maturing, is it any wonder the system is now a
power unto itself? During the past several
decades the Fed Chairmen assumed celebrity status, as the names Paul Volcker,
Alan Greenspan, Ben Bernanke and Janet Yellen became household words. And with presidential appointments and
senatorial approval as the keys to this kingdom, who wouldn’t expect it to
devolve into a maelstrom whereby the political tail wags the regulatory dog?
This brings us to
its most recent declaration: the Fed’s semi-annual Monetary Policy Report to
Congress. On June 22, 2016, Fed Chairman
Yellen decried the widening wealth disparity between races, calling it
“extremely disturbing.” The report
questioned whether the “gains of the expansion have been widely shared,” and
concluded that “blacks and Hispanics suffered the greatest proportional losses
in full-time employment during the recession.”
Since her elevation as chair in March 2014, Yellen made prosperity for
all a signature of her tenure. Perhaps
it comes as no surprise that in April of the same year, President Obama signed
an Executive Order to prevent workplace discrimination and empower
workers to take control over negotiations regarding their pay. In addition, he
signed a Presidential Memorandum directing the Secretary of Labor to require
federal contractors to submit data on employee compensation by race and gender. Does it seem more than coincidence the
President’s selection as Fed Chief is one who will aggressively promote his
goals in this particular political arena.
A final thought: Regardless of
the rules established and the precedents set, don’t expect purity in
government. We function as humans, not as robots, so expect
decisions to be twisted to favor the twisters. Remember always, politics will be the deciding
factor. This is how it is and always
will be.
♦ ♦ ♦ ♦ ♦
If you enjoy this weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly Financial Newsletter, as well as my new book, The Road to Prosperity
♦ ♦ ♦ ♦ ♦
No comments:
Post a Comment