Much less, care what they say
The privately held Federal Reserve Bank Chair is a household name as recognizable as the most senior elected officials occupying positions of extreme power in the federal government. Markets soar and swoon on a Fed Chair’s every utterance, perceived or actual. Fed watchers analyze and pore over their economic pronouncements, couched in indecipherable economic gibberish, like the divination of a sacrificial animal’s entrails. Fed watchers are modern-day haruspices. The Federal Reserve has encased itself in gilded temples, protected and isolated, with an army of high salaried economist data miners whose role is to justify whatever constantly changing policy goal the Fed inflicts on the world. In 2015 the Federal Reserve Bank generated $113.6 billion in interest income from securities acquired through open market operations. This income originates from the Fed’s $4.5 trillion balance sheet up from $.8 trillion in 2008. That is a lot of gild created by whim out of thin air.
Modern day central bankers are well-known. Paul Volcker was the inflation slayer, a hero for arresting inflation, that led to stagflation, that his own institution, the Fed, created through mismanagement after Nixon ended the Bretton Woods international monetary system. Alan Greenspan was the “Maestro”. The subject of a book by Bob Woodward of the same name and master of the universe. Greenspan apparently possessed the gifted power to divine exactly what the funds rate of interest should be at any given moment. He possessed this power above and beyond the collective knowledge of the millions of market participants who actively exchange their production every second of the day based on the myriad of constantly adapting economic variables that surround them. Time Magazine lauded Ben Bernanke as “Man of the Year”. A dubious honor history will correct accordingly when zero interest rates—now on their way to negative—finally implode the global financial system. Greenspan’s funds rate moderation was subtle compared to Bernanke’s sledgehammer bludgeoning of rates to zero. Janet Yellen is hopelessly lost at the controls of Bernanke’s inherited liquidity flood—piloting straight ahead on Bernanke’s errant course, heading into an economic box canyon while navigating off useless landmarks already passed.
An act of Congress created the Federal Reserve in 1913. Creation of the Fed ended the era of free banking that existed more or less since the country’s inception. Until 1913 banks could issue their own currency redeemable in gold. The Federal Reserve Act centralized this process without changing the gold standard the U.S. had operated on since 1789. Instead of numerous banks issuing currency—some of questionable credibility—the Fed became the sole issuer of the dollar. The Federal Reserve note dollar remained redeemable in gold at $20.67/oz of gold until FDR ended the right in 1933. The Fed also acted as lender of last resort. Under defined parameters this was another sensible goal for a centralized bank to prevent bank panics. The expanding political and economic role of the U.S. as a global power required the efficiency of a single currency issuer. As conceptualized the creation of the Federal Reserve was progress for economic advancement.
This remained the case with lessening degree of intellectual memory until 1971 when Nixon ended Bretton Woods. While on the U.S. gold standard, the Fed operated automatically. At the Fed’s inception in 1913, the dollar remained fixed at a set weight of gold, $20.67/oz, until FDR devalued to $35.00/oz in 1933. The Fed created or extinguished base money via their operating mechanisms within a small band to maintain the fixed price. If the Fed erred and the dollar deviated from the fixed price of gold, citizens had the right to exchange their dollars for gold or gold for dollars. A properly operated gold standard is an automatic process, exactly the same as how a currency board operates today. This is how Hong Kong has maintained the value of the Hong Kong dollar with the U.S. dollar for decades without deviation. The currency manager adjusts supply to match demand at a set price.
The operator of such an automatic system is a functionary, who best toils in anonymity. Who were the Fed Chairs from 1913 until 1971? Anyone other than a policy wonk or someone connected with the Fed probably has no idea or any reason to care. Their names have not entered the lexicon of American history as officials whose decisions impacted the lives of the global populace. The Fed certainly has other responsibilities that appear to keep their names in the limelight. Coordinating and meeting with other central bankers and attempting to contain the economic damage they create is a full-time job in itself, but like currency mismanagement these roles are self-created. The more the Fed screws up; the more power it consolidates. Congress rewarded the Fed, who was unable to recognize much less prevent the 2008 economic crisis that they precipitated through dollar devaluation and interest rate turmoil, with greatly expanded regulatory power.
It is time to return the dollar to a unit of account and an economic measurement stick, whose value is unwavering. This requires a Federal Reserve with diminished power to manage the dollar’s value via whim and a return to anonymity for the Federal Reserve Chair. When we no longer know who the Fed Chair is nor care what they say, we will know that stability has returned to Federal Reserve monetary management.