It’s not the Federal Reserve, it’s the system it serves

By Pete Dolack

There are details, and then there is the big picture. Mistaking the former for the latter can send an activist down the wrong path. A good example of this are the often well-meaning people who resolutely demand that we “End the Fed.”

But the problem isn’t the Federal Reserve, it is the system that it serves. If you don’t like the Fed, what you actually don’t like is the capitalist system.

The Federal Reserve, the central bank of the United States, is surely (as its critics accurately charge) a far too secretive, unaccountable branch of government that protects the interests of financiers at the expense of everybody else. A democratically accountable Fed that promulgated policies to increase employment and toward a socially responsible financial system would be welcome reforms.

But they would be unstable reforms, tinkering at the margins and would likely not change Fed policy in dramatic ways. Moreover, increasing oversight on the Fed wouldn’t eliminate the dominance of Wall Street or the largest corporations. There is plenty of oversight of other U.S. government agencies, yet corporate interests have little trouble bending policies toward their preferred outcomes.

Going further, and abolishing the whole thing, is, to be blunt, not a serious demand. Eliminating the Fed is a pointless idea because a central bank is a necessity in an advanced capitalist country, which is why each has one. And, perversely, eliminating the central bank would actually increase the dominance of financiers and would make the booms and busts of the capitalist business cycle sharper than they already are.

Strange as it seems today, when many voices on the Right and the Left echo the demand of “End the Fed,” there was a populist component to the creation of the Fed. Populists of the late 19th century wanted a more elastic currency so that the government could extend emergency credit when the economy collapsed (as it then frequently did) rather than be handcuffed by the gold standard.* In those days, when a crash happened, the U.S. government had to turn to the biggest robber barons of the day, such as J.P. Morgan, and ask them directly for a bailout.

Banks hoarded their reserves during crashes, making the downturns worse, and could issue their own banknotes, helping to fuel bubbles. But, since we are talking about the United States, it took a consensus on Wall Street and not popular demand for a central bank to be created in 1913. Financiers had come to believe that a central bank would temper the extremes of booms and busts, thereby stabilizing the economy. Industrialists joined financiers in that consensus.

Needless to say, the capitalists and not the populists were the drivers of Fed policy from the beginning. But a central bank does, albeit in a highly inegalitarian manner, stabilize a national economy through regulating credit and alternately tightening and loosening monetary policy. Central banks in all advanced capitalist countries manage domestic money supplies and currencies, a crucial task in today’s world in which markets subject to wild swings set prices for everything. The exception is in the countries using the euro, in which national central banks don’t have a currency to manage and are subordinate to the supranational European Central Bank, which is even more unaccountable than national-level central banks.

It won’t come as a surprise that financial institutions are skilled at finding ways around central bank policies. And central banks don’t necessarily do good, either — the Fed under Alan Greenspan encouraged the 1990s stock market bubble and the real estate bubble of the 2000s, and the post-crash Fed of Ben Bernanke is focused on the non-existent phantom of inflation while ignoring the all too real problem of high unemployment. The European Central Bank is, if anything, even more guilty of that than the Fed. The Fed, typical of central banks, is an institution staffed by and ideologically dependent on the financial industry. So it is no surprise that it consistently acts in a manner that benefits the financial industry and is detrimental to working people.

The entire capitalist system acts to benefit capitalists (industrialists and financiers) to the detriment of working people. Why should we expect an arm of a capitalist government to act any different? (Contrary to popular mythology, the Fed is part of the government, the Treasury Department to be specific; its all-powerful chair and board of governors are appointed by the president and approved by the Senate.)

If the Fed were eliminated, the exact same powerful capitalist interests would continue to bend government policy to their preferred outcome and would continue to exercise the same dominance over government, social institutions and the mass media. The only difference would be that the economy would become more unstable than it already is because there would be less ability on the part of government to dampen excesses. Why would that be good?

Concomitant to “End the Fed,” for those on the Right who echo that slogan, is a yearning to return the U.S. dollar to the gold standard. Most of these people do yearn for the good old days of the 19th century, when women, minorities and working people knew their place, and paid a violent price if they didn’t. I’ll pass over the irony of working people yearning for such a time. Unfortunately for gold fetishists, there is no returning to those simple times as capitalism has evolved into a much more complicated system. Capitalism can no longer function under a gold standard and indeed outgrew it in the 1970s.

Richard Nixon, then the U.S. president, pulled the dollar off the gold standard because retaining it was no longer in the interest of the U.S. despite the dollar’s centrality in the Bretton Woods system of fixed currency rates. In that system, implemented at the end of World War II, the dollar was fixed to the price of gold and all other currencies were fixed to the dollar; governments could and did change the value of their currencies based on their particular interests. Doing so was a big deal.

Such a system is more stable than the current one of free-floating currencies that continually rise and fall in foreign-exchange markets. Today’s system is heavily skewed by speculators, and it is precisely the pressure of financial speculators that began to burst the system of fixed exchange rates — today, the size of foreign-exchange markets dwarfs the size of stock markets and those traders are not about to forgo their profits.

There is too much special interest by financiers and speculators to allow a resumption of a gold standard. Going back on the gold standard would also handcuff governments trying to stimulate economies during economic downturns because they would not be able to issue new money. The supply of money would be determined by the productivity of South African gold mines, a rather odd circumstance. Moreover, gold is a commodity the same as any other; despite the fetishes that attach to it there is nothing more intrinsic to valuing money on it than on any other commodity. Why not tie the dollar to aluminum?

Capitalism is an unstable system that will always have booms and busts, and as time goes on the busts tend to worsen. (That tendency was temporarily kept at bay after the Great Depression by significant reforms, but those reforms have been undone and the tendency has reasserted itself.) Capitalism is a system in which those who amass the capital thereby amass power, and power translates into the ability to bend the rules to preferred outcomes or to bypass the rules. Money concentrates into fewer hands and wages are squeezed to facilitate the upward flow of money. Those who succeed are the people endowed with outsized desires to acquire and the personality traits that enable those desires to be met.

Yes, those people so endowed can and do create policy for the Fed, or any central bank. But ending the Fed wouldn’t touch the ability of people so endowed to suffuse their viewpoints and favored policy outcomes throughout a capitalist society, nor would it touch their ability to leverage their outsized wealth and the power their wealth gives them to shape government policy to benefit themselves.

Getting rid of government would actually intensify the dominance of industrialists and financiers in all spheres of life. The dominance of a globalized class that maintains power through a web of institutions and scrambles to manage ceaseless instability — not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

If you don’t like what the Fed does, it is because you don’t like what the capitalist system does. Blaming the central bank is no more than blaming the messenger.

* This and the following paragraph are based on the book Wall Street by Doug Henwood, pages 92 to 95 [Verso, 1998]


5 comments on “It’s not the Federal Reserve, it’s the system it serves

  1. Tom Herzog says:

    Mr. Dolack has the courage to unveil the economic system of capitalism for what it really is, a grossly unjust system that benefits the few — the capital accumulators, the financiers, and the rentiers — at the expense of the many.

    When the American version of capitalism was well regulated from c. 1940 to 1980 the system worked passably well allowing a broad middle-class to come into existence.

    As the system matured, slowed and returns of investment declined the capitalists, through their right-wing think tanks began the propagandization of the American public to get that public to vote against their own middle-class interests in favor of the interests of capital and capital’s prefeered vehicle, large corporations (nominally “public” corporations but in reality owned by a relatively small group of majority stock holding capitalists). This was how Reagan came to the office of the presidency. This was the beginning of the neoliberal version of capitalism with its deregulation, especially of the financial sector, and its shifting of public and private middle class wealth into the hands of the capitalist class.

    It is past time that the public became aware of the real nature of capitalism; instead of demonizing Muslims and Latin Americans for their declining positions in American society it’s time Americans got informed and learned what their economic system is really about.

    • Greetings Mr. Herzog, and thank you for such kind comments. The Keynesian period certainly worked better for working people than the neoliberalism we’ve had since, but it was not a period that could last. Mid-20th century Keynesianism depended on an industrial base and market expansion, but today the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which the capitalist system can expand.

      The public indeed needs to become aware of the real nature of capitalism, a difficult job considering the vast propaganda apparatus that tells them to blame scapegoats. Nonetheless, more people are becoming open to the idea of socialism as conditions under capitalism become more unbearable. Nothing of human creation lasts forever. Capitalism will not be an exception. What follows could be worse if we continue to allow our minds to be stultified; what follows could be better if organize and educate ourselves.

  2. Tom Huckin says:

    Well said, Pete. Long after I’m gone, people will look back on this period of rampant capitalism and see it as analogous to how we today look back on medieval feudalism. Capitalism, like feudalism, is simply unsustainable as an economic system. It creates too many fissures in the population it governs and it’s too destructive of the environment.

    I do detect, though, a couple of errors in your piece. First, the Federal Reserve system is not part of the government and especially not part of the Treasury Department. It’s owned by its thousands of member banks, which are all private entities and receive an annual dividend for Fed stock they own. Whatever control the federal government has over the Fed (several Board appointments, a token appearance by the Fed chief before Congress, reimbursement of interest payments to Treasury, etc.) is little more than symbolic. Real control is maintained by the Fed system itself, including all those member commercial banks that account for 97% of the nation’s money supply.

    Instead of ending the Fed, it should be nationalized. It should be converted from an essentially private bank and inserted into the Treasury Dept as a wholly public bank owned by We the People. Then, in accordance with the Constitution’s declaration (Art. 1, Sec. 8) that only Congress has the right “to coin Money and regulate the Value thereof,” money-creation power should be taken away from the commercial banks and given over to this new publicly-owned central bank (or Treasury itself).

    • I am in agreement with you, Tom, on seeing capitalism to be a phase of human development that will not be looked on fondly in a similar manner to feudalism. That is, if we are able to organize in time to bring a better world into being.

      The Federal Reserve is a part of the government, but as I have argued this point with readers many times, let’s instead go to the issue that is much more important than “ownership”: The complete lack of democratic control by a central bank that acts to benefit the financial industry, even as a piggy bank for it. We all seem to be in agreement on this more fundamental point.

      The entire banking system should become publicly owned and democratically controlled, reduced to a public utility with a definitive end to speculation. A central bank in this system would simply backstop all the other banks and be a lender of last resort when necessary and perform whatever other tasks it would need to take up in a rational economy designed for public benefit rather than private profit.

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