The Current Monetary System is Wrong

Yesterday I really enjoyed talking with two valued friends and as always we were wandering round lots of topics. At one point I said I had been trying to understand economics, and I then accused The Federal Reserve of being more a private than a public institution, and then they were saying not so, and asking me why I should think that, and of course I couldn’t explain it. So – the following is an attempt to give a better answer.

Using the USA Federal Reserve as an example in the current monetary system: All over the internet there is lots about the Federal Reserve and its appointed, not elected, organization: see also the 1913 Federal Reserve Act*. [Alan Greenspan was chairman of the FED Board from 1987 – 2006.]

Below are extracts from a diatribe on The American Monetary Institute that asks whether the Federal Reserve is a governmental or a private organization. I have checked the facts from other sites, including the FED’s own site, where it is clear that Congress has oversight of FED decisions, but it is never pointed out that Congress also takes the Fed advice**.

In my ordinary person trying to understand complicated economic ideas, I find that The American Monetary Institute spoils its arguments by “diatribe” and detail. There is a UK organization called Positive Money who naturally base their facts and figures on the UK and the role of the Bank of England. In essence their arguments are similar. In my opinion, their papers are also hard to read, not because of diatribe, but complexity, where sometimes use of jargon, acronyms, or sometimes a ‘lecturing’ writing style means I lose the thread and feel confused. I doubt that my capacity to write is any better, economic issues are complex, their consequences are wide. Too much detail obscures the essence that all of us seem to instinctively get – the system is broke and we do need to fix it.

These organizations have however convinced me that systemic reform of the monetary system is possible – if enough people can understand that there are viable alternatives to the current flawed system. This applies whether ones politics are left, right or upside down.

Notes about the “FED”, all from The American Monetary Institute

The Federal Reserve System puts itself forward as a non-profit organization that turns over its operating profits to the U.S. Treasury, after all expenses, including the 6% dividend to member banks. However this misses the point on several scores. First, the banking profits coming through the privileged money creation process mainly occurs at the member bank level of operation, and those profits are not turned over to the Treasury. That is, the net earnings from the member banks seigniorage privilege are not turned over to the government but kept by the private member banks. For England this amount has been estimated at 41 Billion Pounds per year. For the US we think it’s between $100-200 billion per year; but we need to know the amount more precisely from the Fed itself.

Primary among these [powers] are the powers necessary to administer a fractional reserve banking system in which the creation of money – what we use for purchasing media – is in private hands.

This money creation which is put into the system when the banks extend loans, eventually becomes a source of funding when our government’s bonds are sold to the public …. [essentially] … the government borrowing the use of its own money. [my italics]

Organization And Ownership:

The Federal Reserve consists of 12 regional Federal Reserve banks, with boards of Directors, under an umbrella direction of the 7 member Federal Reserve Board in Washington, with the power to determine major aspects of banking activity, such as setting interest rates, and the reserve and other operational requirements. There are no shares of the Washington Fed Board organization; the only “ownership” of the Fed is in shares of each of the 12 regional banks which are entirely owned by the private member banks within their respective districts, according to a formula based on their size (they must subscribe to the shares with 3% of their capital plus surplus). The ownership is highly restricted in that such ownership is mandatory; the shares can’t be sold; and they pay a guaranteed 6% annual dividend..

  • The Fed is not organized within the Executive, Legislative or Judicial branches of our government.

  • Who pays the Fed’s bills and determines its budget? Not any part of our government. The Fed gets its funding from its own specially privileged operations. The Fed Board determines Fed budgets.

  • Who monitors and oversees Fed activities? Again the Fed itself. While some important elements of proper auditing have taken place, there has not yet been a comprehensive independent audit, by the Government Accountability Office. [proposed in a letter from Ralph Nader to 2007 Fed Chairman Ben Bernanke, calling for greater monetary transparency.

  • Federal Reserve Employees are not part of the US Civil Service System and are not covered by government employees’ health insurance or pension programs. Who does the hiring and firing? Except for the highly publicized Chairman and 7 member Washington Board, this is in private, unelected hands.

Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board. The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors.

* The Federal Reserve Act

Reading the Act with the question of control in mind, what one finds are primarily an enumeration and description of vast powers over our monetary system being ceded to the non – governmental Federal Reserve. Primary among these are the powers necessary to administer a fractional reserve banking system in which the creation of money – what we use for purchasing media – is in private hands.

**The Act requires the Chairman to appear before Congress and Congressional committees four times a year, and requires the Board to submit two written reports to Congress annually. To understand that this is not sufficient oversight, one need only read Congressman Bernie Sanders questioning of Chairman Greenspan, from the Congressman’s website. When tough questions were put to the Chairman, as Congressman Sanders did, forms of stalling non-answers came back until the announcement, “Your time is up Mr. Congressman.”

The American Monetary Institute, Positive Money and others around the world put forward plans for reform. We need all our representatives and media and financial advisers to know this – the monetary theory, and the system of accountability, that is used to make economic decisions and affects all our lives is wrong, and there are alternatives, that could be enacted by our governments.

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2 thoughts on “The Current Monetary System is Wrong

    1. So glad you said “cogent”. A lovely encouraging word. I do a lot of work to find things out, and then fear that I cannot express usefully, that I do not get through. I think it is the most likely way to create a real change, just keeping on going. Loved your pigeon post today, Elspeth

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