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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

A Return To Real Money

Politics / Fiat Currency Apr 28, 2012 - 01:55 AM GMT

By: Richard_Mills

Politics

Best Financial Markets Analysis ArticleOn the night of November 22, 1910 a delegation of the nation's leading financiers, led by Senator Nelson Aldrich, left New Jersey for a very secret ten day meeting on Jekyll Island, Georgia.

After the Jekyll Island visit the National Monetary Commission wrote the Aldrich Plan which formed the basis for the Federal Reserve system.


After several failed attempts to push the Federal Reserve Act through Congress, a group of bankers funded and staffed Woodrow Wilson's campaign for President. He had committed to sign a slightly different version of the Federal Reserve Act than Aldrich's Plan.

In 1913, Senator Aldrich pushed the Federal Reserve Act through Congress just before Christmas when much of Congress was on vacation. When elected president Woodrow Wilson passed the Federal Reserve Act.

In the Federal Reserve Act Congress established three key objectives for monetary policy:

  • Maximum employment
  • Stable prices
  • Moderate long-term interest rates

The first two objectives are often referred to as the Federal Reserve's dual mandate.

Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.

According to official Federal Reserve documentation today's duties are:

  • Conduct the nation's monetary policy
  • Supervise and regulate banking institutions
  • Maintain the stability of the financial system
  • Provide financial services for depository institutions, the U.S. government, and foreign official institutions
  • Conduct research into the economy and publish results ie the Beige Book

The Federal Reserve's structure is composed of a Board of Governors who - including its chairman and vice-chairman - are chosen by the President and confirmed by the Senate, the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks, privately owned U.S. banks and advisory councils.

The only stockholders of the 12 regional Federal Reserve Banks are the national banks (the ones chartered by the federal government) and those state-chartered banks that wish to join and can meet certain requirements. Roughly 38 percent of the county's plus 8,000 banks are members of the Fed system, and they own the 12 Fed banks.

The FOMC is the committee responsible for setting monetary policy, the committee regulates the nation's money supply and sets targets for short-term interest rates. The FOMC consists of all seven members (a voting majority) of the Board of Governors and the twelve regional bank presidents. Only five of the bank presidents vote at any given time - the president of the New York Fed is a permanent seat and four seats are rotated among the eleven other regional bank presidents.

The US Federal Reserve System is unique:

  • According to its Board of Governors "Its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government"
  • Also unusual is that an entity outside of the US central bank - the United States Department of the Treasury - creates the currency used

"When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money." Federal Reserve Bank of Boston, Putting it Simply (1984)

The Fed is highly profitable, since it can create the money that it needs at no cost the return on its investments flows directly to the bottom line. Federal Reserve banks are also exempt from state and Federal taxes.

The Fed's investment portfolio grew in 2011, it's now approaching three trillion dollars. Almost 97 percent of the Fed's income is generated by interest payments on its investment portfolio - the Fed is the largest single investor in federal government debt and securities issued by the government owned mortgage finance companies Fannie Mae and Freddie Mac.

Most of the money flowing into the Fed's coffers comes from US taxpayers and the U.S. Government receives all of the system's annual profits, after a statutory dividend of six percent on member banks' capital investment is paid, operating expenses are paid (since no one audits the Fed its operating expenses have never seen the light of day and are what the Fed says they are) and an account surplus is maintained.

In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury. This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury Department.

Consider:

The Fed's twelve regional bank are owned by US Federal and State chartered banks - 100% of its shareholders are banks, the stock is not publicly traded and none of its stock is owned by the US government.

The Fed does not look to Congress for annual appropriation. The Fed spends whatever it wants on operations and its profit are whatever remains after all expenses and dividends have been paid - in contrast to ordinary corporate accounting.

The Fed generates profits for its shareholders - six percent may not be considered much of a profit but any business that covers all of its expenses and gives shareholders a guaranteed tax free six percent return is a "for profit" corporation.

In addition to the guaranteed six percent, member banks get interest from the Fed, read taxpayers, on their extra reserves. Of the $1.7 trillion dollars injected into the banking system through two rounds of Quantitative Easing (QE) $1.5 trillion dollars is sitting in the Feds coffers and is collecting .25% interest from the Fed for its member banks - it's shareholders.

"Between August 11, 2008 and the end of 2011, the monetary base, which only the Fed can produce, almost tripled with a Bernanke Fed injection of $1.7 trillion dollars.

Most of the money issued by the Bernanke Fed is parked in banks as excess reserves that the banks are not required to hold.

The Bernanke Fed has been paying banks interest on these excess reserves since October 2008. This is an incentive to hold the cash. At the end of 2011 the U.S. banks were holding 88 percent of the monetary base issued by the Fed since August 2008 as excess reserves they are not required to hold. The banks held $1.5 trillion in excess reserves of the $1.7 trillion increase in the monetary base." Robert Auerbach, Malpractice at the Bernanke Federal Reserve, huffingtonpost.com

Member banks also borrow at the low Fed funds rate, then turn around and put this money into longer term Treasury bonds earning an immediate return from taxpayers.

The US Congress gave the Fed the right to print money at no interest to the Fed. The Fed creates money from nothing, loans it out through banks and charges interest. The Fed also buys government debt with money from nothing, and charges U.S. taxpayers interest. The Fed banking system collects tens of billions of dollars in interest annually and distributes the profits to its bank shareholders.

Ownership of a piece of the Fed's 12 regional banks, and their highly unusual business model, "make money for free," is extremely lucrative for the Fed and it's banker shareholders.

Conclusion

Is the Federal Reserve Bank a privately owned company that controls, and whose shareholders profit immensely, by printing money through the US Treasury and regulating its value?

I'll leave that for you to decide, but there is no doubt that the Fed is, first and foremost, looking out for the special interests of its shareholders, the banks, insurance companies, and securities firms.

The ownership question is moot, it's nothing but splitting hairs and simple misdirection.

The first question we should be asking ourselves is; "What does taking care of its shareholders special interests first, have to do with the Fed's official dual mandate: stable prices and high employment?"

The second question we need to be asking has to be; "What do we replace, not just the Fed with, but the entire global fiat monetary system with?"

A return to real money, gold and silver, has to be on everyone's radar screens. Is it on yours?

If not, maybe they should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for.

Copyright © 2012 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.


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