Does the Federal Reserve control the US economy?

Yes

1 of 14

by Gene Denardo

• 

Write now Print Invite a writer™ Add to Favorites RSS Feed Contact this writer

The Federal Reserve controls the monetary policy and the actual money supply of the economy. Since money is the "medium of exchange", that which we use to complete the majority of transactions within the economy, control of the money supply is at the very least "virtual" if not outright control of the economy. It is the most powerful "outside" force affecting the economy.

I use the word "outside" because the Federal Reserve itself is an "artificial" institution that would not take shape in a "natural" economy. Banks themselves, are simply storehouses for the surplus that is produced by a thriving economy and certainly have a necessary and "natural" function but the formation of a "central" bank such as the Federal Reserve is antithetical to a "free" economy.

In a truly free market economy, banks would compete with each other and prevent the formation of one central bank that has dominance over all others and the money supply itself. Banks essentially compete for "capital" which is produced by the actual real economy, the workers and factories. In a free economy, banks would constantly be choosing between profit created by paying less for this capital [lower interest rates to depositors and creditors] and better inflow of funds by paying greater interest. The outflow of funds in the form of loans to debtors and interest payment to creditors would likewise be constantly monitored to balance the bank's account and place them in proper standing with other banks.

This system would tend to "increase" rather than decrease the number of banking institutions, dependent on the production of capital by the economy. The greater production of capital, the greater need for banking and the greater competition that ensues. Any attempt to gain control of the industry by one bank would most likely result in insolvency. If large profits were attempted by taking great risks, the chances of success would be slim to zero. If profits were enabled by paying poor interest rates, then the depositors would simply abandon the bank for a higher return, leaving the bank without funds. It is a system of natural balance.

There is one foolproof method used to upset this balance: allow a bank to "manufacture" and control the money supply. This is exactly what the Federal government did in 1913 when it created the Federal Reserve. The bank of all banks was created and given the power of money creation and distribution.

What this did, and continues to do to this day, is turn the economic system on its head. The economy is simply what we all do everyday. The products we help produce and the goods and services we purchase make up the economic actions that constitute the economy as a whole. How hard we work and how efficiently we work determines the scale or magnitude of our production. If we are productive, we produce a "surplus" or extra amount that is stored and directed by what has become known as the financial sector of the economy. The work within the productive sector of the economy creates the surplus or capital that passes thru the financial sector and is returned to the working sector. In a "natural" economy, this surplus has no purpose other than to be returned to where it can be used for future production. Keep in mind a couple of extra bushels of grain produced from the farmer's field. It is of no use, other than consumption, unless it is redirected to next year's field and left to grow into next year's crop. It can not multiply itself of its own accord without the labor and the field of the farmer. In fact, it will over time, if not returned to production, become waste.

What if you could create and produce that grain, or at least create and produce what represents that grain, without any effort, without the help of the farmer or the need of the field? And if that was possible, what if you could designate control of this "artificial" production to whomever you wished? This is exactly what the government did when they created the Federal Reserve. They empowered one private bank with the ability to create the "medium of exchange", which is our currency and which represents the fruits of labor and production within our economy, whenever they so desired. They have in effect taken the control of the production of capital out of the hands of those who produce it and put it into the hands of the Federal Reserve and those "selected traders" that the Fed does business with.

However, this money production that is practised by the Federal Reserve is not "complete" control of the economy. It is more of a "layered" control. The closer you are to the actual currency production, the more you are empowered by receiving the funds. As the newly created currency moves through the economy, the reality of production output adjusts to the increased quantity of money and prices rise as a result. Those who receive the funds first, the small group of selected traders the Federal Reserve does business with, receive full benefit of the value of the currency. As they distribute it through the economy by loans and purchases, those receiving it next begin to feel the effects of "monetary" inflation. The presence of "more" money tends to inflate prices. As the funds get to the individuals and companies that actual do the bulk of production the "stimulating" effect is lost and inflation has permeated the entire economy bringing the new money in equilibrium with the actual products that exist. Prices have risen and more money creation is needed to cause the same stimulating effect.

What has occured is a "growth" of the upper eschelons of the financial sector. Access to the new currency empowers them with the ability to purchase output of the economy at "discounted" prices before inflation robs the new money of its power. They are able to purchase assets at a "discount" and then watch their monetary value rise as inflation seeks to balance prices with availability of extra, new money. It is no wonder we possess such a top heavy financial sector which far exceeds the size necessary for efficient channelling of capital back to the productive sector.

In a sense, the Federal Reserve acts as a "tax" on the entire economy. With every new dollar printed, what has been produced by actual labor and enterprise is devalued. That value is extracted through "monetary inflation" and rewarded to those financial corporations the Federal Reserve chooses to deal with. These firms and the financial industry itself grow at the expense of the rest of the economy. When the balance between real production and "artificial" capital grows too large, we have a correction as we are currently experiencing.

A sure sign of the amount of "control" or possibly the loss of control is the direct transfer of wealth from the taxpayer to the financial sector that is occurring. With the Fed interest rates at near zero and money creation occurring at greater rates than ever, there has been little effect on the economy. The federal government has found it necessary to make direct distributions from the taxpayer to the financial sector through various "bailout" programs. The government is trying to satisfy, to the detriment of the country, this insatiable need for capital that the financial sector possesses. Whether it is even possible to satisfy this need, we will soon discover.

The control of economies and people's lives is nothing new. Kings and dictators have done it throughout history. What is new this time is the underlying premise that this time it has been done to foster "individual freedom". Nothing could be further from the truth. Individual and economic freedom cannot come until Capital, the surplus produced, is left to run its natural course through the economy. This will remain in the realm of impossiblity as long as the Federal Reserve is granted omnipotency over the money supply.

Learn more about this author, Gene Denardo.
Click here to send this author comments or questions.