Jan. 9, 2000

Greenspan Nomination Acknowledges Reagan Prosperity

It is amazing how much good can be done if no one cares who gets the credit.

Alan Greenspan has been nominated by Bill Clinton for an unprecedented fourth term as chairman of the Federal Reserve Board. The president thereby admits tacitly that the nation’s longest period of prosperity began with President Reagan who first appointed the chairman in 1987.

Certainly the Fed has an important role in prolonging the good times. This despite financial woes going back to the newly formed United States of America.

Of all the functions of government, regulating money is the most important. The fledging nation had no assets of gold, or a store of taxes collected, or a unified currency expressing value (that is, purchasing power).

Metallic coins such as German dollars, Spanish doubloons and English shillings were the preferred instruments of trade. However, their weight was impractical for large transactions.

Banks of individual states gathered precious metal coins in payments on loans and issued promissory “notes” redeemable in coin on demand. The value of bank notes varied in accordance with each bank’s idea of a fair return on their investment.

Framers of the U.S. Constitution understood the necessity of sound money but dreaded regulation. Article 1, Section 8, merely stipulated that “Congress shall have power … to borrow money … regulate commerce among the several states ... establish uniform laws on bankruptcies … coin money and regulate the value thereof.”

The federal government tried to standardize money value through regulations of banks, but with little effect. Economic booms and busts, bank failures and counterfeiting were common handicaps to a viable economy.

Clearly a “central bank” was necessary to manage money. First efforts put regulation in the hands of Congress, but politics governed monetary policy rather than financial efficiency.

A quasi-official banking system was embodied in the Federal Reserve Act of 1913. It established 12 Federal Reserve banks scattered throughout the country. Each is privately owned by bankers’ bankers and earn a profit subject to rules set forth in the Act.

Their functions are well defined:

*Control the amount of money in circulation.

*Supervise and regulate commercial banks.

*Make loans to commercial banks.

*Forward checks to issuing banks.

*Loan money to the U.S. Government.

The Fed has two tools with which to carry out these objectives:

*Setting the “discount rate” which National Charter banks pay when borrowing money from the central bank or each other.

*Setting the proportion of bank assets reserved for backing up customer deposits.

To carry out its services, the Fed is authorized to issue Federal Reserve notes that constitute the nation’s supply of paper money.

The U.S. Treasury Department prints Federal Reserve notes and sells them to the Federal Reserve at a cost of four cents each. However, the Fed must set aside in its vault an amount of Treasury bonds equivalent in value to the face amount of the currency printed.

This is, in effect, a forced loan to the federal government from national bank depositors. The Fed earns interest on its Treasury holdings but must “rebate” 92.5 percent to the Treasury. This “profit” is used for salaries of 15,000 employees and operational expenses of 12 Fed subsidiaries.

The Fed has a lot of power in setting U.S. monetary policy. Nevertheless it is not “independent” of the government. Its chairman, vice-chairman and others of the 14-member board of governors are appointed by the U.S. president, but must be confirmed by Congress.

Politics are involved in the selection process, and the Fed chairman is called before Congress frequently to explain his official actions.

The Federal Reserve operates very much like other quasi- official entities such as the Federal Deposit Insurance Corporation, Postal Service Corporation, General Services Administration and Federal Emergency Management Agency.

Greenspan says he relishes his job because its like “peanuts you can’t stop eating.” The suggestion that the Fed is peanuts is somewhat unsettling. It suggests a certain peanut farmer whose monetary policies generated high rates of inflation and unemployment some time ago.

Good times aren’t forever. Nonetheless, as the man who fell out a 50-story window said as he passed the third floor, “So far, so good!”

Biggest criticism of the Fed is that “it is run by bankers.” Let us be thankful the Fed is not run by politicians, lawyers, stockbrokers or palm readers.

PARTING SHOTS

Hillary Clinton moved into her New York mansion last week. Bill went along to help. He declares the doghouse out back is very comfy.

* * *

A funny thing happened on the way to last week’s political debate in New Hampshire. Bill Bradley’s two-car entourage inadvertently cut into Al Gore’s long convoy. It is unclear whose parade permit was violated.

Lindsey Williams is a Sun-Herald columnist and can be reached at linwms@lindseywilliams.org