We’ve been led to believe that central banks – and especially the Federal Reserve System – was put in place to protect us. That’s a laugh!
Central banks are partnerships created between bankers and politicians. The political side gets spendable money (created from nothing) without having to raise taxes, while bankers get commissions or interest payments in perpetuity. A sweet deal for both sides!
But who gets the shaft? Yeah, you got it: we do.
Let me back up a step though. Did you know that our current central bank is the fourth try at establishing a central bank?
First came the Bank of North America (1781 – 1783). Then came the Bank of the United States (1791 – 1811). And then there was the Second Bank of the United States (1816 – 1836). Why did they fail, and why on earth did we try and try again?
The first central banks failed because the “money” (or notes created) was so susceptible to devaluation and inflation that the public simply lost confidence (can you blame them?). They stopped using the notes (and weren’t forced to) since it wasn’t “legal tender” in the first three attempts.
But as we’re all too familiar with, politicians like spending what they don’t have and bankers like easy money and don’t like to compete for it, so in 1913 Congress passed the Federal Reserve Act, and here we are.
The granddaddy of central banking though is the Bank of England (BOE). The BOE started in 1694 and has financed England through countless wars and has seen innumerable politicians come and go. It’s the standard for and the basis of most central banks around the world today. Napoleon started the Bank of France based on the English model and we followed suit a few decades later.
But how did they (bankers and politicians) get around the U.S. Constitution, which doesn’t allow Congress the power to create a bank?
To be blunt, they deceived the public, and they had a pretty sophisticated plan to do so. A group of six rival bankers and politicians met secretly in 1910. These few individuals, which represented as much as a quarter of the world’s wealth, came up with a plan to get the bank going.
Again, politicians wanted a mechanism for creating a ton of spending power without having to raise taxes. Bankers wanted a lot more, especially less competition. Basically they wanted a monopoly to create and control the nation’s money at the highest of levels.
Of course, they wanted the taxpayer to bail them out when there were inevitable losses.
To execute the plan, they had to convince Congress that the main objective was to protect the public. So, first things first: they didn’t even call it a bank! The conspirators figured their idea shouldn’t be compared to previous failures. Second, they made it look like a governrnment agency but decentralized it so it doesn’t look like it was controlled by Wall Street banks.
Use the anger created by recent bank failures and panics to create popular demand for reforms, they figured. Even speak out against the plan to convince the public that Wall Street bankers wanted nothing to do with it!
It took a couple tries to convince Congress but, voila, the fourth time was the charm! The Federal Reserve System of the United States is still kicking 105 years later!
During the financial crisis of 2008, the Fed bailed out manufacturers, banks, and other financial firms in the U.S. and abroad – all in the name of protecting the public.
Of course, the central bank wasn’t using its money. The public was on the hook for it. How’s that for protection?
Sure, the Fed does some good by facilitating a safe and efficient payment and settlement system throughout the world for all U.S. dollar transactions. Its army of Ivy League doctorates has published some useful research and I even based one of my trading systems on some of its findings.
But even with that army of academia, the Fed has been wrong about most of its forecasts on economic growth, inflation, and even future interest-rate policy. It’s unrestrained when it comes to use of policy tools like quantitative easing and, perhaps worst of all, is accountable to no one.
I can’t emphasize that enough: The Fed is accountable to no one.
The Fed still tries to control the booms and busts of the business cycle, but it’s been known to create or even exacerbate them. Arguably, even the stock bubble we see today is the fault of the Fed’s machinations.
The gains made over the last 10 years or so haven’t gone to the general public in the form of higher-paying jobs and a healthy and growing economy. The gains have gone to those holding the financial assets helped along by Fed policy.
So, do we really need a central bank? I would argue that we don’t, but at the least it does create some of the volatility that my Treasury Profits Accelerator readers profit from!
And if you’re interested in hearing more about the Fed and how you can profit from overreactions in the Treasury bond market, I’ll be speaking at our annual Irrational Economic Summit in October. I hope to see you there!
Editor, Treasury Profits Accelerator
P.S. The $500 discount for a seat at the Irrational Economic Summit this October lasts until Labor Day only. Don’t miss out of this savings, and don’t miss the summit. It’s changed lives, which you can hear about here.