Next week marks the centennial of the creation of the US Federal Reserve System, mandated by the legislature in response to a series of market panics that came in the aftermath of the Great War and given the triple duties of promoting full-employment, stability in prices and affordable loans. It seems to me that these goals—cushions are the very antithesis of what in reality and any victory, I think, comes in spite of the Fed's better intentions. After failing to avert the Great Depression that followed about a decade, precipitating the next world war, after its founding, the institution—which is not a governmental entity but like any other private bank, just enjoying something akin to a royal charter, like the Dutch East-India Company, it was awarded with broader powers and roles, including dictating monetary policy through an elastic supply, being the bank of the US government—where tax revenues are deposited, being an emergency lender of last resort, banking regulation and supervision and a cheque clearing-house.
That first enumerated power (which other central banks do not have unilaterally) is of course most controversial and possibly most counter-productive to its original charge, as there has been a creeping inflation of around 2000% over the past hundred years (with significant stagnation elsewhere) and though the increase has on balance been gradual and inuring, there has been more frequent periods of price spikes. In order to oversee the quantity and quality of money, the Fed acts as the US Treasury's financial agent by distributing physical cash according to its assessed need: mints produce paper money, which the Fed purchases at labour cost (about 6¢ apiece, whether for a one dollar bill or for a hundred dollar bill) and sells to banks at face-value. Coins, on the other hand, which are regarded as dirty and reviled things, the Fed must buy at retail. I suppose that's part of the logic behind the suggestion that the US president could have solved the budget crisis by striking a pair of trillion dollar coins, but there's also a lot less of metal in circulation and an assault against paying in cash. Now on the eve of this anniversary, the Federal Reserve's prerogative to spin gold out of straw, though far from being called into question, may throw a recovering American economy into turmoil with a decision to ease the printing and stop backing-up debt as routine.
