The Fed Always Does Its Job

November 15, 2020

The Fed always does its job. So, just what is their job? And, how well do they perform?

For the answer to the first question, one statement will suffice: The Fed’s job is to create money; at all times and in all seasons. 

The Federal Reserve Bank creates money for the US government to spend and for banks to loan. It is a partnership that dates back more than one hundred years.

In the early 1900s both Congress and the American public were unsupportive to efforts to create a national/central bank.

In order to allay the fears of the American public, and convince Congress that it was in the best interests of the country to authorize by law the existence of this ‘private’ institution, it was necessary to effect campaigns at two specific levels. The. campaigns were conducted simultaneously.

At the grass root level, certain civic and business leaders were enlisted to calm the public’s fears and persuade the population that the proposed institution was not just another National Bank.

The message delivered was that the mission of the Federal Reserve was to manage the stages of the economic cycle  (recession, depression, recovery, prosperity) and, thus, avoid the extreme conditions of panics and crashes that had plagued the banking industry and put depositors at continual risk.

Enlisting government support was obtained by providing a way for the US Government to fund its operations. The government support was needed in order to persuade Congress to approve a measure authorizing the Fed’s incorporation.

Behind closed doors, a promise was made. The essence of that promise was that the Federal Reserve would see that the US Government would get whatever funds it needed for whatever purpose.

Today, the Fed provides a convenient ‘funnel’ for the issuance of US Treasury securities in the form of bills, notes, and bonds. These securities are a form of debt that is “monetized” on issuance and become a source of collateral and funding for trillions of dollars worth of economic activity.

However, the Fed’s purpose is not to fund the government. The purpose of the Fed is to provide a system whereby banks can do what they do best – loan money; which they do in perpetuity.

Taking it all in, you might say that there are three separate parties, each with a different “job”, or role. The Federal Reserve creates the money, the US Government spends the money, and the banks loan the money.

Remember, though – the US government is only one party dependent on the Fed’s largesse.     The creation of money is amplified via fractional-reserve banking. (see Origin And Danger Of Fractional-Reserve Banking)

Part of the Fed’s job is to oversee, manage, and control the banks and their activities; especially lending activities. However, that does not mean that the Fed acts with our best interests in mind (see Federal Reserve – Purpose And Motivation).

Regardless of how bad things get, the Federal Reserve continues to act in a manner consistent with their motive and purpose; their job, if you will. The Fed is more proficient today than ever before at creating money. The numbers tell the story and give us an answer to the second question, “How well does the Fed perform?”

Financial catastrophe in 2008 was averted temporarily by huge infusions of money and credit created out of nothing, specifically for the purpose of battling financial and economic collapse. Earlier this year, the Fed funded the government’s multi-trillion dollar plan to stave off self-inflicted economic collapse.

Today, the majority of the Fed’s time and efforts are expended by trying to contain collateral damage from their century-long job of creating money. The effects of inflation and the fragility of the banking system, along with the specter of credit collapse, have brought us to the brink of a precipice.

Unfortunately, the Fed always does its job; and does it well.

*********

Kelsey Williams

Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at kwilliams@kelseywilliamsgold.com

Peru became the world’s largest producer of silver in 2012.

Silver Phoenix Twitter                 Silver Phoenix on Facebook