5 myths debunked about the Federal Reserve
Popular myths about the Fed
Assassination, foreign control and money printing: the stuff of a motion picture thriller?
Not in this case. They’re all the fodder for wild and surprisingly popular myths surrounding the nation’s central bank, the Federal Reserve.
It does wield considerable power, evident in the extraordinary measures taken during and after the financial crisis. But it’s amazing the things that otherwise reasonable people say about this admittedly complex U.S. government institution.
David Reiss, professor at the Brooklyn Law School, says, “To most of us, the Federal Reserve is a riddle, wrapped in a mystery inside an enigma, to borrow Winston Churchill’s phrase.”
There are many myths out there regarding the Fed. Here are just a handful.
Myth 1: The Fed is run by foreigners
The Fed is an American institution. About the myth: “This is simply wrong,” says Charles Calomiris, Henry Kaufman professor of financial institutions at Columbia University.
“What we know is, at least on the surface, the Federal Reserve is run by a combination of the Federal Reserve board and the 12 Federal Reserve banks, who together form the governance of the system,” says Calomiris, who also is a visiting scholar at the International Monetary Fund.
The Board of Governors is comprised of Americans. “Some conspiracy-theory types sometimes argue that vague international organizations secretly control the Fed and other central banks. Yet they provide no evidence for that, which of course they can’t if it is really secret!” says Steve Horwitz, an economics professor at St. Lawrence University in Canton, New York.
Myth 2: The Fed isn’t part of the US government
This myth is a bit similar to the last one, but it has a life of its own. For this one, we turned to David Wyss, former senior economist at the Federal Reserve Board.
“The Board of Governors of the Federal Reserve System is a government entity. The 7 members (including the chairman) are appointed by the president with the advice and consent of the Senate, and report semiannually to Congress,” Wyss says.
Where it gets a bit more complicated is with the 12 Fed district banks. Wyss says the district banks “are quasi-private and are legally owned by the member banks.”
“Each district bank has a board of directors, with 3 appointed by the Board of Governors and 6 elected by the member banks in the district. Each member bank owns a share in its regional Fed, which pays a 6% dividend. All earnings above that percent go to the U.S. Treasury,” he says. If you define the member banks in terms of where they pay their profits, they go straight into federal coffers.
By the way, the U.S. flag flies outside the Federal Reserve’s headquarters in Washington, D.C.
Myth 3: The Fed prints money
The notion is rooted in the Federal Reserve’s control of the nation’s money supply. The Bureau of Engraving and Printing, part of the U.S. Treasury, is responsible for printing currency.
“Although the Bureau of Printing and Engraving prints it, it delivers it to the Fed, and then the Fed gets to decide how much of it to put out into the economy,” says W. Michael Cox, director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. He’s also former chief economist of the Federal Reserve Bank of Dallas.
In a way, Reiss of the Brooklyn Law School says, “the Fed can create money and does so in a variety of ways.” What he means is the Fed can increase the money supply through its monetary tools. Since the end of 2008, it has used “quantitative easing,” or QE, a term used to describe the Fed’s strategy to boost the supply of money.
If you want to describe the process correctly, you might take a cue from St. Lawrence University’s Horwitz. The central bank isn’t in the printing business, but it has some control of the process.
“The money that the Fed creates is all done electronically in the form of bookkeeping entries that expand the deposit accounts that banks hold at the Fed,” he says.
Myth 4: The Federal Reserve is not audited
This matter is a little easier to define since it is a matter of public record.
For this one, we turn to William Ford, a former president of the Federal Reserve Bank of Atlanta. Ford says the Fed’s Board of Governors is subject to an audit every year by the account services firm Deloitte Touche Tohmatsu Ltd. using generally accepted accounting principles, or GAAP.
Where it gets a bit murkier is that the 12 Federal Reserve District Banks are not audited using the same GAAP standards, according to Ford. “They don’t use the rules they enforce on banks,” he says.
Horwitz suggests more could be done. “It is not audited in the way many critics would like, with a full accounting of its holdings, and especially what it has done since 2007,” Horwitz says. He says the Fed “publishes information on its balance sheet, and that info is a key part of monetary policy. However, it is true that it’s never undergone a complete audit comparable to what a private-sector firm might.”
Legislation has been proposed in Congress and has been advocated by Sen. Rand Paul, R-Ky., to perform a fuller audit of the Federal Reserve’s activities.
Myth 5: The Fed had President John F. Kennedy killed
Fed experts suggest this myth might as well have come from outer space.
“That doesn’t even deserve a serious response. It’s just in the realm of Sasquatch and foreigners invading from other planets, coming to America,” says SMU’s professor Cox, who is based in Dallas, where the president was killed 50 years ago.
“People can believe anything they want, but that’s crazy. That’s really crazy,” Cox says.
Columbia University’s Calomiris agrees. “I just think that qualifies under the wacko category. You got to be kidding, right?” he says.
The JFK-related myth seems to date back to Executive Order 11110, an interim measure that allegedly gave the Treasury the authority to issue silver certificates against silver bullion, silver and silver dollars in the Treasury, according to the New York Daily News.
J. Bradley Jansen, director of the Center for Financial Privacy and Human Rights, told the Huffington Post that the theory is bunk. “Ironically, the purpose of the order and the legislation was to decrease the circulation of silver certificates, with Federal Reserve Notes taking their place,” he says.
As Horwitz notes, this one might trump all the others because “it ties together 2 classic conspiracy stories: the Fed and JFK.”
“It’s nonsense,” Horwitz says.