Secrets of the Temple: How the Federal Reserve Runs the Country

SUMMARYAn amazing yet lengthy history of banking and money in the United States up to 1987. Especially the Federal Reserve, the Reagan/Volker era, and the political climate during this time.BACKGROUNDThe Federal Reserve has a few primary ways of influence currency:1) Open Market Operations: purchase and sale of securities from the open market2) The Discount Rate: as modern banks primarily use a “managed liabilities” approach, where they make loans then find the deposits, rather than than the other way around, on a nightly basis, they sometimes need to borrow massive sums of short-term money to meet their reserve requirements. This lending comes from their regional Federal Reserve bank.3) The Federal Funds Rate [indicator]: the interbank lending rate, serving a similar purpose to the discount rate, but funds held by the Fed traded between individual commercial banks. The Fed doesn’t set this rate, but instead sets a target, which it manages with it’s two aforementioned tools.4) Policy and direct intervention: the Fed practically doesn’t use these controls. This includes reserve requirements, which the Fed does regulate. But it also includes the right to directly intervene in the operations of any major bank. For example, they can refuse to lend to a bank that’s been behaving irresponsibly, highly increasing their chance of default, to teach other bank a lesson about risky lending. The can also directly impose maximum interest spread, limiting bank profits. They can pretty much do anything they want, but almost never do. Think of their legal relationship with commercial banks as comparably to the role the judicial branch serves for the legislature; checks and balances.The Federal Reserve operates as public-private hybrid. The President [the executive branch] appoints the Chairman of the Fed and the Federal Reserve Governors. Then there’s an advisory counsel to the Fed, the Open Market Committee [with public and private representation], which influences Open Market Operations. And then there are the twelve Federal Reserve Banks, which are private, and serve as a conduit between the Fed and commercial banks. A key point to remember is that the Fed is not a democratic institution, as it’s officials are appointed rather than elected. Technically congress could redefine their role, but historically, has overall declined to exercise this right.If all of this sounds very confusing, it is. Even more confusing than the structure of the Fed is the question of what is money and what is it for. A lot of the power of the Fed and the financial markets is that they’ve given some serious thought to these questions [although their answers are very homogenous], when the vast majority elected officials and citizens have not.KEY POINTSThere has never been a long [decade-plus] period of “stable” money in the history of the United States. And yet, for some reason, this seems to be an American ideal. The Federal Reserve was created in 1913, partially inspired by the panic of 1907. And yet the Great Depression of the 1930s, one of the most severe financial disasters in our history, happened under the direct oversight of the Fed. But if you think the 20th century had it rough, look back to the greenback era and the Great Deflation following the Civil War, where currency in circulation was cut in half over the course of a couple decades.Ironically, the populist era of the 1890s and their call for a move away from the gold standard [a non-dynamic money supply] helped to sew the seeds for the creation of the Fed, an anti-populist institution. One of the reasons for this perversion was that the rural farmers [populists] called for the creation of a land-backed currency [linking value directly to our food supply and natural resources], yet the Fed dropped this aspect of their proposal.The New Deal created the era of centralization and consumerism. Following the Crash of 1929, we had a decision - small economy and decentralization, or big economy and centralization. Obviously, we chose the latter. If we had gone the other way, the world would be a very different place. Rural communities in the US would be thriving. We’d have robust local food systems and local economies. Our technology would likely be less developed, and our GDP would be much smaller. Global population would be smaller. Most of the world would be less “developed.” We wouldn’t have the World Bank or the International Monetary Fund. And we wouldn’t have massive multinationals, or banks that are “too big to fail.” Both Democrats and Republicans nowadays seem to praise the New Deal, but ultimately, the adoption of this mentality has put us into a global sustainability bottleneck, and we might not be coming out the other side.The top global economists have absolutely no idea what’s going on.Fed Governor J. Charles Partee, commenting about the early 1980s:"Interest rates are the device by which you ration the demand for credit so it won’t be excessive. Yet if you look at the demand for credit now, it’s extraordinarily large - it’s huge. Government debt is going up, household debt, corporate debt. How can you look at that and conclude that interest rates are too high. I’d say interest rates aren’t high enough. Yet I have to admit the economy isn’t doing very well. It’s a conundrum - extraordinary."Chairman of the Fed, Paul Volker, commenting about the early 1980s:"This tremendous debt creation worries me. Why are people making all these bad loans? People can say interest rates are too high and I might agree with that, certainly by historic standards and by the conditions in the economy. But if interest rates are too high, why is debt expanding so fast? Why is debt growing at a record rate relative to GNP? Apparently somebody out there doesn’t think interest rates are too high."This general confusion about the fundamentals of economic forces isn’t an exception, but the norm. For example, two of the iconic economic theories of the twentieth century, Keynes and Friedman, were both wrong. The issue isn’t in the details, it’s in the concept of economics itself. The concept that the sum of human relations in the social agreements we call the economy could be behave in any predictable manner isn’t just absurd; it’s dangerous:"The war against inflation is paid for in the lives of the less well off; 45,900 died prematurely in the recession of ’74-‘75."And that was just a small recession.To make matters worse, the controls we’re set up for our global economy are extremely imprecise. For example, if the Fed wants to slow inflation, it raises interest rates with the objective of “liquidating” labor [increasing unemployment]. And yet this process of raising rates and increasing unemployment directly increases wealth inequality. And yet wealth inequality has been proven to decrease economic productivity. The whole system is a mess. We don’t understand what we’re doing, and even if we did, our controls don’t allow us to isolate any one variable in the economy. All of our controls have cascading impacts.Another example: another impact of slowing inflation in the early ’80s [“shoring-up” the economy] was that US bank loans to third world countries started coming concerningly close to default, as we’d raised their rates. Luckily the shoring-up process and the higher rates increased the international investment in the US, strengthening the dollar. This moved productivity from the US to the developing countries, giving them more revenue and increasing their ability to repay. Yet all of the economic benefits in these third world countries was poured into the repayment of interest, as they’d had to go through refinancing. And because of the strong dollar, the US economy lost headway in the global economy. At the end of the day, was the US, or any other nation for that matter, better off because we’d slowed inflation? Not really.A systems thinking perspective is fundamental to beginning to understand the way that the global economy functions. But don’t ever think you’ve figured it out; that’s when you’ll go wrong.Greider set an interesting undertone of faith and religion throughout the book. Money, unlike the laws of physics, is a social agreement, or a social technology. This agreement is much more flexible than we might think, and built on trust. Greider points out that anyone who becomes intimately familiar with and buys into the way our money systems work is a religious person. In other words, they put their trust in systems beyond their comprehension or control.The book is an invaluable history, but Greider’s tone is a little disjointed and rambling. He seemed to be trying to prove a point, and there’s definitely some opinions I’ve formed from becoming more familiar with the history of our financial system, but I don’t think he drove home one unified thesis. This means that the book isn’t much of a page turner, but again, certainly worth reading.QUESTIONSAs a tribute to it’s value, the book has left me with more questions than answers:* What is money?* What is money for?* What’s the difference between interest and inflation?* Is inflation really bad?* Is positive interest ethical?FURTHER READING"Debt: The First 5,000 Years" by David Graeber"Sacred Economics" by Charles Eisenstein"Thinking in Systems" by Donella Meadows"Barbarians at the Gate" by Bryan Burrough, John Helyar

"Secrets of the Temple" is an interesting book written by a very good writer, William Greider. Although it was published more than 20 years ago, he makes points that are somewhat relevant today. The book is largely about the Federal Reserve Board (or "FED") under chairman Paul Volcker from 1979 to 1987 although there is a good deal of history on the FED prior to Volcker's appointment as chairman by President Jimmy Carter.Greider is a classic populist, in the sense he reveres the populists of the late 19th century, who fashioned themselves as champions of the (largely agricultural) producers of the era against the creditor classes, the moneyed interests. Much of this analysis of the issues in this book (and others he has written) is grounded that same populist class cleavage. Although populism often appeals to the baser instincts of the masses, Greider tries to give it an intellectual veneer, but in the end, the reader is struck with the same contradictions. Greider bucks conventional wisdom by suggesting the inflation that gripped the 1970s was a net plus, since he saw it as an economic leveler, much as the classic populists of the 19th century saw it. As inflation pushes up the nominal incomes of borrowers it lowers the real value of their fixed debt obligations. There are some serious problems with this view, which Greider doesn't bother to address. First, the benefit of an outburst of inflation accrues to the last set of borrowers before inflation begins, since interest rates shoot up and future borrowers have to seek credit with potential creditors based on expectations of higher inflation. The second, perhaps bigger, problem is once inflation is unleashed it is hard to control. Inflationary expectations can accumulate, if price increases of 10 percent a year are acceptable, what about 20 percent? Or 50 percent? At some point, inflation can cause real economic upheaval and I'm unaware of any society that progressed during a period of hyperinflation.Greider also gives the FED more credit than it probably deserves. He suggests every post-WWII recession was caused by the FED employing tight monetary policies (high interest rates or unwillingness to lend to banks). The business cycle existed before the Federal Reserve and, at best, the FED has an impact and probably did deliberately trigger a recession in early 1980, however, many other factors come into play in the real world. The recessions of early 1990s and 2001 were hardly triggered by the FED and the most recent recession that began in late 2007 wasn't the result of tight monetary policy but rather, if anything, the opposite, excessively loose monetary policy in middle of the decade.For the other side of the story, read Robert Samuelson's  The Great Inflation and Its Aftermath: The Past and Future of American Affluence

Intriguing book so far! Very interesting and surprisingly up to date and current given current market turmoil.

Sometimes could be a little bit rough, but its very interesting. I really recomend it for those who want to understand how Federal Reserve works.

Is was from the public library of Vancouver!

Great quality as a second-hand book.