The Austrian Economics Wiki - User contributions [en]

Net neutrality

2011-02-25T00:42:45Z

Voldemeg:

{{TOC right}}
'''Net Neutrality''' is a slogan used to describe [[intervention]] in the [[internet]] service market that would prevent [[internet service providers]] (ISP) from discriminating between different types of content and applications online.

Proponents claim that the market remaining unregulated in this matter will result in consumers and businesses being exploited and discriminated against, stifled competition, and restrictions on entrance into the market.<ref>[http://www.savetheinternet.com/net-neutrality-101 Save the Internet: Net Neutrality 101], Net Neutrality Support Organization</ref> Opponents refute such claims with evidence that in an unregulated ISP market customers and businesses are better served due to increased choice and variety between service providers and plans, competition is fueled by innovation and diversity in how services are priced and implemented, and entrance to the market remains open because ISPs are still vulnerable to under-satisfying their customers if they choose to be restrictive in what content passes through their networks.

Supporters specifically point to discrimination between content of the same ''type'' as wrong, as in one video provider paying more for faster access than a competing video provider, though many claim that discrimination between ''types'' is acceptable, as in all video providers getting faster access than all social networking sites. But opponents raise the question, how do we define ''types'', and what about sites that transcend the defined ''types'' or fit into multiple ''types''?<ref>[http://econ.tepper.cmu.edu/ecommerce/Economics%20of%20Net%20Neutrality.pdf The Economics of Net Neutrality] by Robert Hahn and Scott Wallsten, The Economist's Voice, June 2006</ref>

There has been legislation passed on this matter in several countries, including the United States and Canada.

==Legislation in the United States==

Regulations were passed by the FCC on 21 December 2010 by a 3-to-2 vote that imposes a set of requirements by the [[Federal Communications Commission]] (FCC) on telecom operators and [[Internet service provider|internet service providers]] operating in the [[United States]]

The regulations shift decision-making about owned resources from the network resource owners to non-owners. The non-owners seeking to influence the decision-making in this and other similar conflicts are sometimes termed "[[Stakeholders|stakeholders]]."

There are six areas of guidelines:

* Access to content

* Access to applications and services

* Connection of devices

* Access to competitive options

* Nondiscrimination

* Transparency

It is not unlikely, however, that proponents of the net neutrality provisions may be reacting to past [[Monopoly|monopolistic]] assignments of geographic customer territories, also by the FCC. Many incumbent telecom companies continue to be shielded from competition by FCC regulations.

==Excerpts from the FCC "guidelines"==
From the news release issued by the FCC on 21 December 2010, the day the FCC voted itself the power to intervene in the operation of the [[Internet]]:

===Rule 1: Transparency [per the FCC]===

A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.

===Rule 2: No Blocking [per the FCC]===

A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non-harmful devices, subject to reasonable network management.

A person engaged in the provision of mobile broadband Internet access service, insofar as such person is so engaged, shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony services, subject to reasonable network

===Rule 3: No Unreasonable Discrimination [per the FCC]===

A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service. Reasonable network management shall not constitute unreasonable discrimination.

===Select Definitions [per the FCC]===

Broadband Internet access service: A mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service. This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence, or that is used to evade the protections set forth in this Part.

Reasonable network management. A network management practice is reasonable if it is appropriate and tailored to achieving a legitimate network management purpose, taking into account the particular network architecture and technology of the broadband Internet access service. Legitimate network management purposes include: ensuring network security and integrity, including by addressing traffic that is harmful to the network; addressing traffic that is unwanted by users (including by premise operators), such as by providing services or capabilities consistent with a user’s choices regarding parental controls or security capabilities; and by reducing or mitigating the effects of congestion on the network.

==What the FCC news release omitted==

The FCC did not acknowledge in its December 2010 news release that the original marketplace [[intervention]] that limited transparency and enabled the aforementioned anti-competitive structures and behaviors was the passage by the U.S. Congress of the [[Communications Act of 1934]], along with the predecessor of the FCC, the [[Federal Radio Commission]].

The 1934 act created the FCC, but the FCC neither suggested nor voted that the U.S. Congress de-fund the agency and repeal the 1934 Act to allow a completely unencumbered marketplace for electronic communications. Rather than optimize neutrality by establishing a fully consumer-oriented free market environment, it appears (in late 2010) the U.S. Congress will instead battle with the FCC to determine whose coercive version of Internet control will be implemented.<ref>[http://washingtonexaminer.com/blogs/beltway-confidential/2010/12/demint-vows-reverse-fccs-internet-takeover DeMint vows to reverse FCC's 'Internet takeover'], Washington Examiner, 22 December 2010</ref>

==References==
<references/>

==Links==

* [http://blog.mises.org/10967/a-libertarian-take-on-net-neutrality/ A Libertarian Take on Net Neutrality] by [[Stephan Kinsella]]

* [http://mises.org/daily/4432 Net Neutrality: Unwarranted Intervention] by Fernando Herrera-Gonzalez

* [http://mises.org/daily/2139 Who owns the Internet?] by Tim Swanson (May 2006)

* [http://www.theobjectivestandard.com/issues/2008-winter/net-neutrality.asp Net Neutrality: Toward a Stupid Internet] by Raymond C. Niles

* [http://www.washingtontimes.com/news/2010/dec/2/wave-goodbye-to-internet-freedom/ Wave goodbye to Internet freedom], Washington Times editorial, 2 Dec. 2010

* [http://www.fcc.gov/Daily_Releases/Daily_Business/2010/db1221/DOC-303745A1.pdf FCC news release of 21 Dec. 2010] (PDF file may be occasionally unavailable, due to internet traffic and other factors)

* [http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-201A1.pdf Full text] (194 pages in PDF format) of the FCC "Report and Order" adopted 21 December 2010; Dissent by commissioner Robert M. McDowell begins on p. 145; Dissent by commissioner Meredith Attwell Baker begins on p. 180

* [http://techliberation.com/2010/12/22/two-scathing-dissents-on-the-fccs-illegal-unnecessary-harmful-net-neutrality-order/ Short summary of dissents] by the 2 commissioners opposing the FCC order, The Technology Liberation Front, 22 Dec. 2010

* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=963623 The Net Neutrality Debate: Twenty Five Years After United States v. AT&T and 120 Years After the Act to Regulate Commerce] by Bruce M. Owen, February 2007

* [http://en.wikipedia.org/wiki/Network_neutrality Network neutrality] on Wikipedia

{{stub}}

[[Category:Interventions]]

Net neutrality

2011-02-22T17:55:37Z

Voldemeg: Replaced introduction, changed ordering, cited new sources, still needs work!

{{TOC right}}
'''Net Neutrality''' is a slogan used to describe [[intervention]] in the [[internet]] service market that would prevent [[internet service providers]] (ISP) from discriminating between different types of content and applications online.

Proponents claim that the market remaining unregulated in this matter will result in consumers and businesses being exploited and discriminated against, stifled competition, and restrictions on entrance into the market.<ref>[http://www.savetheinternet.com/net-neutrality-101 Save the Internet: Net Neutrality 101], Net Neutrality Support Organization</ref> Opponents refute such claims with evidence that in an unregulated ISP market customers and businesses are better served due to increased choice and diversity between service providers and plans, competition is fueled by innovation and diversity in how services are priced and implemented, and entrance to the market remains open because ISPs are still vulnerable to under-satisfying their customers if they choose to be restrictive in what content passes through their networks.

Supporters specifically point to discrimination between content of the same ''type'' as wrong, as in one video provider paying more for faster access than a competing video provider, though many claim that discrimination between ''types'' is acceptable, as in all video providers getting faster access than all social networking sites. But opponents raise the question, how do we define ''types'', and what about sites that transcend the defined ''types'' or fit into multiple ''types''?<ref>[http://econ.tepper.cmu.edu/ecommerce/Economics%20of%20Net%20Neutrality.pdf The Economics of Net Neutrality] by Robert Hahn and Scott Wallsten, The Economist's Voice, June 2006</ref>

There has been legislation passed on this matter in several countries, including the United States and Canada.

==Legislation in the United States==

Regulations were passed by the FCC on 21 December 2010 by a 3-to-2 vote that imposes a set of requirements by the [[Federal Communications Commission]] (FCC) on telecom operators and [[Internet service provider|internet service providers]] operating in the [[United States]

The regulations shift decision-making about owned resources from the network resource owners to non-owners. The non-owners seeking to influence the decision-making in this and other similar conflicts are sometimes termed "[[Stakeholders|stakeholders]]."

There are six areas of guidelines:

* Access to content

* Access to applications and services

* Connection of devices

* Access to competitive options

* Nondiscrimination

* Transparency

It is not unlikely, however, that proponents of the net neutrality provisions may be reacting to past [[Monopoly|monopolistic]] assignments of geographic customer territories, also by the FCC. Many incumbent telecom companies continue to be shielded from competition by FCC regulations.

==Excerpts from the FCC "guidelines"==
From the news release issued by the FCC on 21 December 2010, the day the FCC voted itself the power to intervene in the operation of the [[Internet]]:

===Rule 1: Transparency [per the FCC]===

A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.

===Rule 2: No Blocking [per the FCC]===

A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non-harmful devices, subject to reasonable network management.

A person engaged in the provision of mobile broadband Internet access service, insofar as such person is so engaged, shall not block consumers from accessing lawful websites, subject to reasonable network management; nor shall such person block applications that compete with the provider’s voice or video telephony services, subject to reasonable network

===Rule 3: No Unreasonable Discrimination [per the FCC]===

A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service. Reasonable network management shall not constitute unreasonable discrimination.

===Select Definitions [per the FCC]===

Broadband Internet access service: A mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service. This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence, or that is used to evade the protections set forth in this Part.

Reasonable network management. A network management practice is reasonable if it is appropriate and tailored to achieving a legitimate network management purpose, taking into account the particular network architecture and technology of the broadband Internet access service. Legitimate network management purposes include: ensuring network security and integrity, including by addressing traffic that is harmful to the network; addressing traffic that is unwanted by users (including by premise operators), such as by providing services or capabilities consistent with a user’s choices regarding parental controls or security capabilities; and by reducing or mitigating the effects of congestion on the network.

==What the FCC news release omitted==

The FCC did not acknowledge in its December 2010 news release that the original marketplace [[intervention]] that limited transparency and enabled the aforementioned anti-competitive structures and behaviors was the passage by the U.S. Congress of the [[Communications Act of 1934]], along with the predecessor of the FCC, the [[Federal Radio Commission]].

The 1934 act created the FCC, but the FCC neither suggested nor voted that the U.S. Congress de-fund the agency and repeal the 1934 Act to allow a completely unencumbered marketplace for electronic communications. Rather than optimize neutrality by establishing a fully consumer-oriented free market environment, it appears (in late 2010) the U.S. Congress will instead battle with the FCC to determine whose coercive version of Internet control will be implemented.<ref>[http://washingtonexaminer.com/blogs/beltway-confidential/2010/12/demint-vows-reverse-fccs-internet-takeover DeMint vows to reverse FCC's 'Internet takeover'], Washington Examiner, 22 December 2010</ref>

==References==
<references/>

==Links==

* [http://blog.mises.org/10967/a-libertarian-take-on-net-neutrality/ A Libertarian Take on Net Neutrality] by [[Stephan Kinsella]]

* [http://mises.org/daily/4432 Net Neutrality: Unwarranted Intervention] by Fernando Herrera-Gonzalez

* [http://mises.org/daily/2139 Who owns the Internet?] by Tim Swanson (May 2006)

* [http://www.theobjectivestandard.com/issues/2008-winter/net-neutrality.asp Net Neutrality: Toward a Stupid Internet] by Raymond C. Niles

* [http://www.washingtontimes.com/news/2010/dec/2/wave-goodbye-to-internet-freedom/ Wave goodbye to Internet freedom], Washington Times editorial, 2 Dec. 2010

* [http://www.fcc.gov/Daily_Releases/Daily_Business/2010/db1221/DOC-303745A1.pdf FCC news release of 21 Dec. 2010] (PDF file may be occasionally unavailable, due to internet traffic and other factors)

* [http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-201A1.pdf Full text] (194 pages in PDF format) of the FCC "Report and Order" adopted 21 December 2010; Dissent by commissioner Robert M. McDowell begins on p. 145; Dissent by commissioner Meredith Attwell Baker begins on p. 180

* [http://techliberation.com/2010/12/22/two-scathing-dissents-on-the-fccs-illegal-unnecessary-harmful-net-neutrality-order/ Short summary of dissents] by the 2 commissioners opposing the FCC order, The Technology Liberation Front, 22 Dec. 2010

* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=963623 The Net Neutrality Debate: Twenty Five Years After United States v. AT&T and 120 Years After the Act to Regulate Commerce] by Bruce M. Owen, February 2007

* [http://en.wikipedia.org/wiki/Network_neutrality Network neutrality] on Wikipedia

{{stub}}

[[Category:Interventions]]

Federal Reserve System

2010-11-15T02:31:27Z

Voldemeg:

The '''Federal Reserve System''', (also known as the '''Federal Reserve''', and informally as the '''Fed''') is the central banking system of the United States. It was founded in 1913 by the [[Wikipedia:Federal Reserve Act|Federal Reserve Act]] to "provide the nation with a safer, more flexible, and more stable monetary and financial system." Over the years, its role in banking and the economy has expanded.<ref name="Fed_Purpose">Federal Reserve. [http://www.federalreserve.gov/pf/pdf/pf_1.pdf "The Federal Reserve System Purposes & Functions"] (pdf), Board of Governors of the Federal Reserve System, Washington, D.C, Ninth Edition, June 2005. Referenced 2009-06-10.</ref>

{{Stub}}

==Structure==

===Commercial Banks===
* "'''[[Wikipedia:State bank|State banks]]'''" are chartered by state governments, and have to obey state laws. They are also regulated by either the Federal Reserve (if member) or the [[Wikipedia:Federal Deposit Insurance Corporation|FDIC]]. They can choose to become members of the Federal Reserve System, if they meet the standards set by the Board of Governors.
* "'''[[Wikipedia:National Banking Act|National banks]]'''", chartered by the federal government (through the [[Wikipedia:Office of the Comptroller of the Currency|Office of the Comptroller of the Currency]] in the Department of the Treasury) are by law members of the Federal Reserve System and are regulated by it. They are independent from state banking laws and can act across the whole USA.<ref name="Comptroller_Banks">Comptroller of the Currency Administrator of National Banks. [http://www.occ.treas.gov/DualBanking.pdf "National Banks and The Dual Banking System"] (pdf), September 2003, referenced 2010-03-29.</ref>

===Regional Federal Reserve Banks===
As of March 2004, of the nation’s approximately 7,700 commercial banks approximately 2,900 were members of the Federal Reserve System (approx. 2,000 national banks and 900 state banks).

Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus, half of which must be paid, the other half is subject to call by the Board of Governors. The stock does not confer control and financial interest like stock in for-profit organizations, and it may not be sold or pledged as collateral for loans. Member banks receive a 6 percent dividend annually on their stock, and vote for the Class A and Class B directors of the Reserve Bank. Stock in Federal Reserve Banks is not available for purchase by individuals or entities other than member banks.<ref name="Fed_Purposes">Board of Governors of the Federal Reserve System. [http://www.federalreserve.gov/pf/pdf/pf_complete.pdf "The Federal Reserve System Purposes & Functions"] (pdf), Ninth Edition, June 2005, pages 12, 4, 11. Referenced 2010-03-27.</ref>

Every Federal Reserve Bank has a board of directors, subject to the orders of the Board of Governors. The class A directors of a board are chosen by and represent the stockholders. Class B directors are also chosen by the stockholders, but represent the public, they can't be an officer, director, or employee of any bank. Class C directors are appointed by the Board of Governors, one of them is named the chairman of the board and another the vice-chairman. They cannot be officer, director, employee, or stockholder of any bank.<ref name="Fed_Act">Board of Governors of the Federal Reserve System. [http://www.federalreserve.gov/aboutthefed/section4.htm "Federal Reserve Act"], Section 4, Paragraphs 8, 14, 15, 20. Referenced 2010-03-27.</ref>

===Board of Governors===
The Board of Governors of the Federal Reserve System is a federal government agency. It is composed of seven members, including the Chairman and the Vice Chairman of the Board. All are appointed by the President of the United States and confirmed by the U.S. Senate. The full term of a Board member is fourteen years, and the appointments are staggered so that one term expires on January 31 of each even-numbered year. After serving a full term, a Board member may not be reappointed.

After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. In 2003, the Federal Reserve paid approximately $22 billion to the Treasury.<ref name="Fed_Purposes" />

The Federal Reserve System cannot be therefore considered an independent entity, and constitutes a [[Wikipedia:Special Purpose Entity|Special Purpose Entity]] (legally a "[[Wikipedia:Variable Interest Entity|Variable Interest Entity]]") of the US federal government.<ref name="Oberholster_Fed">Sarel Oberholster. [http://mises.org/daily/4171 "The Independence of the Fed?"], Mises Daily:, March 2010, referenced 2010-03-27.</ref>

==Workings==
===State debt===
When the US federal government runs a budget deficit, it can't simply have the Fed print up enough $100 bills to cover the shortfall. No, the [[Wikipedia:United States Department of the Treasury|Treasury]] always covers its budget deficits by issuing debt, referred to as [[Wikipedia:United States Treasury security|Treasuries]]. These are bonds, IOUs sold by the Treasury to outside investors who lend the Treasury money today in the hopes of being paid back in the future.

One of the main buyers of this Treasury [[debt]] is the Federal Reserve itself. This phenomenon is especially pronounced during emergencies such as major wars and the times of financial crisis. In the second quarter of 2009, the Federal Reserve was the effective buyer of some 48 percent of the new Treasury debt issued that period, as part of its "quantitative easing." True, the Fed doesn't show up at the Treasury auctions and directly buy the new T-bills and so forth, but private dealers pay higher prices for the Treasuries knowing that the Fed will pick them up.

Let's say the Fed wants to buy $1 million worth of T-bills from Joe Smith. So it writes Joe a check for $1 million, drawn on the Fed itself. Joe hands the T-bills over to the Fed, where they end up on the asset side of its balance sheet. Joe then deposits the check in his personal checking account, which goes up by $1 million. So at this point the Fed has increased the money supply by $1 million. (In normal times, because of the [[fractional reserve banking]] system, Joe's bank would lend out $900,000 of the new deposit to another customer, so that the money supply would grow even further.)

By entering the bond market and buying Treasuries (with money created out of thin air), the Fed pushes up the price of the bonds. That of course means that their yield drops. So, for example, if the Treasury issues a T-bill promising to pay the holder $10,000 in 12 months, then the auction price determines how much money the Treasury actually gets to borrow now in exchange for this promise to pay back $10,000 in one year. If the demand is such that people pay $9,900 for each T-bill with a face value of $10,000, then the Treasury gets to borrow money for a year at an interest rate of 1 percent. If nothing else, the Fed's massive buying of Treasury debt pushes up the auction price of the Treasuries, meaning the federal government can borrow at cheaper interest rates.

The Treasury is paying interest on its debt, but the Fed gives the interest payments right back to the Treasury! After all, interest is how the Fed "makes money." It writes checks on itself (created out of thin air) and accumulates assets, and then earns the interest and (in some cases) capital gains on the assets. But after the Fed pays its employees and other bills, it remits the excess earnings back to the Treasury.

For example, according to its report <ref name="Fed_report_2008">Board of Governors of the Federal Reserve System. [http://www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/AR08.pdf "Income and Expenses"] (pdf), 95th Annual Report 2008, p.173, referenced 2010-02-03.</ref>, in fiscal year 2008 the Federal Reserve distributed to the US Treasury some $31.7 billion of its net earnings. So not only is the official rate of interest kept artificially low by the Fed's money-creation, but the interest payments themselves are largely refunded to the Treasury.

A debt should be repaid at some point. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed [[Wikipedia:Rollover (finance)|rolls over]] the debt. Over time, the nominal market value of the Fed's holdings of Treasury debt continually grows. Barring a sudden reversal in this policy, the Treasury knows that it will never have to pay off this debt.<ref name="Murphy_Limits">Robert P. Murphy. [http://mises.org/daily/4029 "The Fed as Giant Counterfeiter"], Mises Daily, February 01 2010, referenced 2010-02-03.</ref>

By 1921, the Fed acquired about $400 million worth of government bonds, and $2.4 billion by 1934. By the end of 1981 it was no less than $140 billion of U.S. government securities; by the middle of 1992, the total had reached $280 billion.<ref name="Rothbard_Case_Fed">[[Murray N. Rothbard]]. [http://mises.org/books/fed.pdf "The Case Against the Fed"] (pdf), How the Fed Rules and Inflates, p. 144-145, referenced 2010-03-23.</ref> At the end of 2008, it held about $476 billion.<ref name="Fed_report">Board of Governors of the Federal Reserve System. [http://www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/AR08.pdf "95th Annual Report 2008"] (pdf), p.400, U.S. Treasury Securities held outright: 475,921. Referenced 2010-03-23.</ref>

===Issuing currency===
Banks get cash from Federal Reserve Banks. The Federal Reserve orders new currency from the [[Wikipedia:Bureau of Engraving and Printing|Bureau of Engraving and Printing]], which produces the appropriate denominations and ships them directly to the Reserve Banks. For the [[banknote]]s, the Fed pays only the cost of printing.<ref name="Fed_currency">Federal Reserve Bank of New York. [http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html "How Currency Gets into Circulation"], referenced 2010-03-06.</ref> During the Fiscal Year 2008, the Bureau delivered 7.7 billion notes at an average cost of 6.4 cents per note.<ref name="Bureau_cost">Bureau of Engraving and Printing. [http://www.bep.treas.gov/uscurrency/annualproductionfigures.html "Annual Production Figures"], referenced 2010-03-06.</ref>

[[Coin]]s are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins. Large banks in some Federal Reserve Districts receive coins directly from the [[Wikipedia:United States Mint|Mint]].<ref name="Fed_currency" />

==History==
{{See also|History of money and banking in the US}}
By the turn of the century the political economy of the United States was dominated by two generally clashing financial aggregations: the previously dominant [[Wikipedia:J.P. Morgan & Co.|Morgan group]], which began in investment banking and then expanded into commercial banking, railroads, and mergers of manufacturing firms; and the [[Wikipedia:Rockefeller family|Rockefeller]] forces, which began in oil refining and then moved into commercial banking, finally forming an alliance with the [[Wikipedia:Kuhn, Loeb & Co.|Kuhn, Loeb Company]] in investment banking and the [[Wikipedia:E. H. Harriman|Harriman]] interests in railroads. Although these two financial blocs usually clashed with each other, they were as one on the need for a central bank. Attempts to use the [[Wikipedia:United States Department of the Treasury|Treasury]] as a central bank had failed, as evidenced by the [[Wikipedia:Panic of 1907|Panic of 1907]].<ref name="Rothbard_Origins">[[Murray N. Rothbard]]. [http://mises.org/journals/qjae/pdf/qjae2_3_1.pdf "The Origins of the Federal Reserve"] (pdf), The Quarterly Journal of Austrian Economics, Vol. 2, No. 3 (Fall 1999), referenced 2009-09-13.</ref> In 1913, the American banking system received a central bank of the European model, the [[Federal Reserve System|Federal Reserve]]. The U.S. was the last great nation to introduce central banking.

The Federal Reserve System was deliberately designed to create and control [[inflation]]. Only the Federal Reserve Banks could print paper notes, and the member banks would buy them from the Fed by drawing down deposit accounts at the Fed. The different reserve requirements for central reserve city, reserve city, and country banks were preserved, but the Fed was now the single base of the entire banking pyramid. [[Gold]] was centralized at the Fed, and the Fed could pyramid its deposits 2.86:1 on top of gold, and its notes 2.5:1 on top of gold. (That is, its reserve requirements were: 35 percent of total demand deposits/gold, and 40 percent of its notes/gold.) All national banks were forced to become members of the Federal Reserve System, state banks had a choice. But in order to get cash for their customers, nonmember banks had to keep deposit accounts with member banks who had access to the Fed, and so were under its control as well.

At the founding of the Fed in 1913, the most important single item of paper money in circulation was the gold certificate, held by the Fed and backed 100 percent by gold assets in the Treasury. But within a few years, the Fed started withdrawing gold certificates from circulation and substituting [[Wikipedia:Federal Reserve Note|Federal Reserve Notes]] (FRN). But since the FRN only had to be backed 40 percent by gold certificates, 60 percent of the released gold was available as a base on which to pyramid more bank money.

The average reserve requirement of all banks before the establishment of the Fed was 21.1 percent. Under the provisions of the original [[Wikipedia:Federal Reserve Act|Federal Reserve Act]] in 1913, this requirement was cut to 11.6 percent, and to 9.8 percent in June 1917. As a result, the Fed doubled the money supply between its inception at the end of 1913 and the end of 1919. Also, the reserve requirements on time deposits in commercial banks (deposits that could only be withdrawn after a certain length of time) drastically lowered from the original 21.1 to 5 percent, and again in 1917 to 3 percent. As a result, banks encouraged their depositors to transfer their funds to savings accounts, to have a larger basis for credit expansion.

From June 1914 to January 1920, when demand deposits grew from $9.7 billion to $19.1 billion, or by 96.9 percent, time deposits at commercial banks rose from $4.6 billion to $10.4 billion, or 126.1 percent. In the great boom of the 1920s, that started after the [[Wikipedia:Depression of 1920–21|recession of 1920–21]] (a short recession, thanks to the budget cutting and lowering of taxes by [[Wikipedia:Warren Harding|Warren Harding]]<ref name="Woods_Harding">Thomas E. Woods, Jr. [http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b "Warren Harding and the Forgotten Depression of 1920"], First Principles, Fall 2009 issue of The Intercollegiate Review. See also the [http://www.youtube.com/watch?v=czcUmnsprQI video]. Referenced 2009-10-11.</ref>), total demand deposits rose from $16.7 billion in July 1921 to $22.8 billion in July 1929, eight years later, an increase of 36.5 percent. Time deposits in commercial banks expanded from $11.2 billion to $19.7 billion in the same period, a far greater rise of 75.9 percent. The great boom of the roaring 1920s was largely fueled by credit expansion going into time deposits. The greatest expansion of time deposits came in Central Reserve Cities (New York and Chicago), where the Fed’s open market operations were all conducted, as opposed to Reserve Cities and areas served by Country Banks. As acknowledged by Federal Reserve officials, time or savings deposits were then, for all practical purposes, equivalent to demand deposits and would be paid on demand in case of a run on a bank.

With the passage of the Federal Reserve Act, [[Wikipedia:Woodrow Wilson|President Wilson]] appointed [[Wikipedia:Benjamin Strong, Jr.|Benjamin Strong]] to the most powerful post in the Federal Reserve System, Governor of the Federal [[Wikipedia:Reserve Bank of New York|Federal Reserve Bank of New York]]. He quickly used his position to dominate the System and made decisions on Fed policy without consulting the Federal Reserve Board in Washington, often against their wishes. Strong was the dominant leader of the Fed from 1914 until his death in 1928. He pursued an inflationary policy, partly to finance the war effort of WWI, connected to the interests of the [[Wikipedia:J.P. Morgan & Co.|House of Morgan]]. Another motivation was attempting to prop up the [[Bank of England]] after it returned to the gold standard with an overvalued pound. To prevent the loss of gold to the States, its governor [[Wikipedia:Montagu Norman, 1st Baron Norman|Montagu Norman]] secretly convinced Strong to inflate in order to help England. The expansion ended only after his death and the '''[[Wikipedia:Great Depression|Great Depression]]''' followed soon after. In 1928 Strong admitted that "very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis" - that is, to help Britain maintain a phony and inflationary form of the gold standard.<ref name="Rothbard_Federal_Reserve">[[Murray N. Rothbard]]. [http://mises.org/books/mysteryofbanking.pdf "The Mystery of Banking"] (pdf), Chapter XVI: Central banking in the United States IV: The Federal Reserve System, p.235-246, referenced 2009-10-03.</ref>

While for a brief time in the early 1920s the Fed was bent on providing credit only in emergencies, it soon reverted to its policy of extending credit during booms <i>and</i> depressions, thus promoting continuous and permanent inflation.<ref name="Rothbard_policy">[[Murray N. Rothbard]]. [http://mises.org/rothbard/agd.pdf "America’s Great Depression"] (pdf), The Inflationary Factors, p.120, referenced 2009-10-16.</ref>

===The Great Depression===
The '''New Deal's''' Banking Acts of 1933 and 1935 transformed the face of the Fed, permanently shifting crucial power from the New York Fed to Washington, D.C. The result of these two Banking Acts was to strip the New York Fed of the power to conduct open-market operations, and to place it squarely in the hands of the Federal Open Market Committee, dominated by the Board in Washington, but with regional private bankers playing a subsidiary partnership role. The [[Wikipedia:Federal Deposit Insurance Corporation|Federal Deposit Insurance Corporation]] (FDIC) was created to insure all bank depositors against losses. However, the FDIC only has in its assets a tiny fraction (1 or 2 percent) of the deposits it claims to "insure." The validity of this "insurance" may be gauged by noting the late 1980s catastrophe of the savings and loan industry, whose deposits were insured by another federal agency, the defunct [[Wikipedia:Federal Savings and Loan Insurance Corporation|Federal Savings and Loan Insurance Corporation]].

After 1933, Federal Reserve Notes and deposits were no longer redeemable in gold coins to Americans; and after 1971, the dollar was no longer redeemable in gold bullion to foreign governments and central banks. The gold of Americans was confiscated and exchanged for Federal Reserve Notes, which became legal tender; and Americans were stuck in a regime of fiat paper issued by the government and the Federal Reserve. Over the years, all restraints on Fed activities or its issuing of credit have been lifted. Since 1980, the Federal Reserve has enjoyed the power to buy not only U.S. government securities but any asset, and to buy as many assets and to inflate credit as much as it pleases. There are no restraints left on the Federal Reserve.<ref name="Rothbard_Case_Fed">[[Murray N. Rothbard]]. [http://mises.org/books/fed.pdf "The Case Against the Fed"] (pdf), p. 131-134, referenced 2010-05-10.</ref>

The Fed greatly expanded bank reserves in the 1930s. Panicking at the inflationary potential in 1938, it doubled the minimum reserve requirements to 20 percent, sending the economy into a tailspin of credit liquidation. Ever since that period, the Fed has been very cautious about the degree of its changes. So although changes in bank reserve requirements happen fairly often, they're in very small steps, by fractions of one percent.<ref name="Rothbard_Case_Fed" />

===Goals===
The Federal Reserve was supposed to protect the monetary and financial system against inflation and violent swings. According to a statement by the [[Wikipedia:John Skelton Williams|Comptroller of the Currency]] at its opening, it would supply "''...a circulating medium absolutely safe, which will command its face value in all parts of the country, and which is sufficiently elastic to meet readily the periodical demands for additional currency, incident to the movement of the crops, also responding promptly to increased industrial or commercial activity, while retiring from use automatically when the legitimate demands for it have ceased. Under the operation of this law such financial and commercial crises, or "panics," as this country experienced in 1873, in 1893, and again in 1907, with their attendant misfortunes and prostrations, seem to be mathematically impossible.''" Also:<ref name="Groseclose_Comptroller">Elgin Groseclose. [http://mises.org/books/moneymachine.pdf "America's Money Machine: The Story of the Federal Reserve"] (pdf), Arlington House, Westport, Connecticut, 1980. p. 84-86, quoting the Secretary of Treasury Annual Report of 1914 (see also the [http://www.archive.org/stream/CCbanking1924proc00uoft/CCbanking1924proc00uoft_djvu.txt "Proceedings (revised) of the Select Standing Committee on Banking and Commerce of the House of Commons"], online copy, Appendix No. 1., p. 175.). Referenced 2009-05-22.</ref>

<blockquote>"''Under the provisions of the new law the failure of efficiently and honestly managed banks is practically impossible and a closer watch can be kept on member banks. Opportunities for a more thorough and complete examination are furnished for each particular bank. These facts should reduce the dangers from dishonest and incompetent management to a minimum. It is hoped that national-bank failures can hereafter be virtually eliminated.''"</blockquote>

The value of the dollar has rapidly declined since the Federal Reserve's founding. The goods and services that could be bought for $1.00 in 1913, would be currently bought for $21.80 - a fall to $0.05 of its original value. In other words, over 95% of the dollar has been inflated away.<ref name="Fed_CPI">Federal Reserve, St. Louis. [http://research.stlouisfed.org/fred2/graph/?chart_type=line&width=800&height=480&preserve_ratio=true&s%5B1%5D%5Bid%5D=CPIAUCNS "Consumer Price Index for All Urban Consumers: All Items"], 1913-2009. See also the [http://data.bls.gov/cgi-bin/cpicalc.pl Inflation Calculator] by the [http://www.bls.gov/data/ Department of Labor Statistics]. Referenced 2009-05-22.</ref>

As for the [[business cycle]] and the abolition of panics, the data shows otherwise. Recessions of the 20th century as documented by the [[Wikipedia:National Bureau of Economic Research|National Bureau of Economic Research]] include: 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1929–1933, 1937–1938, 1945, 1948–1949, 1953–1954, 1957–1958, 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007 to the present.<ref name="NBER_panics">National Bureau of Economic Research. [http://www.nber.org/cycles.html "Business Cycle Expansions and Contractions"], referenced 2009-06-22.</ref>

==Impact on the economics profession==
It is argued that the Federal Reserve dominates the field of monetary economics through its extensive network of consultants, visiting scholars, alumni, and staff economists, so that real criticism of the central bank can be a career liability for members of the profession. The editorial boards of key journals have many members directly working or affiliated with the Federal Reserve. [[Milton Friedman]] noted that it has a sort of oligopoly on monetary opinion, in that someone wanting to advance in the field of monetary research would be disinclined to criticize the major employer in the field.<ref>White, Lawrence H. 2005. [http://www.aier.org/ejw/archive/complete-issues/doc_view/3686-ejw-200508?tmpl=component&format=raw "The Federal Reserve System’s Influence on Research in Monetary Economics"]. Econ Journal Watch, Volume 2, Number 2, August 2005, p. 325-354. Referenced 2009-10-11.</ref> This influence was criticized particularly after the Fed failed to foresee the current economic crises, along with many other mainstream economists.<ref name="Grim_Fed">Ryan Grim. [http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html "Priceless: How The Federal Reserve Bought The Economics Profession"], Huffingon Post, posted 2009-09-07, referenced 2009-10-11.</ref><ref name="North_Fed">Gary North. [http://www.lewrockwell.com/north/north757.html "The Third Rail of Academia"], Lewrockwell.com, posted 2009-09-16, referenced 209-10-11.</ref>

==References==
{{Reflist}}

==External links==
* [http://www.federalreserve.gov/ Board of Governors of the of the Federal Reserve System] - official website
* [[Wikipedia:Federal Reserve System|Wikipedia page]] on the Fed
* [http://www.bos.frb.org/about/pubs/begin.pdf Historical Beginnings... the Federal Reserve] (pdf) by Roger T. Johnson, Federal Reserve Bank of Boston, 1999.
* [http://mises.org/story/3709 Is the Fed's Pumping Inflationary?] by Frank Shostak, September 2009
* [http://mises.org/books/cartelization.pdf The Federal Reserve as a Cartelization Device] by Murray Rothbard, 1984
* [http://mises.org/daily/4668 Bad Monetary Policy Is Redundant] by George F. Smith, September 2010
[[Category:Historical]]