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RSSThe History and the Role of the US Federal Reserve Board 1
Book Review on Secrets of the
The History and the Role of the
This book is about the contemporary history of U.S central bank, the Federal Reserve Board system. The U.S Fed has influenced not only U.S domestic market but also the shapes of world economy through its unique monetary policy. However, its organization is totally different from those of other U.S federal government agencies. Unlike other democratic government agencies, it does not follow the basic principle of representative democracy. It is organized and operated by bureaucratic technocrats who have been trained in the fields of financial corporations. It is exempted from regular monitoring by the U.S congress not to mention by the White House.
Even though the U.S President has a right to appoint one or two members of the Board of Governors in the Federal Reserve Board for every 4 years, the president cannot influence the Fed policy once he or she nominates the chairman of the Fed. In other words, during these 4 years of tenure, the members of the Board of Governors can adopt certain monetary policies based on their own judgment on the state of the economy without any institutional interruptions. This book introduces the brief history of the U.S Fed, and explains how this federal bank has gained its unique institutional independence and the relative autonomy throughout about 1 hundred years of its history.
Economic scene in the late 1970s
However, this book is not merely about the modern history of the US Federal Reserve system. It is more about its economic policies and their significant effects on the U.S economy on macro level as well as their global consequences in the 1980s. The 1970s in the
To use economic jargon, at that time every economic agent from household to big firm started to gain “rational expectation,” based on its past experiences of continuous inflation, that overall price level would continue to rise in the future: ordinary wage earners tried to raise their nominal wages in order to prevent their wages’ real purchasing power from falling; Every corporation tried to raise the price of its products in order to retrieve its probable losses from nominal wage increase and increasing capital cost.
Admittedly, most economic agents do not know exactly to what extent the future inflation rate will be. However, this uncertainty for the future does not play a role as an antidote for inflationary pressures but intensifies these inflationary pressures at an unprecedented level. Nobody knows whether my previous wage bargaining was appropriate or not. Nobody knows whether your firm’s previous price markup was at a relevant level. However, one thing is certain: Even though you have bid up your nominal wage too much, or your executive managers have increased the price markup too much, it will not matter unless the whole economic system turns its direction abruptly.
Inflation – who gain and who lose
In this sense, the inflation itself does not do any harm to both the owners of the firms and those who sell their labor force in the market as long as they can receive higher nominal wages and profits in accordance with the inflation. But continuous overall price increase does harm to those who finance the operation of corporations. In modern eras, those who accumulate huge amount of money (either from their previous investment on productive capital or from robbery, either from their previous industry or from their parents’ huge heir does not matter) usually invest their money in financial markets in order to make more money.
Traditionally, most capitalist firms and corporations borrow their “capital cost” for new plants, factories, new machines, etc., as well as “labor cost” from commercial banks. Banks usually lend them from their own financial assets and savings deposited by ordinary citizens. However, modern capitalist market has also developed different kinds of financial markets including “bonds market,” “money market,” “stock market,” etc., as well as highly sophisticated financial techniques to facilitate various financial transactions.
These financial markets are no longer composed solely of private entrepreneurs and individual investors; the government has been one of the most significant players in the market. Both private firms and government borrow their budgetary or fiscal expenditures by selling their meticulously decorated papers called “stocks” and “bonds,” all of which are certifying their financial assets and liabilities of future payment. The “premium” financial investors are supposed to gain from their investment risk is usually determined by nominal “interest rates” printed on the fore front of the financial certificates issued by borrowers.
However, once the general price level started to rise and remain at an extraordinarily high level, the real “arbitrage” which had induced the owners of financial assets to invest in the market would be reduced substantially. Let us suppose that you will be paid back 10% of annual interest 3 years after now when you buy a newly issued government bond at $1000 cost. You will receive $300 interest from your bond after three years or $100 interest per year during three consecutive years in the future.
In spite of this interest gain, if the inflation will be continued at an annual rate of 8%, your $100 interest per year will turn out to be 2% losses. Even though you will earn10% “nominal interest” from your first financial investment, the “real purchasing power” which your interest earning has will be minus from your original investment. In this way, If inflationary pressures are allowed to continue, most financial asset holders will not have any other choices but to tolerate their substantial losses from investment or decide to withdraw their financial assets from the market.
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