The Federal Reserve and Why Poverty is Necessary By Mason Giem 11/2/08

As citizens of the United States we are lead to believe we have a stable economic system, when in fact it has only become more unstable during the low interest rates and neo-liberal ideals of the last 20 years. Several key Neoliberal strategies like the privatization of public enterprises, specifically water and energy production, the deregulation of the economy, the liberalization of trade and capital markets, tax cuts (for corporations and the wealthy), strict control of interest rates, reducing the power of organized labor, cutting social-service expenditures, and reducing the size of the government economic have added to poverty and have gone unnoticed by a majority of the public. According to the U.S. Census Bureau, in the past 20 years the percentage of people in poverty living in the United States has increased to 12.5% 1. By looking at the undemocratic nature of our Federal Reserve monetary system, corporate interest in governmental affairs and the motivations behind those in power, I will show that poverty in America is not an accident and is intended to keep the richest one percent of the nation wealthy and the poorest ten percent in poverty. Section 1: The Undemocratic nature of the Federal Reserve Monetary System The first attempt at a Neoliberal ideology was at the creation of the Federal Reserve act, and it was passed on December 23, 1913. The Act, provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.2 The bank was originally founded by 1 2 1

donations from one of the country’s most wealthy family, the Rothschilds. The Federal Reserve System enjoys many undemocratic benefits including the fact that the Chairman of the Federal Reserve does not need to be approved by the senate.3 Then there is the fact that they claim to be an independent organization within the government, and should be free from its influence.4 Most importantly “The Federal Reserve banks are exempt from all taxation. These people are very independent, independent of audits, independent of congressional supervision, and independent of the American voter”.5 Power of the organization has only grown since its inception because of its ability to have regional branches that help regulate the amount of money in our economy through a currency system that is not backed by gold but by speculation on the future of the economy. “ They will provide an elastic currency, issuing notes secured by their commercial interests”.6 This power has freed our economic system from the pressures of not having enough money to supply unlimited growth. Unlimited Growth is an ideal that has been supported through the de-regulation of the banking system and low interest rates and now has led to what may be considered the second economic crash Federal Reserve has created7. The first crash occurring in 1929, and the second in the fall of 2008. The subsequent effect of these economic crashes on the communities of the United States has been devastating. Section 2: Where we are at now

3 Wayne N. Krautkramer, 2004, The Federal Reserve - Its Origins, History & Current Strategy, 4 Wayne N. Krautkramer, 2004, The Federal Reserve - Its Origins, History & Current Strategy, 5 Wayne N. Krautkramer, 2004, The Federal Reserve - Its Origins, History & Current Strategy, 6 The Federal Reserve Act of 1913, O. M. W. Sprague, The Quarterly Journal of Economics, Vol. 28, No. 2 (Feb., 1914), pp. 213-254, Published by: The MIT Press 7 The Federal Reserve's Role in the Great Contraction and the Subprime Crisis, Timberlake,Richard H., Cato Journal, 2008, 28, 2, 303-312 2

The creation and subsequent implementation of the Federal Reserve banking system was the first step to the American loss of economic freedom. The next steps are a complicated network of the slow growth of Keinsian economic policys and neoliberal ideals that have taken America into historical debt and the highest G.D.P. in the world. Having the highest GDP in the world has come at a price for the American people, and her future generations. The lowering of interest rates, and deregulation of sub-prime mortgage lending during the rise of the Neoliberal ideals fueled the rise of individual debt. In our society we are often forced to borrow money to make money. Thus, we have lost much of our freedom and have become the equivalent modern day serfs to the feudal rulers of the national banking system, and all those who profit from our dependence. This point is illustrated by examining the enticing element of getting a dream house for 0 down at a %5 interest rate, the high cost of higher education, and the high cost of healthcare. During the current Bush administration, Americans’ savings rate actually went to an all time low, while household debt as a percentage of GDP soared above 130%, a doubling in 25 years8. The resulting effects on communities have been a nation with a savings rate of less than one percent9, which expects to keep on growing forever. A country with such low savings rates decreases the value of its currency, and thus a spiral into recession is the only logical conclusion. This is shown by the decreasing value of the United States currency compared to that of Canada or the European Union and our current recession. Where will this trend lead? As Harvey Molotch ,1976, would point out, the battle for the nicest car, house, kid, is exactly the kind of power game the political economy wants us to play10. 8 (Meet the Shallowest Generation, November 1st, 2008, idCategory=34&idsub=158&id=16602&t=Meet+the+Shallowest+Generation 9 The Return of Saving, Feldstein,Martin, Foreign Affairs, 2006, 85, 3, 87-93, Foreign Affairs 10 The City as a Growth Machine," by Harvey Molotch, in The American Journal of Sociology, © 1976 by The University of Chicago. 3

There are many members of the Buguasie, that have influenced this type of development but there is one person that I feel has been a cheerleader for these short-term economic growth packages, Alan Greenspan. Alan Greenspan, former Federal Reserve Chairman, and large supporter for de-regulation of the banking industry, claimed on October 23, 2008, that perhaps there was a flaw in his free market ideology11 (Andrews, New York Times, 2008).

“He noted that the immense and largely unregulated business of spreading financial risk widely, through the use of exotic financial instruments called derivatives, had gotten out of control and had added to the havoc of today’s crisis. As far back as 1994, Mr. Greenspan staunchly and successfully opposed tougher regulation on derivatives”12

The Chairman, appointed by the president, casts his large shadow of influence on the entire nation by raising or lowering interest rates or speculating what the Neoliberal buguasie wants the economy to do. The rational-legal authority presented ,Weber ,1968, illustrates that the power the Federal Reserve chairman holds is given to him by law and is legal.13 I however, advocate that the position of Federal Reserve Chairman is so important that we should be electing and holding the chairman responsible to the American public. In order to understand how an unelected individual has so much power in a democratic society, we must look at the Neoliberal economic philosophy of the organization for which he works. The power of the banking industry on government policy has allowed for a worldwide distribution of debt known as derivatives. 11 Greenspan Concedes Error in Regulation, Andrews, New York Times, 2008, 12 Greenspan Concedes Error in Regulation, Andrews, New York Times, 2008, 13 The Types of Legitimate Domination, Max Weber, 1968, p.p. 215-245. 4

“Derivatives are a financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency”.14 With the widespread use and subsequent abuse of derivatives assuming their value on an inflated home value bubble, the American investment banks were able to spread the loans all over the planet.15 The spread of these loans was supposed to stabilize the market and allow for more Americans to become the mass consumers that drive our GDP to the highest in the world. Molotch would say that this is a perfect example of how politics revolve around the conditions for creating growth and distributing the resources obtained from growth.16 With the national government as an example, I claim the American people have been convinced that it is OK to get rich quick, even if it means the cost of the American ideal of pulling yourself up by the bootstraps. The question we need to ask ourselves is why do we put so much trust in an ideology that of the well-being of American lives all over the country? Section 3: What the Neoliberal Ideology Does to Increase Poverty The Neoliberal ideology requires that certain policy directions are taken that increase the percentage of those in poverty while increasing the amount of wealth owned by the Buguasie. These policy directions include,.17 Let me now discuss the unacceptable cost of higher education compared to that of other countries and its subsequent effect on the kidnapping of American freedom. “Over the past 10 years, tuition fees at four-year public colleges have grown at a rate of about 4.2 percent a year after inflation, according to the College Board. Tuition has grown at an annual average of 2.4 percent at private four-year schools, and at a rate of 1.4 percent a 14 15 The Federal Reserve's Role in the Great Contraction and the Subprime Crisis, Timberlake,Richard H., Cato Journal, 2008, 28, 2, 303-312 16 The City as a Growth Machine," by Harvey Molotch, in The American Journal of Sociology, © 1976 by The University of Chicago. 17 America Transformed, Globalization, Inequality, and Power, Gary Hytrek, Kristine M. Zentgraf, 2008, pg 8. 5

year at public two-year schools” (Saturday, November 1, 2008, College costs going up, The Business Review (Albany), The high cost of education has succeeded in discouraging students from competing their college degree. As evidence by the graduation rate that has remained steady over the past four years and has dropped only slightly over the past 10 years down from 54 percent in 1992 (

(( The cost of healthcare in the United States has also risen as corporations receive more power in our society. I can speak from personal experience knowing that my grandmother was being assigned multiple medications that were unnecessary and in some cases off setting the effects of other medications. “From 1987 through 1994, of the 11.9 percent average annual rate of spending growth, about half reflected the direct effects of increased prices, while the remaining half is attributed to utilization growth. In contrast, from 1994 through 1999 the growth rate remained in double digits, but only about onefifth was directly attributable to price changes; nearly 80 percent of increased drug 6

spending was related to growth in utilization” ( This goes to show that there are many influences that have worked together to reduce the amount of economic freedom we have as individuals.

( I would like to challenge every one to think about what constitutes a better life? Is it a nicer car or bigger house? What about happiness? Happiness levels in the United States from the 1970s until the present have not changed much, even though it has been a period of unprecedented prosperity. To the extent they have changed, they have dipped 7

downward very slightly (the explanation usually given for that drop is the unevenly shared nature of the economic gains) (Gross National Happiness and the Economy Happiness, Global Economics, U.S. Economy, Financial Markets, Carol Graham, Senior Fellow, Foreign Policy, Global Economy and Development, Soumya Chattopadhyay, Senior Research Analyst, Foreign Policy, Global Economy and Development TheGlobalist, If happiness hasn’t gone up over the last 35 years, than why has our savings rate been dropping (, %20Vol%201.2.pdf)? The influence of mass media is everywhere, we are in an imaginary world where the media tells us that if we don’t have the latest product or credit card, we are not happy. I detest the veil of glamour that has caused our society to become the sheeple of the corporate agenda. If we were truly free and informed citizens we would realize that the very nature of a country run by corporations is one in which the human rights to life, liberty and the pursuit of happiness, are a lower priority than making money. Excessive wealth does nothing but lead to gluttony, war, and lethargy, all of which were very prevalent in ancient Rome before its fall, and are currently at all time highs in American society. In this paper I have used the political economy approach presented by Harvey Molotch and Max Weber in understanding some of the biggest issues of our times. I have yet to state my own beliefs about the reasoning behind our current modes of operation. Harvey Molotch would completely agree that we are in a truly political economy, and one side is winning, the corporate side. America has been known as the best place in the world to invest because of our free market ideology. Our current believe in Reganomics or the trickle down theory, is the idea that the market will take care of itself and regulating it will only subtract from its potential to create a better way of life for its 8

people. This theory is presented by Harvey Molotch, and motivated by the centralization of monetary power in the hands of rich, which control the flow of goods and recourses within our country. These rich do not want to lose their power, and have thus have done everything within their power to reduce the chances of individuals from lower classes moving up into the upper classes. This principle motivation to look out for oneself even if it is to the detriment of the community is a dangerous lifestyle when sustainability is considered. It seems to me that the people of power in our society understand and implement the political economy approach to understanding society. This is why we need to take back the future of our country from the deadly grasp of corporate agenda, if we are to enjoy the freedoms of life, liberty and the pursuit of happiness, as granted to us by the U.S. Constitution.

Mason Giem


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