DiBACCO: The Federal Reserve’s woeful century

OPINION:

Today marks the 100th anniversary of the Federal Reserve Act, the history of which mirrors the Affordable Care Act, better known as Obamacare.

Both acts were revolutionary, the first agenda item on each president’s to-do list, no matter that after 1912, when President Woodrow Wilson was elected, a major economic slump punctuated the economy. The Federal Reserve bill, like Obamacare, was intensely partisan. Wilson’s liberal Democrats, who held both houses of Congress, wanted a completely government-controlled system for a central bank and currency, whereas Republicans favored mostly private regulation.

Democrats prevailed, jamming the measure through the Senate by a divided vote of 54 to 34 on Dec. 19, 1913. A conference committee approved it on Dec. 22, followed by a House vote of 298 to 60, with 76 not voting. The Senate passed the conference report on Dec. 23 by 43 to 25, with 27 not voting and one vacancy. Not a single Senate Democrat opposed the conference report, only two in the House, and the president signed it the same day.

Most of the nonvoters just happened to be opponents — absentees who had gone home for the holidays, thinking that past protocol in both houses would prevail, meaning that no serious business would be taken up during the season of good will. (Recall that Obamacare was passed by the Senate on a strictly partisan vote on Christmas Eve in 2009, with the House holding off until March 21, 2010, again along party lines.)

Although the Federal Reserve Act wasn’t as long as Obamacare, its 30 sections were still tough reading. Absent were provisions for congressional oversight, independent auditing or for ensuring that the reserve banks would, like states, have some power (including the authority to set their own interest rates), instead of the likely concentration of all power in the Federal Reserve Board. Add to that the fact that the act has been amended some 200 times. Also, it’s one of the few pieces of federal legislation the full text of which is almost impossible to draw up in federal archives on the Internet. For example, then-Rep. Ron Paul, Texas Republican, complained in January 2009 that the most he could access was 28 of the 30 sections, with the last one allegedly devoted to means to repeal the law.

The problem with the Federal Reserve Act is that, like economics in general, practice doesn’t necessarily follow theory. For instance, take the notion that the Federal Reserve, by lowering its interest rate charged to member banks, would stimulate the economy. All other things being neutral or equal, this might work. In the nation today, though, cheap money is not lent out by banks for fear that it might be used unwisely by the credit-unworthy. Or, if lent out and used by firms to become leaner, meaner and more competitive — resulting in a potential loss of jobs — then the employment aspect of the economy doesn’t benefit, which is the case today. Combined with the expansion of the welfare state, providing for handsome benefits to individuals who don’t work, low interest rates make for more borrowing by government to pay for the nonworkers, more public indebtedness, and, for prudent savers, unacceptable interest rates, inducing speculation in stocks. Recall that bubbles in stocks are often an untoward result of such Fed policy.

Or take the notion of the Fed’s power to print money through quantitative easing — the buying of government securities to improve employment. Since 2008, more than $3.85 trillion has been issued through this conduit, without measured success in reducing unemployment.

The Fed’s inability to ensure solid employment was one of the reasons Congress passed in 1946 the Employment Act, creating one more body — the Council of Economic Advisers — to try to solve the problem. Seventeen years later, when the Fed’s Board of Governors published a 50-year report card, it glossed over its employment accomplishments, with not a single reference to the subject in its index, let alone a chapter.

Then there’s the matter of Obamacare, about which the Fed is even more powerless. Because of the act’s provisions, employers are likely to increase the number of part-time workers or even to lay off workers altogether because of unacceptably expensive health insurance premiums. With conservatives rightly calling Obamacare a “job-killer,” the Fed is in no position to deal with this employment calamity.

The Fed has also become politicized. Outgoing Fed Chairman Ben S. Bernanke, a critical ally of President Obama, is not going to leave office in January by fully retreating on quantitative easing. (The tapering announced last Wednesday and set for next month is token, not significant.) His likely successor, Janet Yellen, has been appointed because she, too, is an advocate of printing money, keeping it going — regardless of any improvement in economic conditions — at least until after the 2014 midterm elections.

After 100 years, the Fed’s greatest legacy is that it has evolved into a money machine for the federal government rather than a repository of economic discipline and wisdom.

Thomas V. DiBacco, professor emeritus at American University, is author of “Made in the U.S.A.: The History of American Business” (Beard Books, 2003).