People really need to let go of the misunderstanding that the Federal Reserve is a "privately" held institution. It's utter folly to think that it's independent just because its founding papers 100 years ago intended it to be privately-held. In modern times, the Fed essentially operates as an arm of the Treasury Department. Last year, it turned 96% of its profits over to the U.S. Treasury. When a single shareholder of a your "private" company gets 96% of your profits and that shareholder is the U.S. Treasury, then you're beholden to the government and nobody else. If you don't believe me, then take it from Treasury and Fed officials themselves: Finally, I don't know how many times I need to say this before it finally registers: The Fed does not control the money supply. The Fed controls the level of reserves in the banking system. Banks control what reserves make it into the economy Unless banks lend those reserves, all that "printed" cash never makes it into the economy and never "devalues" the dollar. Banks lend based on who they think is credit worthy. During the dot-com and housing booms, the Fed was actively removing reserves from the system (thereby increasing rates) to slow down lending, yet banks still lent freely to practically anyone who would walk by. Currently, banks are flooded with tons of excess reserves but are afraid to lend to anyone. The only other way newly "printed" money makes it into the economy is via deficit spending, but then that's Congress' fault. If folks think the money supply needs to be more tightly controlled, bank lending standards and Congressional spending are what need to be changed.
I agree that the use of fiat currency makes macro-economic operations much more difficult to understand. Maybe I have too much naive faith in humanity, but I don't believe that this lack of transparency is being maintained intentionally. The Federal Reserve and the Nixon Shock were enacted in an effort to stabilize the economy during economic crises. Of course, doing so created a system that's very powerful in the right hands, but also easily mismanaged in the wrong hands. I suppose that's the million dollar question. Which would the following systems is preferable to you? 1. A fiat system that allows the government more flexibility to tailor policies to the economic climate. However, unless the people in charge are properly educated in its use and choose to use it wisely, they can really screw things up. 2. A pegged system that handcuffs the government's ability to battle recessions, but one that's also harder for the folks in charge to mismanage. Naturally, there's no right or wrong answer. It all comes down to how much faith you have in our leaders.
I tend to disagree, I think faith in individuals should have nothing to do with it. I think institutions should and can be set up in a manner such that it requires no faith in individuals to be moral or ethical or unbiased - and if that's not possible, then that's what we should strive for. Under the current system, a foreigner who's country's currency is pegged to the dollar would have to have faith in the head of a "privately" held institution, the Fed, which holds hands with the US Treasury. Ask yourself, why would I have faith in someone who is selected to serve the American people (and rightfully so)? While I concede that he is likely to be more qualified than anything we can come up with at this point in history, it doesn't change his job description and hence his bias. So unless I am certain that there will never be any conflict between what our leaders want and what your leaders want, how do I establish this faith? I'll give you an example. Let's say you are from oil-rich country A which is pegged to the dollar 1 to 1, and I'm from the US which is a not-so-liquid country consuming 4-5 times the oil China consumes. In 2008, **** hits the fan, and the Fed needs to act. The Fed will allegedly do what's best for me, especially if my company was allowed to get large enough to become a systemic risk. Now, since your country is extremely liquid and your financial sector is dwarfed by your oil profits, this financial crisis is pretty meaningless to you as you can easily drop enough cash to wipe out any credit issues. In some ways, you've actually hit the jackpot - you were lucky enough not to develop fast enough to be totally anihilated by this financial mess, and so now you take a look at the world and realize: hey, I'm the most liquid mofo in the world, and liquidity is at an all-time low. Key questions: - How would the US gov react to your country re-considering the peg? - Is the Fed likely to enact policies which are useful to you? This is the type of faith which has been asked of me by religious institutions. My bank doesn't accept faith when I pay back my loans, and I don't accept faith if a bank doesn't have my money. Are the two suggestions you offered really all we got? Those are the only two options? Or are those the only options within this current system? EDIT: I'm fully aware that this is my problem, and not everyone else's problem. I do think think it's relevant and important for Americans to know what their government does and how it impacts other people, since the behavior and attitudes of non-Americans towards America is a particularly hot topic these days. I don't purport to know everything my government does abroad and how it affects people abroad, and I think often we ignore these "external" things though it comes back to bite us in the ass internally.
You'll get no argument from me on this point. At the end of the day, I'm sure everyone will want a system in place that any idiot can run...because sooner or later, it's likely some idiot will be running it. Unfortunately, many people are under the incorrect illusion that a pegged system will fix all our problems. The only major difference between something like Bretton-Woods and the current system is that we no longer constrain the government's ability to expand the money supply (both reserves and non-reserves). IMHO, it just seems strange to give the government the ability to shrink the money supply (when there's limited production and high inflation like the 1970s), but not the ability to expand it (in times of high private sector debt and decreased demand like the 1930s or post-2008). The pegged system may handcuff the federal government into not screwing things up by unilaterally increasing the money supply (or reserves). However, they can still screw things up in countless number of ways, all the while powerless to combat demand-induced recessions like the one we're in right now. The first question is a little hard to answer because oil's already denominated in dollars, oil-rich nations tend to accept dollars as payment, and the price of oil is governed by the international market. Foreign-exchange rates only plays a small role since the price of oil tends to go up across the board against all currencies, not just a weakening dollar. But for the sake of argument, we'll assume we have an oil-rich nation that only accepts payment in local currency that's currently pegged to the dollar 1-to-1. Post-2008, the U.S. and its declining dollar would not be happy with the decision to allow local currency to float against the dollar. Oil imports would decrease, and since oil is a major lynchpin in the U.S. economy, it would decrease the amount of productive output. In such a scenario, there's very little the Fed could do, but in any situation I only expect the Fed to act in a way that they perceive to be beneficial to Americans. Until we have a central bank for planet Earth, I don't see any financial institution acting on behalf of humanity. At the end of the day, I'm not necessarily making an argument for the status quo. If we don't like the system, then we ought to change it. However, until that day comes, it's important to understand the current system. Too many people have this bizarre belief that the Fed is a privately-held institution working solely for its member banks, creating trillions of new dollars and destroying people purchasing power. Believe me, the Fed wishes it had that kind of power. Despite being "independent," it's very much accountable to the Treasury and Congress. The only thing it can create out of thin air are bank reserves, and banks are limited in what they can do with those reserves.
