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5 Myths About the Federal Reserve You Shouldn’t Believe

June 08, 2018

  • The Federal Reserve is the U.S. central bank, created in 1913
  • Many conspiracy theories and myths circulating around the Fed and its important regulatory role
  • These myths are mostly false, or at least warped versions of the truth
6 min read

The Illuminati, the Bilderbergers, and the Federal Reserve.

Some are convinced that one or some combination of these three secretly rule the world through clandestine manipulation of our political, legal, and monetary systems. You don’t need to harbor Fox Mulder-levels of paranoia to buy into these theories, but if you follow the internet rabbit hole down far enough, you may end up buying into them yourself.

While the Illuminati and Bilderberg Group are beyond our expertise here at Stash, myths concerning the Federal Reserve are more within our scope.

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States.

It was created in 1913 when Congress developed the Federal Reserve System through the Federal Reserve Act. The Board of Governors is appointed by the president and confirmed by the Senate, and operates out of Washington D.C.

While it’s headquarters is in Washington, D.C., it consists of 12 district banks that operate in geographical regions throughout the country.

Here’s a map of the districts:

*Source: Federal Reserve

What does the Fed do?

The Fed’s primary goal is to promote stable economic growth through monetary policy. Specifically, the Fed aims to maximize employment, stabilize prices (control inflation), and moderate interest rates.

The Fed sets a benchmark interest rate that forms the basis of other interest rates, dictating how much banks charge to borrow from one another, and eventually, how much consumers pay to borrow money from banks.

Because banks are required to be adequately capitalized, they’ll borrow from each other, charging the prevailing rate. This creates a chain effect, with individual consumers as the last link, borrowing money for mortgages, auto loans, college tuition, or more routine daily purchases.

The Fed is a public entity as well as a private corporation, which is the root of most Fed-related conspiracy theories.

Although the Fed is accountable to Congress and the U.S. taxpayers, its individual  banks are considered “independent within the government.”

This means that it doesn’t receive funding appropriated by the congressional budgetary process, and instead, it receives income from interest on government securities to continue operations. If it turns a “profit” from those securities, the earnings are turned over to the Treasury.

But many people still don’t understand the Fed, what it does, and why it exists. It’s a looming government presence, that somehow fiddles with the economy, and because of that, many conspiracy theories about the Fed persist. Including these myths:

The Fed isn’t audited

You’ve probably heard that the Fed isn’t audited, or even seen political signs demanding that we “audit the Fed.” The idea behind the call for an audit process is that the Fed operates independently, and due to its seeming lack of accountability, is operating as a rogue agency into which taxpayer dollars are lost.

The truth is that the Fed is audited–often, in fact. The Fed is reviewed and audited by the Government Accountability Office and the Office of Inspector General to ensure it’s complying with federal laws and regulations. It also publishes its balance sheets–financial documents stating an entity’s assets, liabilities, and capital–and issues regular reports, which are combed through by independent auditors.

You can even look at the Fed’s quarterly reports for yourself.

The Fed is controlled by the Illuminati…

…Or foreign countries, Darth Vader, etc.

There’s long been a debate as to who “owns,” or controls, the Fed. While the Fed does respond to external economic events, it isn’t actually owned or controlled by any one group or entity.

So, what about all of those rumors of foreign interests, wealthy domestic cabals, and the Illuminati?

Foreign financial institutions can’t own stock in a Reserve Bank, ensuring that the system isn’t subject to foreign interests. Domestic banks can buy stock in Reserve Banks, but can’t trade or sell the shares. And as far as anyone can tell, the Illuminati is all but extinct.

The Fed caused the Great Depression

Blaming the Fed has always been in style. Even back in the 1930s, people blamed the economic upheaval on the central bank, and that myth has persisted well into the 21st century.

The idea behind this myth is that the Fed, in response to the crashing economy, tightened the money supply and worsened the crisis. Even the iconic economist Milton Friedman, and former Federal Reserve Chairman Ben Bernanke have argued in support of that theory.

Though still disputed, it doesn’t hold much water, despite the contention by many that the Fed did make mistakes at the time in responding to the recession, which may have prolonged it.

Conversely, during the financial crisis, the Fed expanded the money supply, which we’ll explain a bit later.

It prints and distributes cash (and manipulates the economy)

Yet another pervasive (or conflated) myth about the Fed is that it can (and does) print cash–in an effort to manipulate the economy.

You could make the argument that the Fed’s mandate is, actually, to manipulate the economy, but the prevailing conspiracy theories insist on something more insidious. Mainly, these theories all tie back into each other; They’ll state that the Fed can crash or bolster the economy for political purposes and that the people who are secretly pulling the strings are the ones behind it all.

These theories are mostly seriously misconstrued versions of the truth.

First, the Fed doesn’t print money. The U.S. Treasury controls whether cash is printed, and the U.S. Mint prints money. The Fed does control the money supply, though, which is likely what confuses people.

And as for manipulating the economy? To some extent, the Fed can exert influence. And there’s an ongoing debate whether or not the Fed has too much power in that regard. But the idea of the Fed intentionally propping up (or crashing) the economy on a whim? There isn’t much evidence to support it.

The Fed did, however, have an active role in rescuing the U.S. economy during the financial crisis of 2008. It did this–through a process that came to be known as quantitative easing– -by lowering interest rates, purchasing bonds, and pumping money into the banking system.

As the financial crisis spread around the world, other nations responded by using models similar to the one the Fed put in place.

The Fed is unconstitutional

Is the Fed unconstitutional? There are many who believe that’s the case because the U.S. Constitution doesn’t specifically say anything about a creating a central bank.

Given the important role that the Fed plays in our economy, this has led many to push backs on whether the Founding Fathers ever anticipated a central bank messing with the economy.

So, is it unconstitutional? The Fed actually falls into a gray area since the Founding Fathers’ document doesn’t actually address it. But it does address the government’s authority in creating money and regulating commerce, which is the basis for the Fed’s creation.

Though the arguments about the Fed’s constitutionality can be lengthy, financial experts generally consider the central bank to be a legal and necessary part of the U.S. financial system.

The Fed may be a mysterious, misunderstood government authority with some sway over what happens in the U.S. economy. But if you’re worried about the Illuminati and wanton unaccountability, put your fears to rest.

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By Sam Becker
Sam Becker is Stash's financial writer.

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