Happy 99th Birthday, Federal Reserve Bank. And Happy 1,479th Birthday Codex Justinianus (Civil Law). In her Congressional testimony this week, Fed Chairwoman-in-waiting Janet Yellen said, “I don’t think that the Fed even can be or should be a prisoner of the markets.” In this comment she probably truly stated an imaginary desire for an alternative bank in an alternative universe. However, in this comment, both she and her Congressional inquisitors failed to recall the founding history and practical reality of the very institution she’s being nominated to head.
Benjamin Strong, the first Governor of the Federal Reserve Bank of New York who opened the august institution 99 years ago on this day stated that the bank was not only created, “to serve the banker, the farmer, the manufacturer, the merchant or the Treasury of the United States… but to serve them all.” When Strong opened the bank on this day, he had seven bank officers, 85 clerks and $99,611,670 in deposits from member institutions. In his early tenure, his mission, together with his warnings and admonitions are as eerie as the dense fog that shrouds this morning in Charlottesville, Virginia. It’s as though he was looking across the future that lay before him and anticipating the moment we’re now embracing. He wrote:
“And a seventh and last difficulty, although this may not indeed be all of them, is the one which I regard as more serious than any of the others – the exercise of the powers conferred by the Reserve Act upon the Reserve Banks by this rule of personal discretion, I fear, would develop inevitably in time a bureaucratic attitude of mind on the part of the managers of the Reserve banks which would be unfortunate indeed for the welfare of the whole banking System. Power excites appetite for more power. Bankers in time would rebel and the public would rebel.”
“Its future depends upon its own good behavior and upon its success in winning and holding the confidence of the public.”
Strong was running a well-funded start-up. Ms. Yellen is inheriting a bloated balance sheet, obese, unwieldy, diabetic, and Alzheimer’s-afflicted institution. Strong, by education or intuition, was acutely aware of the Justinian Codex which preceded his leadership which, in its second title, subsection 11, states that, “the laws of nature… are established by divine providence… but the municipal laws… are subject to frequent change, either by the tacit consent of the people, or by the subsequent enactment of another statute.” Congress and Ms. Yellen would be well-served to read Title 14 of the Codex in which the Romans were good enough to recognize that civil society depends on real contracts and obligations to insure that those who take on obligations understand the nature of their obligations and are bound to restitution in the event that those obligations are unfulfilled.
Ms. Yellen’s aspiration for the Fed to be emancipated is going to take more than a Lincoln proclamation. If the markets have told us one thing over the past 5 years it is simple: the Fed’s lofty goals of employment and inflation management have been weighed in the balance and found wanting. Employment has not improved and the record number of employment-eligible people who are without adequate compensation is growing at an alarming pace. And inflation control is an illusion supported by a mutual-assured destruction currency cold war that is allowing manipulation to override the markets that would be evidenced if Free Trade was Free. While the U.S. has barely returned to 2008 levels in critical areas like Gross Fixed Capital Formation (still well below 2007 levels), the GDP effect of this fixed capital utilization is nowhere near where we were in the mid 2000s. So, despite pumping trillions of dollars into balance sheet expansion, the desired effect has not manifest.
Moving the goal posts doesn’t win the game if the players know the rules and are paying attention. Like the Affordable Care Act and the Administration’s response thereto, failed policy is not ethically managed by stating that the rules no longer apply. The Roman Civil Code clearly recognized that The People will either have “confidence” or they will “rebel”. If an emperor figured that out fifteen centuries ago, is it reasonable for us to ask for at least equivalent accountability?
It’s time for each of us to realize that our persistent neglect to holding public officials accountable for lack of oversight and integrity is not their failure but our own. The impulse to criticize is nearly universal. The integrity to accountably operate evidencing a better path is the road less traveled. And on this day, in the yellow wood, I, delighted not to travel both, am not standing long and looking down both. The one well-worn, fair and heavily trodden is one that has led to massive asymmetries of wealth and inhumanity. The one whose leaves are untouched and overgrown for want of wear is a different path, one less traveled by, and traversing that path has, for me, made all the difference.