The Fight for Transparency at the Federal Reserve

Stephen Zarlenga

This article is from the September/October 2006 issue of Dollars & Sense: The Magazine of Economic Justice and is available at

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This article is from the September/October 2006 issue of Dollars & Sense magazine.

The Federal Reserve banking system is an immensely powerful institution, on a par with a fourth branch of government. As such, it deserves more attention and scrutiny than it now receives, and not just from the financial community trying to divine the direction of interest rates. While most Americans are aware that our monetary system is controlled by the Fed, they remain in the dark on how it operates and whether its actions serve to promote particular interests. But we weaken both democracy and economic justice when we allow the internal workings of the Fed to remain unexamined.

Ben Bernanke's recent appointment to replace Alan Greenspan—for the most part lionized rather than scrutinized by the press during his nearly 20 years as Fed chair—prompted reformer Ralph Nader to put out a call for more transparency at the Fed. However, since Bernanke's ascension to the throne, the Fed has arguably reduced transparency by ceasing publication of the M3 money supply statistic. M3 is the broadest measure of the money supply, including cash, savings and checking deposits, travelers checks, large time deposits such as certificates of deposit, and some eurodollar accounts (deposits in foreign banks but denominated in dollars).

The Fed reportedly regarded this statistic as expensive to compute and no longer meaningful, but this ignores its long use by scholars and analysts alike. The widespread reaction to the change among market participants was, "What are they hiding? Is the Fed anticipating inflation that they'd like to keep under wraps?" The Fed should continue to compute and release M3 figures to provide continuity of data for researchers, and if necessary adjust the statistic so that it better reflects what analysts believed it was offering us: the broadest measure of the money supply and thus the best indicator of its rate of growth.

Getting the Fed to continue reporting the M3 figure is just one skirmish in a larger struggle for transparency in the Fed's monetary policymaking. On September 21-24, the second annual Monetary Reform Conference will take place in Chicago, organized by the American Monetary Institute. In addition to developing proposals for broader reforms of the U.S. monetary system, AMI has worked with Rep. Dennis Kucinich (D-Ohio) to prepare draft legislation, the "Monetary Transparency Act," which would require the Fed to make information about its activities available in a way that is understandable for the average newspaper reporter and reader, not just for sophisticated bond traders.

For example, the law would require the Fed to estimate the annual value to commercial banks of their money-creation privilege. When banks take dollars from a depositor and in turn lend them to a borrower, both the depositor and the borrower now "have" those funds. In this way, banks actually add to the money supply; in other words, banks themselves create money. And, of course, banks earn interest on the money the system permits them to create through making loans. This profit is called "seignorage." Its value is estimated at 40 billion for the U.K., and for the United States it may be over $100 billion annually, but we need an authoritative estimate from the Fed itself.

Another key provision of the act would require the Fed to report what share of its reserve lending goes to various activities, such as capital spending, consumer spending, public infrastructure, or leveraged buyouts and mergers. Clear reporting would reveal, for instance, how much of the money the Fed permits banks to create goes into real estate loans (fueling a housing bubble) versus rebuilding crumbling infrastructure (such as the inadequate levees in and around New Orleans)—and these figures in themselves would represent critiques of what the system is doing. Their publication and dissemination would put pressure on the Fed to adjust its operations so as to better serve the public interest and would help lawmakers to shape good public policy.

Passage of the Monetary Transparency Act would represent a significant step toward a more transparent Federal Reserve. And only with a more transparent Fed will activists be able to initiate a genuine, well-informed public debate on monetary policy in the United States.

Stephen Zarlenga is the director of the American Monetary Institute, the author of The Lost Science of Money , and creator of the AMI Monetary Reform Conferences held annually in Chicago.