This is Richard Wolff with another response to an AskProfWolff question from our Patreon Community.
This question comes from Juliet, and I want to thank her for sending the question in. She wants to know about the Federal Reserve (“The Fed”),
the Central Bank of the United States, whose job it is, and has been for a hundred years we’ve had it, to keep roughly price stability,
so we don’t have inflation on the one hand, and deflation on the other,
and secondarily to manipulate the American money supply, so there’s enough money to keep the economy going in a reasonable way,
but not too much so that inflation happens.
And finally, we’ve wanted the Federal Reserve to help moderate the business cycles,
i.e. these terrible downturns, recessions, depressions, crashes, busts, that occur every 4-7 years. We have so many words for this awful thing that we cannot shake,
and we wanted the Federal Reserve to come in and, at least, moderate these ups and downs,
because they are so personally difficult, so painful, so costly and so disruptive.
Ok, so what has the Federal Reserve been doing? Well, let’s be clear. It is a creature of Capitalism,
it had to be established by the Congress and signed by the President.
The corporate sector of our economy, always the dominant influence, was behind it, and that’s why it happened.
It was created to serve the reproduction of Capitalism, and that is what it does to this day, and that’s what it has always tried to do.
What is the record? It has done it! It has kept prices, often, from going off the rails.
We’ll never know if the prices would’ve gone crazy if it hadn’t been for the Federal Reserve. That might have happened,
and there certainly were times when the Federal Reserve tried to stop it, and it didn’t work.
The record of the Federal Reserve on price stability is mixed.
But it looks as though it helped some, and so there’s no reason not to continue to have it monitor prices and try to intervene
by adding or subtracting from the money supply to keep the prices, more or less even.
When it comes to their ability to interfere in business cycles and moderate them, their record is spottier.
If anyone imagined that the Federal Reserve would eliminate business cycle, then you’re looking at a total failure, as they haven’t been able to do that.
We’re in a terrible one now, and it’s the 3rd one of this century.
Clearly, the Federal Reserve can’t prevent, and doesn’t look like it’s really good at moderating our business cycles.
The one in 2008 and the one now, are among the worst 5 in the endless cycles that have characterized Capitalism for 2 or 3 centuries.
Well then, what can we say about the Federal Reserve?
Firstly, it doesn’t make much sense to focus your anger, upset or opposition on that part of the system
It was created by the capitalist system, its problems are those of the capitalist system
and it has had a mixed record of doing what it was assigned to do, i.e. manage those problems or at least keep them from destroying the system.
Nothing was ever expected or given to the Federal Reserve to control or shape what’s going on.
Well then, some of you will say, isn’t it having a big influence now? The answer is yes, it is.
That’s partly why you’re asking the question, and partly why it’s getting so much attention.
But that’s not because the Federal Reserve has done all these new and different things.
It’s because the capitalist system is facing new, different and much deeper problems.
We’ve had cycles every 4-7 years, but the last two, the one in 2008 and the one now, are among the worst in our history.
The Federal Reserve has a big role to play, because the problems it is supposed to solve are bigger than they ever have been.
One of the big responses of the Federal Reserve to the crash in 2008 and now the crash in 2020 has been to do what they have always done, only more so.
So, the interest rates have been dropped to help the economy by making it cheaper for corporations to borrow to invest,
for individuals to borrow to buy the car or home, etc.
We’ve dropped them not just a little, but virtually to zero. We have even flirted with negative interest rates.
It’s an extreme action, but it’s in response to an extreme problem.
Likewise, the Federal Reserve has created money, one of the things it has the power to do,
be it to print the bills we carry in our wallet or create financial accounts at banks out of nothing, which they have the right to do
These activities, leading to an increase in the money supply, have been extraordinary, going into trillions of dollars. We’ve never done that before,
but that’s because the problems of this economy, of this capitalism are worse than they have been.
So, the Federal Reserve pumped in wild amounts of money back in 2008, and even wilder amounts today.
Let’s follow the money. The money goes into the hands of bankers and large corporations,
and is then supposed to trickle down, that’s always been the theory, and help the economy get through whatever difficulty it faces.
So, what are corporations and banks doing? Let’s start by making clear what they’re not doing.
They’re not going to hire large numbers of people. Why? Because they can’t sell what they’ve already produced.
They know that the mass of the American people, when we have over 40 million unemployed, is a mass of people that cannot buy anymore.
Real wages have been stagnant for 40 years. The only reason we’ve been able to buy more is because of the debt the mass of Americans were willing to take on.
They can’t take on more, they’re massively unemployed, wages continue to go nowhere.
So, there’s no point in corporation, whose goal is to make profit, to take the free money they’re getting from the Federal Reserve and invest it by hiring people
They have no interest in doing it, and as long as we allow their profit-based decisions to govern what happens, that’s the outcome we have.
So, the corporations are not going to invest in hiring people, and they’re not going to invest in buying new machinery, or any of the other things that have to do with production
with the real life economy of all of us who go to work, want to earn money, want to go to the mall, want to buy things, etc.
They’re not in the business of making the economy work well. They are in the business of making a profit for their corporation.
Then where does all the money go? It goes into the one place where corporations and banks can make money these days – the stock market,
where you can buy a share of stock, hold it for a few weeks or months, and then sell it to someone else who’s doing the same thing at hopefully a higher price.
The difference between what you paid for a share and what you get when you sell it, is the capital gain, and there’s your profit.
So, all that extra money, has in fact produced an inflation, which is what the Federal Reserve always worries about
However, it’s not an inflation in terms of our wages, and not an inflation in terms of goods and services we buy.
A big inflation has happened in the stock market, and for the 10% of the people that own 85% of the shares, this is good news
For the 90% who own nothing or next to nothing in terms of shares, this is a disaster.
But the Federal Reserve doesn’t care. It never did. Its job is not to help the mass of people
Its job is to keep the capitalist system going
That’s a system that has produced inequality and instability, long before there was a Federal Reserve.
The Federal Reserve isn’t going to stop that process. That’s not what it was set forth to do.
My conclusion: Don’t waste your energy, your intellect and your activism on the Federal Reserve. It doesn’t deserve it.
It is a creature and a servant of the capitalist system. That’s our problem.
It’s a system in which a tiny group of people sit at the top of every business (e.g. the owner, the board of directors, etc.)
and makes all the decisions – whether you have a job or not, what the company produces, how it produces, where it produces
and what is done with the profits you all helped to produce. That’s the problem, and our government replicates that system.
Capitalism, the system, is the problem. The Federal Reserve is not. It’s a mere institution within, and serving that system, which is the problem.
This is Richard Wolff for Democracy At Work responding to another AskProfWolff question from our Patreon Community.
