Money Mischief_ Episodes in Monetary History - Milton Friedman [119]
The Board of Governors of the Federal Reserve System is composed of seven members, all appointed by the president with the aid and advice of the Senate. It clearly is a branch of the government.
The confusion arises because the twelve Federal Reserve banks are federally chartered corporations, each with stockholders, directors, and a president. The stockholders of each bank are the member banks of its district, and they select six of its nine directors. The remaining three directors are appointed by the Board of Governors. Each member bank is required to purchase an amount of stock equal to 3 percent of its capital and surplus. So, nominally, the Federal Reserve banks are privately owned.
However, dividends paid on the stock are limited to 6 percent. Any additional income in excess of costs is turned over to the U.S. Treasury (nearly $20 billion in 1989). The Board of Directors of each district bank names the managing officials of the bank. However, the Board of Governors has a veto power and in practice has often played the major role in naming the presidents of the district banks.
Finally, the most important policy body in the system, other than the Board of Governors itself, is the Open Market Committee, which has as members the seven governors plus the twelve bank presidents. However, only five of the presidents have a vote at any time, so that the Board of Governors is guaranteed ultimate control.
In short, the system is in practice a branch of the government, despite the smoke screen of nominally private ownership of the district banks.
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* By correctly measured, I mean the inclusion of the so-called deficit as a hidden tax. The figures cited are for government expenditures as a fraction of national income, a better measure of the tax burden than the total called "taxes." A better measure, but still too low because it does not include spending mandated by government but omitted from the budget figures.
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* The figures usually cited for the debt are misleading because they include debt owed by federal agencies and the Federal Reserve System. For example, in June 1990, the gross debt was $3,233 trillion and the net debt $2,207 trillion, a third less.
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* My earliest systematic statement is in A Program for Monetary Stability (1960). My most recent is in "Monetary Policy for the 1980s" (1984).
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* I am indebted to Yoshio Suzuki for detailed up-to-date data for Japan.
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* I am indebted to Dan Gressel and Arnold Harberger for information on the Chile episode and to Haim Barkai and Michael Bruno for information on the Israel episode.
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* Pinochet took office in September 1973, and the peak rate of inflation in consumer prices, as measured from the same month a year earlier, was reached in April 1974.
In the simplest terms, government spending in 1973 amounted to 44 percent of gross domestic product (GDP), and explicit tax receipts amounted to 20 percent of GDP, leaving a deficit of 24 percent of national income. By this time the ability of the government to borrow from the public or from abroad had essentially disappeared, and the only recourse for financing the deficit was the creation of money. In addition, the public had learned during the inflation how to economize on government-created money, so that the outstanding stock of money had declined to a small fraction of GDP, something like 3 percent or 4 percent of GDP. To finance a deficit of 24 percent of national income by a tax on the stock of money thus required a tax of 600 percent to 800 percent, and the deflator in 1974 was about 700 percent higher than in 1973.
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* In addition, as Harberger emphasizes, the change in the terms of trade and a sharp reduction in the inflow of capital required a reduction in real wages for full adjustment, and that was prevented by a legal limitation. However, the reduction in the inflow of capital was, at least in part, itself a result of the pegging