The Fed Isn't Helping

By Scott Robbins

Before the establishment of a central bank, there were frequent economic depressions and financial panics with crises in 1873, 1884, 1893 and 1907. The latter, with backing by international bankers, finally convinced the American public to establish a central bank, the Federal Reserve Bank, which came about in 1913. Controlled largely by private financial bankers, the Fed is supposed to implement policies that encourage economic stability; however, economic crises still occur and have been more severe since the Federal Reserve was created.

The main problem during these economic crises was a fall in confidence by the general public that resulted in mass withdrawals of money from banks. In 1893, because of a railroad collapse and the government buying up silver, there was a run on the banks, causing them to go out of business. In 1907, a huge stock market crash followed a retraction of market liquidity by New York City banks. As a result, many people withdrew their money and banks went out of business. After some banks had failed, JP Morgan and other big New York bankers began to pump money into the economy.

People argued that a central bank could pump money back into the economy and prevent banks from defaulting, if not quell panics. Perhaps as a method for controlling such direct abuse of control by a few powerful financial men, the central bank for the United States was created by congress and Woodrow Wilson in 1913.

One would expect that after the establishment of the Fed, there would have been fewer or less severe financial crises, but the largest and worse economic panic came in 1929 with the start of the Great Depression. The stock market crash and retraction of money by the Federal Reserve resulted in the mass failure of banks. History repeated itself in 1980, when the Fed decreased the money supply in order to control for inflation and a severe recession began.

The most recent financial crisis that started in 2007 was partly caused and definitely worsened by a shortfall of liquidity in the U.S. banking system. The interest rate policy of the Federal Reserve Bank was partly to blame. Not only did this financial crisis result in large unemployment, the government gaining more control and power of financial and banking institutions, but numerous economists have stated it was the worst financial crisis since the Great Depression.

If the Federal Reserve Bank was established to prevent or weaken financial crises, then it is failing. The U.S. is a vastly more powerful and rich nation than it was before the Federal Reserve Bank was established, but it is still susceptible to large fluctuations during crises.

Economist George Selgin said, "by almost any measure, the major financial crises of the Federal Reserve era -- those of 1920-21, 1929-33, 1937-38, 1980-82, and 2007-20[10] most recently -- have been more rather than less severe than those experienced between the Civil War and World War I."

In order to improve the Federal Reserve, we could start by auditing it. The biggest and most powerful national bank in the world is controlled largely by private international bankers, with the hope that they will do what's best for the American people and not themselves. We could also start by printing our own money instead of delegating the task to these private bankers, which the Constitution does not clearly allow. Bankers during Lincoln's time tried to get their hands in the U.S. banking system and earn massive interest on each dollar, but Lincoln had the wisdom to print the money himself and avoid unnecessary debt and loss of control.

Hopefully we can take a little of Lincoln's wisdom and examine more carefully how we can fix the current problem of the Federal Reserve.

Originally posted on The Student Review.

 

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Comments

[leonadude]

02:45 PM on 05/15/2012

In addition, the suggestion to print our own money is rather unclear. Today, the U.S. Department of the Treasury prints our money through its US Bureau of Engraving and Printing and the US Mint. The Federal Reserve is no more than a retailer of the newly printed currency. Banks come to the Fed and purchase cash to meet the needs of their depositors. The Federal Reserve does not dole out currency but rather allows the free market demand for it control its goings and comings. However, the majority of money in circulation is electronic and thus is created by loans. This is not controlled by any one directly, but is encouraged or discouraged by the various interest rates.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

Lincoln’s National Banking Acts of 1863 and 64 created the national banking system and allowing the government to regulate banks at a federal level. Thus increasing the government’s power over the financial system and, as history showed, allowed for the great prosperity that the nation experienced post civil war.

A certain amount of clarity would be appreciated in the article, especially in regard to the suggested solutions.

[leonadude]

02:45 PM on 05/15/2012

The economic recession of 1980 was planned and foreseen by the central bank. Both inflation and unemployment were high in the late 70’s. Paul Volcker, the chairman of the fed, instituted high rates in order to combat inflation, cause a short recession, which later allowed the economy to grow to full employment without inflation.

This post fails to illustrate how the Federal Reserve’s interest rate policies in reaction to the 2007/08 financial caused a shortfall in liquidity in the U.S. Banking system.

It also fails to mention the enormous success that the bank’s policies had on sustain a vibrant economy through most of the 1983 until 2007 (an unprecedented achievement), despite crises in 1987, 1991, 1997, and 2001. Not to mention the economic prosperity that followed the great depression until the planned recession of 1980.

The Federal Reserve is audited at various levels.
http://www.federalreserve.gov/faqs/about_12784.htm