1913: America's Worst Year - The Federal Reserve

Too much power in too few hands.

December 23, 1913

John Steinbeck, author of The Grapes of Wrath, once said:

The bank is something more than men, I tell you.  It's a monster.  Men made it, but they can't control it.

In an effort to end the ups and downs of the business cycle, a group of bankers, businessmen and politicians got together and hammered out a deal that would benefit their interests more than anyone else's.  The creation of the Federal Reserve system was many years in the making, but was in the end of 1913 that it was created by an act of Congress and signed into law.

The record of the Federal Reserve Bank is messy at best and a disaster for the most part.  For years, people have debated the bank's role in the Great Depression and other significant financial crises.

In the 21st century, we're at the brink of, or sliding down into, another financial crisis.  What's the Fed to do?

Some argue that there's little it can do.  Some argue that its past and current actions are causing the problems now.  Either way, it points to the problem caused by the fact that a few guys in suits have so much power over the economy.

Guys in suits can be bought and sold.  They are human and can make mistakes.  Alan Greenspan was almost treated as a god, yet he's just a guy who guessed, sometimes right, sometimes wrong.  Now he's a guy trying to blame the current problems on others so that his legacy stays clean.

One of the original responsibilities of the federal government was to coin money.  Milton Friedman, an economist, talked about what is money (please read this link).  Money is many things, but in the end, something that we use to store value.

Inflation was one of the things a central bank was supposed to solve.  The theory is that a central bank can regulate the money supply.  This regulation is used to ensure too much money doesn't get in the system.  Too much money causes inflation.

Inflation is the loss of value of money, or rather the increase in prices.  Today you must spend more than $20 to get the same value as you would from spending $1.00 in 1913, the year the Fed was started.

It is true that since the Second World War, we have not had the extreme cycles of boom and bust that characterized the 19th century.  Sometimes this is credited to the Fed.  But it's just as likely that this improvement had other causes -- regulations restricting (and slowing down) the ability of banks to foreclose mortgages; government unemployment insurance; the availability of pre-authorized lines of credit, such as credit cards; and even modern communications and transportation technology, allowing people to more readily move from an economically depressed state to a booming one.

In any case, over the last century it's become clear that the Federal Reserve Bank cannot do what it was created to do -- namely, even out the business cycle.  If it can't perform its primary function, then why do we let it exist?

The Fed helped with the removal of the gold standard.  The Fed is most likely responsible for most of the inflation this country has seen.  A few men and a few privately held companies have significant power over our economy.  This is the legacy of the Federal Reserve Act of 1913.

Fennoman is a guest writer for Scragged.com.  Read other Scragged.com articles by Fennoman or other articles on Economics.
Reader Comments
What financial crisis? Most of the recent "recession" news is made up by the media because of instability in the housing market (something that cannot on its own lead to recession) and recent events in the Asian markets because of the French rogue trader. There is no brink, and there is only minimal sliding. As for the Federal Reserve, imagine if they didn't exist right now. There would be no cutting interest rates - something that has proven to stabalize hiccups in the system time and time again. The American financial system has been incredibly stable in the past 75 years throughout periods that could have turned very bad. I say that speaks volumes about the Fed.
February 21, 2008 9:01 AM
Remember that every time you vote to have the minimum wage increased, you are voting for inflation. The more you make, the more things cost. It's pretty much across the board. So inflation is much oour fault. Where the goverment fails we must again blame the American people for voting in spenders for senate, congress, etc.
February 21, 2008 10:41 PM
Lewis: You said "The American financial system has been incredibly stable in the past 75 years throughout periods that could have turned very bad. I say that speaks volumes about the Fed."

The Great Depression, the stagflation and malaise of the 70's, the stock bubble of 2000 and the housing bubble of 2007/8 are all directly related to actions (or inactions) of the Fed. In fact, if you review the previous economic history with the history during the time of the Fed you'll discover that the Fed cannot do one of the things they said it would do: even out the business cycle.

Chris: Inflation is not our fault, but the fault of those responsible for our money supply. The more money in the system, the greater the inflation. A limited money supply prevents inflation by its very nature. In fact, if there's more stuff available, and a limited money supply we get deflation. But you are correct in saying we create spenders in congress because congress has the ability to get the Fed to print more money--which causes inflation.
February 22, 2008 9:23 AM
I could not agree more. Unfortunately, Ron Paul has kind of given up running. It's understandable considering the media freeze-out he got. Still, he was probably the only candidate out of the original 20 on both sides that really, truly believed this. Are you planning on endorsing him?
February 26, 2008 6:29 PM
I agree that we as Americans have played a role in inflation because of our demands, however if people would study the history of the Fed and understood the people who put together the Federal reserve act they would know that a small group of unscrupulous bankers and bussinessmen. The fact that the Fed is a central bank and it loans the Gov. money with intrest tag on it that the tax payer pays back via Federal Income Tax. Read up on the Rothchilds, Rockefellers, JP Morgan, and Paul Warburg. Study the men and understand their intent. The Panic of 1907 was started because of a rumor printed by JP Morgans Paper! I think people have fofgot that we are all still very Human and things like Greed and the lust for more power is still very evident!
And yes I am for Ron Paul and believe in what he believes in. American People do need to take responsablity for there crazy spending habits too!
Great Blog BTW!
hb
March 20, 2008 1:19 PM
The Fed is legalized thievery that gives global moneychangers the power to create money out of thin air and then tax us for it. America does not even control its own money supply. It is owned by the banking institutions of Europe.
December 20, 2008 5:13 AM

"Money is many things, but in the end, something that we use to store value." Store value? Fiat money is merely a medium of exchange, and has it has no intrensic value, it is not in an of itself a store of value.
It might be a convenient and useful measure of value, but it is not value.

March 24, 2012 4:25 PM

@Ed - you are correct, of course. Since it has no intrinsic value of its own. the government can manipulate it by running the presses and cause inflation. That seals from savers, but politicians don't care about that.

March 24, 2012 7:02 PM
Add Your Comment...
4000 characters remaining
Loading question...