Close window | View original article
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.