The Federal Reserve has been around for over 100 years and though the sole purpose of the institution was to prevent financial crisis, the country has gone through the world’s largest period of financial depression and since then, endured more than a couple recessions. With a measure in place to prevent this, why have these recessions occurred?
To answer this, it might help to understand more about the history of this financial institution.
The United States has a mixed history with central banking. As you might recall from your history classes, individuals like Thomas Jefferson and James Madison were heavily opposed to such an institution being founded in the country. Despite their opposition, the First Central Bank of the United States was established in 1791 and lasted until it expired in 1811 due to lack of support from congress. The country remained without a central bank until 1816.
After this, the country went through a few banking situations. From 1816-1836 it operated under The Second Bank of the United States. From 1846-1921, the country relied on the Independent Treasury System and from 1863-1913 there were a variety of National Banks. Of course, throughout all this, there were some ups and downs.
Signed into law by Woodrow Wilson, the Federal Reserve act was supposed to be a way to actually help businesses. In reality, it certainly did help some of the biggest businesses, but for most normal citizens and small business owners, it had the opposite effect. This act allows the Fed to produce reserve notes (I.E. US Dollars) to be used as legal tender. It created a system of public and private entities to monitor banking in the United States and steer the course of economic history going forward.
In theory, this might appeal to some who believe government control is necessary for success, but in reality it doesn’t really do that either. With the power it was granted, the federal government is not actually the one printing the money, but rather the reserve system is. Either way, it means citizens in the United States are relying on a fiat currency.
You may have heard the term “fiat currency” before. By definition, fiat currency is any money that derives its value from government law or regulation, it has no intrinsic value. While it may be worth X amount today, tomorrow it could be worth 2X or 1/2X. Unlike currency backed by a commodity, or a physical good of some kind, fiat currency can inflate or deflate for no reason.
Unfortunately, the US Dollar is a fiat currency. With the power it has, the Federal Reserve can print money on demand, and if there is ever a deficit they can artificially adjust the value. For those at the top of the money ladder, this might seem fine and dandy, but for the working class Americans, this can lead to some serious financial issues.
In the 2012 presidential election, Republican candidate, Ron Paul, spoke out against the Federal Reserve. Paul, who is often identified as libertarian, suggested the abolishment of the Fed. There were even movements that arose related to his call to End the Fed. Of course, assuming he was the first person to suggest the deconstruction of the Fed would be a mistake.
In 1998, author G. Edward Griffin wrote a book titled The Creature from Jekyll Island, which took a hard look at the Federal Reserve system in the United States. If you are interested in learning more about the creation of the federal reserve and how it works, you might want to check this book out. Needless to say, it doesn’t have much good to say about the Reserve and warns the Fed could ultimately cause a greater economic collapse than ever before.
The simple reality is the recessions continue to happen because natural forces are always more powerful than artificial control measures. Having a system like the Federal Reserve in place does not actually help stabilize the dollar. Instead, it sets up artificial stopgaps and devalues the currency it is meant to protect. As with all fiat currencies, the probability of collapse is high.
Do you think the Federal Reserve needs to be abolished? What changes would you put in place to ensure the country’s economic future?