The Case of the Federal Reserve
Ah, the Fed. It is an institution of which everyone has heard, yet only a mere segment of the population has managed to garner the knowledge of its operations and its purposes. I feel as though I should begin with the definition of the Fed, as given by its website, federalreserve.gov. Apparently, the nature of this institution is as follows: “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.”
How interesting. I would assume that at this point, you may already be conjuring up a few questions in regard to the validity of this statement. To be sure, I shall examine the two sections of this statement in the rest of this article. However, first I would like to assert how the Fed and its actions relate to conservative principles. As a conservative, I would furthermore classify myself as a libertarian. Therefore I do not hold a great deal of faith in the centralized manipulation of an economy, regardless of its size; nor do I believe that any sort of government-mandated planning provides a “stable monetary and financial system” as the Fed claims it manages to do. Of course, there is utmost certainty that my beliefs hold no validity of their own unless I produce proper evidence in support of them.
“The Federal Reserve, the central bank of the United States…”
This preliminary portion of the definition, which is perhaps the only true part, is exactly the case. Indeed, the Fed was created by Congress in 1913 with the intention of providing the economy and its financial systems with a sense of stability and also to insulate the banks from potential panics that had occurred in times before the Fed was instated. If you have studied United States history, you will surely know that the Fed is not our first central bank. In fact, the first Secretary of the Treasury, Alexander Hamilton, forcefully advocated for a central bank years before the United States ever had one. Eventually, in 1791, the First Bank of the United States was chartered by Congress. After the twenty-year duration of its charter, Congress failed to reissue its charter in 1811. Five years later, the Second Bank of the United States was created in order to manage the government’s finances, but following the War of 1812, it assumed the role of financing the debt incurred after the war. Its twenty-year charter also expired in 1831, and after being reverted back to a normal bank, it went bankrupt in 1836. (This Second Bank is the one that was “killed” by President Andrew Jackson.)
Both of these banks were intended to be, and were, private banks. From 1837—1862, a “free banking” era ensued in which hundreds of private banks sprang forward, with each issuing their own currencies and bank notes. What else do I have to say except that confusion ran rampant in the market? With the Civil War, the government saw it as necessary to create a national banking system in an attempt to create financial stability, establish a uniform national currency, and of course finance the war debt. However, since the notes issued by the new national system were backed by government treasury securities that often fluctuated in value, the loans issued were not consistently stable. This lack of confidence in credit stability led to a wide-spread panic in 1907.
By 1913, the idea was conceived to create a new central bank that was independent of the government, could set interest rates, and print money at its own discretion. The monetary system of the United States would be completely controlled by a new private banking system called the Federal Reserve. (As a side note: in my humble opinion, all of these systems are unconstitutional, since Article I, Section 8 of the Constitution declares that only Congress can coin money and set the value thereof.) Indeed, the initial duty of the Federal Reserve was to act as a “reserve” which could pump liquidity into smaller private banks in the event of a financial panic.
Now that we have concisely discussed the long, painful history of public finance in the United States, let us examine the second part of the definition.
“…provides the nation with a safe, flexible, and stable monetary and financial system.”
You need not be an economist to realize that the Fed has not provided us with a safe, flexible, or stable monetary and financial system. When I listen to the media conglomerates and the conversation of the citizenry, I fail to sense an air of stability in the market. It seems to me that we simply expect too much from the Fed. After all, all the Fed can really do is manipulate interest rates and print more fiat currency. If we allow ourselves to step out of the situation, it becomes excessively easy to understand that such a large, influential system—which is totally independent of the public and of that public’s government—cannot possibly create a perpetually healthy, prosperous economy if it can only perform two major functions.
To further understand this, we need to briefly discuss the composition of the Federal Reserve System as a whole. The Board of Governors consists of Chairman Bernanke, Vice Chairman Yellen, and five other members who are also appointed by the President and confirmed by the Senate. These seven members are the most active Fed “policy makers,” so to speak, who regulate the currency and monitor the confidence held in it. There are also twelve regional banks that “enact” the Fed’s “policy” in order to keep the system functioning.
Thus the question arises: do we honestly believe as a people that this handful of individuals can actually administer good monetary policy that will not only affect the United States, but also the global economy as a unit? Indeed, if one examines the members’ credentials, they are all well-educated and have considerable experience in the field of macroeconomics. Nevertheless, I would suggest that the public should be extremely skeptical about blindly handing such incredible power to so few individuals. Besides that, the Fed does not exactly have a gleaming record in terms of stabilizing the economy and protecting the market from panic and lack of confidence. In times past, it has chosen to prop up colossal, monopolistic financial institutions which should have, in a truly free market, failed.
It appears to me that the reasons we have allowed our economy to be effectively lambasted by the Federal Reserve System for nearly ninety-eight years is because we have allowed our confidence in the merits of a free market to dwindle. Let’s face it, the only real manner in which a government can “save” the market from itself is by bailing out corporations that partook in risky business. To be sure, these businesses could have been done away with by the market, and the necessary correction could have been made rather quickly. However, given the obvious interest that government has in propping-up multinational, multibillion-dollar corporations, the only way to achieve such a monstrous bailout is to finance it through a central bank that has the freedom to wildly print money at the will of the ill-informed economists who perpetuate the system. This undoubtedly creates inflation, especially when the currency is totally fiat—when it is not backed by a commodity such as gold, the age-old metal that has proven to possess excellent levels of stability in the markets of history.
What should this mean for a conservative? If it is true that being conservative means believing in Constitutional—and only Constitutional—government, sound money, a strong national defense, and above all, personal liberty and freedom from the oppression of government—and I hope it does!—then he who is conservative must realize that a centrally-planned economy cannot possibly encourage growth, innovation, or happiness; for when we entrust the workings of the market into the hands of only a few, the contributions of the many will surely be drowned out by the overbearing interests of the power-hungry.
Eleanor Roosevelt said: “Great minds discuss ideas; average minds discuss events; small minds discuss people.” I have discussed all of those things in this article. I would encourage you, the reader of this article, to discuss ideas more than you discuss anything else. Ideas lead us to freedom. It is my undying belief that if we fail to question and stop discussing ideas, then we will accomplish nothing but failure. My idea is that we need not a private “federal” banking system to make the most crucial economic decisions for us. I believe that is the people’s job through the free market. My idea is an idea of freedom, and I am not about to stop discussing it.
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