It was 1913, and the Progressive Era was in full swing. Theodore Roosevelt and William Taft had been cracking down on big business for a decade, workers’ rights were increasing through enlarging governmental power, and President Woodrow Wilson, in response to the banking crisis of 1907, drafted the Federal Reserve Act into law. The ideals behind its founding were laudable. The government wanted a way to directly interfere with the United States economy to be able to promote the best outcome possible for the public. However, much like other government programs, such as the Post Office, Prohibition, the War on Drugs, and the War on Terror, it not only didn’t fix the problems it attempted to solve, but exacerbated them instead.
The 1907 Bankers’ Panic, while substantial – the New York Stock Exchange fell almost 50% compared to the peak the previous year – was relatively short lived. Its negative economic effects lasted only from May of 1907 to June of 1908, however its legislative effects still impact us to this day. The Federal Reserve, created in 1913, was founded in order to better control the U.S. economy through monetary policy by means of the purchasing of bonds, the adjusting of interest rates, and control of the money supply. This power in the wrong hands can lead to serious problems in the economy, from extreme inflation to drastic depression, and the first example of this was none other than the Great Depression.
After the Wall Street Crash of 1929, the Federal Reserve under the leadership of Chairman Roy A. Young, began restricting the money supply, as opposed to enforcing loose monetary policy which is normally what is used during a recession. The restriction on the money supply caused an increase in interest rates, decreasing the amount of capital investment and hurting long term growth in the economy. Not only this, but the contraction of the money supply caused the United States dollar to appreciate relative to other currencies, causing less countries to import our goods, further hurting American businesses and putting more people out of work. In addition to a decrease of the money supply, the Federal Reserve denied banks suffering from bank runs assistance, therefore causing hundreds of thousands of people to lose their life savings. This also acted as a way of restricting money supply – there was now less money available for loans, further increasing interest rates and decreasing aggregate demand and long-term aggregate supply. The Federal Reserve – created in order to protect the public good – was now actively hurting it. These monetary policies, as well as fiscal policies like Herbert Hoover’s Smoot-Hawley Tariff of 1930 and Franklin Roosevelt’s “New Deal” were instrumental in turning what was originally simply another recession, much like the Panic of 1907 and 1920, into a decade long depression.
In the 1970s, events such as the 1973 Arab oil embargo and the 1979 Iranian revolution had a profound effect on the United States economy. Crude oil prices were skyrocketing, and there were two competing perspectives as to why. The first perspective was demand-pull inflation, which argued that the increase in inflation was due to higher consumer spending than could be handled by the economy, spurred on by monetary policy. The second was cost-push inflation, which claimed that the increase in inflation and unemployment was due to supply disruptions. The Federal Reserve at the time believed that the increase in inflation due to the rising price of oil was out of their control, and therefore focused on unemployment by enforcing loose monetary policy. In addition to this, through the Nixon tapes, we know that Arthur Burns, chairman of the Federal Reserve, was pressured by Richard Nixon into expansionary monetary policy in the lead-up to the 1972 election; demonstrating that though the Fed should be above politics, its undoubtedly partisan. Unfortunately, this action by the Fed simply caused an ever increasing amount of inflation as well as an increase in unemployment, creating the new term “stagflation.” In 1964, inflation was at a steady 1% while unemployment was at 5%. By 1980, inflation surpassed 14% and unemployment reached over 7%. These terrible economic effects can be directly attributed to the Federal Reserve’s economic manipulation.
What is even more concerning than the past mistakes of the Federal Reserve is our future and how it hangs precariously in the balance by their decisions. The US dollar since the creation of the Federal Reserve has lost 96% of its value, because, of course, increasing inflation is the easiest form of taxation. Even so, the United States government is over nineteen trillion dollars in debt. Instead of the government slashing costs in order to even attempt paying it off, the Federal Reserve simply prints more money in order to support the ever increasing government expenditures. This is extremely dangerous for the future of the country. A government and a populace that doesn’t recognize the negative effect of runaway government spending is doomed for depression, as seen in modern countries such as Venezuela and Greece. Unchecked government spending is the reason why newborn babies in the United States automatically owe $39,500. The Federal Reserve manipulating interest rates, which are now at 0.5% after being stuck at 0.25% for years, is dangerous for long term economic growth because it sends the wrong signals to entrepreneurs and investors. The tech and housing bubble of 2001 and 2008 respectively were spurred on by low interest rates set by the Federal Reserve. Rejecting free market signs and principles in favor of simply setting standards is dangerous for the stability and future of an economy. And yet, we do nothing to change. Our children’s futures are being sold for political gain in the present, financed by the Federal Reserve, and yet we do not act, because, after all, the bill is still in the mail.
The Federal Reserve System was created as a central bank of last resort – a place where private banks could receive discount loans to keep from going under. However, what we have now is something much more sinister. The power centralized in it is dangerous for any committee to handle – examples of its incompetency abound from its century-long existence. The idea of a system so wide-reaching as the Federal Reserve placing the judgment of a committee at a higher level than actual market forces is disconcerting. What is even more troubling is the status of the economy today and the wobbling stilts that the Fed places us on. Our economy is drudging by on a government stimulus which is only responsible for a growth of 2.4% in GDP on average – worse than years when no stimulus was given at all. What’s worse is that it’s financed through the unlimited printing of money. Unlimited money makes for unlimited spending, which inevitably leads to unlimited debt. The Federal Reserve is placing the entirety of America on the altar of the whims of politicians. Let’s hope for a gentle crash.
Veracity as Virtue 