They competed with the state and private banks, with each printing its own banknotes. Banks were unstable and untrustworthy; failures and loss of deposits were widespread. In 1863, with the country in the midst of the Civil War, Congress created the National Bank Act. The country was financially pressed by the war, and the economy was rapidly expanding. The act chartered and regulated a system of private banks.
Many have criticized the Fed's response and questioned their influence. Since its inception in 1913, the Federal Reserve has had a major increase in its power and role in monetary policy, is this power to great in one single entity or is there enough oversight in what it does? The Federal Reserve came from humble beginnings. In the 1800's "bank runs" were normal. In times of financial panic, concerned consumers would withdraw all of their money.
Throughout the course of this paper, I will attempt to determine whether or not there is a causal relationship between the Federal Reserve Bank’s monetary policies and the decline of the U.S. economy. I will do this through a brief analysis of the history and role of this institution, in addition to the central banking system in general. In turn, I will argue that the reckless and intentional manipulation of the economy by the Federal Reserve Bank, through inflation and the abolishment of the gold standard, has led to the current economic crisis in the United States. Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy.
Two key objectives to maximize employment and stabilize prices were established by Congress in the Federal Reserve Act in regards to the monetary policy. These objectives, known as the Federal Reserve’s dual mandate are a long-term goal for monetary policy. In order to reach this monetary policy goal, the Federal Reserve was established as an independent agency by Congress to ensure that decisions are focused solely on achieving the dual mandate and are free from political influence. “The Federal Reserve's dual mandate and the provisions for the independence of the Federal Reserve are two key factors that help guard against negative outcomes in the United States” (FRB). Currently, the Federal Reserve, which is lead by Chairman Ben Bernanke, is in charge of the monetary policy in the United States.
Retrieved on July 8, 2011 from http://www.adamsmith.org/blog/tax-and-economy/interest-rates-and-the-price-system/. Financial Manager. (2011). Retrieved on July 8, 2011 from http://www.prospects.ac.uk/financial_manager_job_description.htm. Fundamentals of Corporate Finance.
FEDERAL RESERVE ACT OVERVIEW The Federal Reserve Act States that, The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. (Federal Government, 1977) After several years of financial turmoil and panics, particularly the panic of 1907, the U.S. policymakers realized the need for banking and currency reform. The Federal Reserve Act was enacted on December 13, 1913. It was an act of congress that setup the Federal Reserve System. The Federal Reserve Act gave the Federal Reserve System legal authority to issue Federal Reserve Notes, also known as United States Dollars, and the Federal Reserve Bank notes as legal tender.
This paper will identify and analyze the tools used by the Federal Reserve to control monetary policy, and how this, in turn influences the US economy and money supply. The first of the three major tools employed by the Federal Reserve is known as reserve requirements. Reserve requirements can be defined as: "The ratio of reserves (vault cash plus deposits at a Fed bank) to transactions deposits that commercial banks must keep on hand." (Dakota State University, 2003) These reserves are held for specified deposit liabilities by federally insured banking institutions. Reserve limitations are specified by law, and under the sole authority of the Board of Governors.