The Fed: Solution or problem?

The Washington Times ^ | 2008-11-26 | Richard Rahn

[rabscuttle385]

Should we abolish the Fed? The Federal Reserve Bank, or "The Fed" as it is commonly known, is the central bank of the United States. It was created by Congress in 1913 as the direct result of the Panic of 1907 (recessions or depressions were previously called panics, and they tended to be short lived and self-correcting).

[ml/nj]

While I wish that the Constitutional Money system had never been abandoned, I believe that there are two problems with the articles I've seen this AM regarding eliminating the Fed. The first is that it just isn't possible to wave a magic wand and eliminate an institution that has become a part of nearly every financial transaction done in this country, and many others around the world. The second is that the Fed now is very different from the thing that was created in 1913. Until 1933 FR Notes were not legal tender (That is no one had to accept them for payment if they preferred not to.) and they were redeemable in gold at any of the 12 FR banks or at the US Treasury.

ML/NJ

[slnk_rules]

They need a pinata over here. Thought I would ping the man with the best qualifications for the job.

[Moonman62]

What was so special about the Panic of 1907? IOW, why did they create a Fed then, but not for any prior panic?

Because the government had to turn to a private individual to bail out the financial system. JP Morgan could have demanded to be king.

[Moonman62]

Just an observation. All of these companies, banks, credit organizations and car companies on the borderline of failure...have Harvard, Yale, Princeton and Colombia business school graduates running them.

Maybe you're right. Didn't W get his MBA at Harvard?

[Moonman62]

Currency not backed by precious metals is the other

All currency should be backed by gold, like the mark during Germany's hyperinflation.

And here we are with the fiat dollar denominated US Treasury bonds setting records for low yields.

[traviskicks]

thnx for posting that link

[sanchmo]

Even BH Obama’s recent pick for economic advisor, Christina Romer argues that (her quote) “we have replaced the prewar boom-bust cycle driven by animal spirits and financial panics with a postwar boom-bust cycle driven by policy,” namely cycles of over-expansive, inflationary policy at the Fed, followed by recession-inducing, deflationary policy. Links:
* http://elsa.berkeley.edu/~cromer/JEP_Spring99.pdf
* http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227216

Former Fed official O’Driscoll has been warnign for a year that the Fed was inducing a dangerous imabalance:
* http://www.cato.org/pub_display.php?pub_id=9379
* http://www.cato.org/pub_display.php?pub_id=8849
* http://www.cato.org/pub_display.php?pub_id=8638

More recently, Lawrence White showed the mechanics of how inflationary policy from 2001-2006 led to deflationary policy in 2007 and to a quick shift to massive and ineffective inflationary policy. A scary chart on p4 of this paper shows how the Fed is over-steering like an SUV about to turn over.
* http://www.cato.org/pub_display.php?pub_id=9788

The public recently devalued mortgage backed securities and credit default swaps and other derivatives when it realized that those notes were backed by nothing but an absurd cycle of debt. The irony was that the Fed & Treasury thought the solution was to replace those debt-backed instruments with Federal Reserve Notes.

[gwilhelm56]

**”the power to coin money, and regulate the value thereof” - THAT Congress.**

Forgive me for not sharing your enthusiasm. I’d rather go back to the BARTER SYSTEM than to trust BWaney FWANK , Chris Dodd, and SCHMUCKY SCHUMER with the MONEY supply!

[djsherin]

There had been 2 central banks prior to the fed (actually 3 but the first was before the Constitution). Then came the “free banking era” (if you can even call it that because the government constantly allowed the banks to suspend specie payment). Then came the National Bank Act which formed a quasi-centralized banking system that paved the way for the federal reserve.

The panic of 1907 was special I believe because there was finally (unfortunately) enough political will combined with the support of enough businessmen and bankers to get it passed. This was the progressive era after all and the more centralization, the better.

[Ken H]

The panic of 1907 was special I believe because there was finally (unfortunately) enough political will combined with the support of enough businessmen and bankers to get it passed. This was the progressive era after all and the more centralization, the better.

That explanation makes the most sense to me. As you say, this was the Progressive Era. In relatively short order, the first federal drug control laws were passed, the 16th and 17th Amendments were ratified, and Prohibition was on the way.

[narses]

The First and Second Bank I recall, what was the pre-Constitution bank?

[djsherin]

It was called the Bank of North America and it was headed by Robert Morris. It was chartered in 1781 but it lost the public’s confidence when it began inflating its bank notes and it became commercial in 1783 (Chartered by Pennsylvania).

[djsherin]

Yeah that era did a lot of damage to the country in my estimation. I do find it interesting though that the government passed an Amendment to ban alcohol but just laws to ban drugs.

[narses]

Cool, thanks.

[bamahead]

Bookmark.

Sorry just catching up after Turkey hiatus :) Re-ping me on anything I missed that’s earth shattering!