The Fed

This past Wednesday night, I found myself watching the Republican Presidential debate on CNBC.  This was the first time I had been able to watch a full debate without having to leave, flip the channel, or do things in other rooms.  I always find it important to watch such debates because it allows me to compare each of the main candidates next to each other.  At one point, a couple of candidates brought up the notion that they would abolish The Federal Reserve.  (This was Texas Governor Rick Perry and Texas Congressman Ron Paul.  I’m sorry if I have forgotten any other candidate that agreed with this.)  Earlier in the night, on a topic completely unrelated to this one, former-House Speaker Newt Gingrich actually criticized his fellow-Republican candidates for not knowing history.  And completely abolishing The Federal Reserve (the Fed) could bring us into another economic meltdown… as it has happened before.

The Federal Reserve was created on December 23, 1913, with the enactment of the Federal Reserve Act.  However, the Fed was not the first national bank within the United States.  The Bank of the United States (later known as the First Bank of the United States) was created under Treasury Secretary Alexander Hamilton during the administration of President George Washington.  It was part of the negotiated deal between Hamilton and House-Speaker James Madison that placed the nation’s capital city along the banks of the Potomac River (though Washington, himself, would pick the exact spot).  The First Bank of the United States was in operation from 1791-1811 when it’s charter expired under the administration of President James Madison (the vote to renew the charter failed by one vote in the House of Representatives).

The Second Bank of the United States was chartered in 1816… only 5-years later.  It had been created because of the war of 1812… and done so by many of the same people who had refused to renew the first bank’s charter.  Why was this done?  The United States was suffering from severe inflation and could barely afford to pay for military operations during the War of 1812.  Also, the credit and borrowing status of the nation was at its lowest level since the nation’s founding.  Having dissolved the First Bank of the United States had led to a small financial problem since there was no national bank to oversee the entire financial system.

Now let’s skip ahead to the 1830s.  President Andrew Jackson disliked the Second Bank of the United States as he saw it as corrupted and filled with fraud.  And in a political move, he vetoed the renewal for its charter… which came to his desk early.  (It was sent to him by House Speaker Henry Clay in a political move to keep President Jackson from being reelected.  Clay was also on the side of Bank President Nicholas Biddle.  Jackson vetoed the bill and still won reelection).  Though President Jackson had vetoed the renewal charter, the Second Bank of the United States had several years remaining under its current charter, but Jackson decided to move first.  He ordered his Treasury Secretary to remove all of the funds by the federal government from the bank and redirect all the federal government’s deposits to the state banks.  This was being done at a time when Congress was on recess.  When his Treasury Secretary refused, he fired him and appointed another… and did so until he found a guy that would do the task at hand.  This was done in 1833.  The Second Bank of the United States was no more.  It charter officially expired in 1836, and five years later, the bank went bankrupt.

So why did I just give you that huge history lesson?  Simple.  It all comes down to the year 1837 and a financial crisis.  The Panic of 1837 was caused by severe runaway inflation due to the demise of the Second Bank of the United States.  The Panic was followed by a five-year depression with bank failures and severe unemployment.  So now I ask you this… are you seeing a trend from when we have done this in the past?

The Federal Reserve was created for a reason… maintain employment, keep prices stable, and keep interest rates at a moderate level by regulating monetary policy.  Sounds simple enough.  But like the 1830s, I do think The Fed is filled with corruption and fraud.  Interest rates have been placed at zero, and money is being printed off more abundantly than at any time in our nation’s history.  Problem?  This, too, can cause massive inflation.  This would the other extreme of having The Fed completely dissolved.  So what needs to happen?  It needs to stop printing off money that has no support behind it.  You must remember that any paper currency is completely worthless without anything behind to support it (i.e. the gold standard, the silver standard).  And The Fed needs to be completely overhauled.  The waste needs to be thrown out, the organization needs to be completely restructured, and it needs to have government oversight so that it can’t just run amok and do whatever it wants to do.  There are severe consequences to allowing a government agency do as it wants without any checks.  It also needs to have the oversight of the people.  Though we may not have a complete understanding of things, it should not be treated as though it’s out of our reach.  We need to have a voice in the matter and know what The Fed is doing.

Changes need to be made… some of them need to be drastic changes.  But I think the message of completely dissolving The Federal Reserve is the wrong way to go.  I think it would lead to an even bigger crisis than the one we have been facing for the past few years as history has indicated.  Author David McCullough once said, “History is a guide to navigation in perilous times. History is who we are and why we are the way we are.”  We need to learn from our past mistakes and not repeat them this time around.

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3 Responses to The Fed

  1. Awesome blog article.Thanks Again. Really Cool.

  2. Jgrenville says:

    The author of this article, may very much like to read a study just completed on the true story of Jackson and the Bank. The myth is ended. The controllers of Jackson were those of Aaron Burr, Jeremy Bentham, and other agents of the British Empire. John Quincy Adams and Nicholas Biddle were the nation builders and patriots. “How Andrew Jackson Destroyed the United States.” larouchepac dot com/andrewjackson

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