There are ultra-conservative politicians
who do not like the Federal Reserve System. The most notable of these is the
former House member from Texas, Ron Paul, who also ran for president several
times. He hated the Federal Reserve so much he wrote a book called “End the
Fed”. Reading his book reveals a reactionary mindset that was shaped by his
youth in the Great Depression. It is less about his perceived evils of the
Federal Reserve and more about what he thinks is the panacea for whatever
economic ill is at hand: the gold standard. It is important to look at people
who want to change the status quo and to look at what they want in their stead.
Ron Paul and his ilk want to go back to a system that was abandoned by Lincoln
when the north needed money in the Civil War and then by all of the European
Powers in the Great Depression (Krugman & Wells. p. 417). We abandoned the gold standard because it
failed.
We
have the current system because with a gold standard, the monetary system
treats money as a commodity in itself. Paul wants to hold onto it and hoard it
– at least twice in his book, he speaks lovingly of various hoards he has had. The
problem is that with commodity money, you need to spend it to trade it for
goods and services. With commodity money there is an opportunity cost to
exchange because there is a fixed amount of it in circulation. There are also mines
that grow the supply of money, but as long as the global economy is growing at
a rate greater than the supply of you commodity money, the money itself will
increase in value and there will be a disincentive to spend it. The whole basis
of the Populist movement in the late nineteenth century and William Jennings
Bryan’s “Cross of Gold” speech was the commodity nature of the money at the
time. Therefore, with the political winds shifting, the panic of 1907 was
enough to show the authorities that the current monetary regime was not
working. The Federal Reserve was put in place and it was nominally still back
by gold at a fixed rate in 1913. That worked until the crash of 1929 and the
ensuing depression showed that even gold-backed currency needed to float some
times. It is telling that the earlier the major economies left gold backing in
the Depression, the sooner they started to recover. The post-war Bretton Woods
system was an even weaker gold standard, with the U.S. maintaining convertibility
of the dollar in foreign currency and fold at fixed rates. The nation could do
this because after the war the U. S. was the largest creditor nation and had
huge stockpiles of gold. Nixon closed the gold window and allowed currencies to
float because the reserves were dwindling and to keep the previous price ratios
was expensive.
The
reason to go through all of that is that far right politicians are idiots and either
do not know their history or bought into their ideology first and then looked
for post hoc explanations. The strength of the nation is individually, in the
strength of its institutions. The Federal Reserve System is not perfect. It has
made transitions to transparency, but they still only hold press conferences
after every other meeting. The Federal
Reserve Act shields the Federal Reserve from political oversight because the
central bank is supposed to be neutral and rules based. Far right politicians
who hate government by their nature are not happy with an institution that is
self-funded and has proved over time that it can keep the economy running
smoothly. It has worked so well that economist call the time from the war to
the oil supply shocks and the resulting stagflation “The Great Moderation”. Moreover,
that was just its day-to-day operations.
The
video “Open & Operating: The Federal Reserve Responds to September 11”
shows that the central bank , while important in everyday life, is even more
important in emergency. Early in the film, the narrator describes the Fed’s
role as keeping people’s faith in the financial system (3:30). Through the
Bank’s actions, they did just that. The day of the attack, they made sure ATMs
had plenty of cash on hand, pushing over four hundred million dollars’ worth of
currency to banks (6:12). They also provided liquidity to check writers, making
sure that all the checks cleared, and providing almost forty times the normal
liquidity in float, the time between a check being cashed and it being cleared
(6:40). However, the Bank was not just focusing on the stability of the local
economy in New York and Washington, where the people were directly affected.
The events of 9/11 spread shockwaves throughout the nation, as everyone was
uncertain of what would happen next. In that time, the Fed lent over 46 billion
dollars to banks that needed money at the discount window (11:00), and in the
week that followed, it injected hundreds of billions of dollars into the
banking system by purchasing bonds from banks (12:30). When the FMOC met that
week, it lowered the target federal funds rate half a percentage point, a large
amount at that time (14:12). All of these actions helped maintain the financial
system’s stability, and though there was a downturn because of the attacks, it
was not as deep or long as it might have been without the quick actions of the
Fed and its long institutional knowledge. Those who think the nation would be
as prosperous or agile without the Fed are foolish, perhaps naive at best.
Federal Reserve Bank of San Francisco. (2014) Open & Operating: The Federal Reserve Responds to September 11. Retrieved at http://www.frbsf.org/education/teacher-resources/open-operating-federal-reserve-response-911/video
Krugman, P.
& Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers