HOME

TheInfoList



OR:

The
Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after ...
(also known as "the Fed") has faced various criticisms since it was authorized in 1913.
Nobel laureate The Nobel Prizes ( sv, Nobelpriset, no, Nobelprisen) are awarded annually by the Royal Swedish Academy of Sciences, the Swedish Academy, the Karolinska Institutet, and the Norwegian Nobel Committee to individuals and organizations who make o ...
economist
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and his fellow
monetarist Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on natio ...
Anna Schwartz Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
criticized the Fed's response to the
Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange coll ...
arguing that it greatly exacerbated the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. More recent prominent critics include former Congressman
Ron Paul Ronald Ernest Paul (born August 20, 1935) is an American author, activist, physician and retired politician who served as the U.S. representative for Texas's 22nd congressional district from 1976 to 1977 and again from 1979 to 1985, as we ...
.


Creation

An early version of the
Federal Reserve Act The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Pani ...
was drafted in 1910 on
Jekyll Island Jekyll Island is located off the coast of the U.S. state of Georgia, in Glynn County. It is one of the Sea Islands and one of the Golden Isles of Georgia barrier islands. The island is owned by the State of Georgia and run by a self-sustaining, s ...
,
Georgia Georgia most commonly refers to: * Georgia (country), a country in the Caucasus region of Eurasia * Georgia (U.S. state), a state in the Southeast United States Georgia may also refer to: Places Historical states and entities * Related to the ...
, by
Republican Republican can refer to: Political ideology * An advocate of a republic, a type of government that is not a monarchy or dictatorship, and is usually associated with the rule of law. ** Republicanism, the ideology in support of republics or agains ...
Senator A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the el ...
Nelson Aldrich Nelson Wilmarth Aldrich (/ ˈɑldɹɪt͡ʃ/; November 6, 1841 – April 16, 1915) was a prominent American politician and a leader of the Republican Party in the United States Senate, where he represented Rhode Island from 1881 to 1911. By the ...
, chairman of the
National Monetary Commission The National Monetary Commission was a U.S. congressional commission created by the Aldrich–Vreeland Act of 1908. After the Panic of 1907, the Commission studied the Banking in the United States, banking laws of the United States, and the leadi ...
, and several Wall Street bankers. The final version, with provisions intended to improve public oversight and weaken the influence of the New York banking establishment, was drafted by Democratic
Congressman A Member of Congress (MOC) is a person who has been appointed or elected and inducted into an official body called a congress, typically to represent a particular constituency in a legislature. The term member of parliament (MP) is an equivalen ...
Carter Glass Carter Glass (January 4, 1858 – May 28, 1946) was an American newspaper publisher and Democratic politician from Lynchburg, Virginia. He represented Virginia in both houses of Congress and served as the United States Secretary of the Treas ...
of
Virginia Virginia, officially the Commonwealth of Virginia, is a state in the Mid-Atlantic and Southeastern regions of the United States, between the Atlantic Coast and the Appalachian Mountains. The geography and climate of the Commonwealth are ...
. The structure of the Fed was a compromise between the desire of the bankers for a central bank under their control and the desire of
President President most commonly refers to: *President (corporate title) * President (education), a leader of a college or university * President (government title) President may also refer to: Automobiles * Nissan President, a 1966–2010 Japanese ...
Woodrow Wilson Thomas Woodrow Wilson (December 28, 1856February 3, 1924) was an American politician and academic who served as the 28th president of the United States from 1913 to 1921. A member of the Democratic Party, Wilson served as the president of ...
to create a decentralized structure under public control. The Federal Reserve Act was approved by Congress and signed by President Wilson in December 1913.


Inflation policy

In ''
The Case Against the Fed ''The Case Against the Fed'' is a 1994 book by Murray N. Rothbard criticising the United States Federal Reserve, fractional reserve banking, and central banks in general. It details a history of fractional reserve banking and the influence that ba ...
'',
Murray Rothbard Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian ...
argued in 1994 that, although a supposed core function of the Federal Reserve is to maintain a low level of
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
, its policies (like those of other
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
s) have actually aggravated inflation. This occurs when the Fed creates too much
fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometim ...
backed by nothing. He called the Fed policy of
money creation Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
"legalized
counterfeiting To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...
" and favored a return to the
gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...
. He wrote:


Effectiveness and policies

The Federal Reserve has been criticized as not meeting its goals of greater stability and low inflation. This has led to a number of proposed changes including advocacy of different policy rules or dramatic restructuring of the system itself.
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
concluded that while governments do have a role in the monetary system he was critical of the Federal Reserve due to its poor performance and felt it should be abolished. Friedman believed that the Federal Reserve System should ultimately be replaced with a
computer program A computer program is a sequence or set of instructions in a programming language for a computer to Execution (computing), execute. Computer programs are one component of software, which also includes software documentation, documentation and oth ...
. He favored a system that would automatically buy and sell
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
in response to changes in the money supply. This proposal has become known as
Friedman's k-percent rule In macroeconomics, Friedman's k-percent rule (named for Milton Friedman) is the monetarist proposal that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles. Definit ...
.Salter, A. W. (2014). An Introduction to Monetary Policy Rules. ''Mercatus Workıng Paper. George Mason University''. Others have proposed NGDP targeting as an alternative rule to guide and improve central bank policy. Prominent supporters include
Scott Sumner Scott B. Sumner (born 1955) is an American economist. He is the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University, a Research Fellow at the Independent Institute, and professor who teaches at Bentle ...
, David Beckworth, and
Tyler Cowen Tyler Cowen (; born January 21, 1962) is an American economist, columnist and blogger. He is a professor at George Mason University, where he holds the Holbert L. Harris chair in the economics department. He hosts the economics blog ''Marginal R ...
.


Congress

Several members of Congress have criticized the Fed. Senator
Robert Owen Robert Owen (; 14 May 1771 – 17 November 1858) was a Welsh people, Welsh textile manufacturer, philanthropist and social reformer, and a founder of utopian socialism and the cooperative movement. He strove to improve factory working conditio ...
, whose name was on the Glass-Owen
Federal Reserve Act The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Pani ...
, believed that the Fed was not performing as promised. He said:
The Federal Reserve Board was created to control, regulate and stabilize credit in the interest of all people. . . . The Federal Reserve Board is the most gigantic financial power in all the world. Instead of using this great power as the Federal Reserve Act intended that it should, the board . . . delegated this power to the banks.
Representative Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920 to 1931, accused the Federal Reserve of deliberately causing the Great Depression. In several speeches made shortly after he lost the chairmanship of the committee, McFadden claimed that the Federal Reserve was run by Wall Street banks and their affiliated European banking houses. In one 1932 House speech (that has been criticized as bluster), he stated: Many members of Congress who have been involved in the House and Senate Banking and Currency Committees have been open critics of the Federal Reserve, including Chairmen
Wright Patman John William Wright Patman (August 6, 1893 – March 7, 1976) was an American politician. First elected in 1928, Patman served 24 consecutive terms in the United States House of Representatives for Texas's 1st congressional district from 1929 to 1 ...
,
Henry Reuss Henry Schoellkopf Reuss (February 22, 1912 – January 12, 2002) was a Democratic U.S. Representative from Wisconsin. Early life Henry Schoellkopf Reuss was born in Milwaukee, Wisconsin. He was the son of Gustav A. Reuss (pronounced ''Royce'' ...
, and Henry B. Gonzalez. Representative
Ron Paul Ronald Ernest Paul (born August 20, 1935) is an American author, activist, physician and retired politician who served as the U.S. representative for Texas's 22nd congressional district from 1976 to 1977 and again from 1979 to 1985, as we ...
, Chairman of the Monetary Policy Subcommittee in 2011, is known as a staunch opponent of the Federal Reserve System. He routinely introduced bills to abolish the Federal Reserve System, three of which gained approval in the House but lost in the Senate. Congressman Paul also introduced H.R. 459: Federal Reserve Transparency Act of 2011, This act required an audit of the Federal Reserve Board and the twelve regional banks, with particular attention to the valuation of its securities. His son, Senator
Rand Paul Randal Howard Paul (born January 7, 1963) is an American physician and politician serving as the Seniority in the United States Senate, junior United States Senate, U.S. senator from Kentucky since 2011. A member of the Republican Party (Un ...
, has introduced similar legislation in subsequent sessions of Congress.


Great Depression (1929)

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna Schwartz Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
stated that the Fed pursued an erroneously restrictive monetary policy, exacerbating the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. After the
stock market crash A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often foll ...
in 1929, the Fed continued its contraction (decrease) of the
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
and refused to save banks that were struggling with
bank runs A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
. This mistake, critics charge, allowed what might have been a relatively mild recession to explode into catastrophe. Friedman and Schwartz believed that the depression was "a tragic testimonial to the importance of monetary forces." Before the establishment of the Federal Reserve, the banking system had dealt with periodic crises (such as in the
Panic of 1907 The Panic of 1907, also known as the 1907 Bankers' Panic or Knickerbocker Crisis, was a financial crisis that took place in the United States over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% fro ...
) by suspending the convertibility of deposits into currency. In 1907, the system nearly collapsed and there was an extraordinary intervention by an ad-hoc coalition assembled by
J. P. Morgan John Pierpont Morgan Sr. (April 17, 1837 – March 31, 1913) was an American financier and investment banker who dominated corporate finance on Wall Street throughout the Gilded Age. As the head of the banking firm that ultimately became known ...
. In the years 1910–1913, the bankers demanded a central bank to address this structural weakness. Friedman suggested that a similar intervention should have been followed during the banking panic at the end of 1930. This might have stopped the vicious circle of forced liquidation of assets at depressed prices, just as suspension of
convertibility Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies mus ...
in 1893 and 1907 had quickly ended the
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...
crises at the time. Essentially, in the monetarist view, the Great Depression was caused by the fall of the money supply. Friedman and Schwartz note that " om the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls "The
Great Contraction The Great Contraction is the recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book '' A Monetary Hist ...
"—a period of falling income, prices, and employment caused by the choking effects of a restricted
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
. The mechanism suggested by Friedman and Schwartz was that people wanted to hold more money than the Federal Reserve was supplying. People thus hoarded money by consuming less. This, in turn, caused a contraction in employment and production, since prices were not flexible enough to immediately fall. Friedman and Schwartz argued the Federal Reserve allowed the money supply to plummet because of ineptitude and poor leadership. Many have since agreed with this theory, including
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
,
Chairman of the Federal Reserve The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Board of Governors of the Federal Reserve System. The chair shall preside at the meetings of the Boa ...
from 2006 until 2014, who, in a speech honoring Friedman and Schwartz, said: Friedman has said that ideally he would prefer to "abolish the Federal Reserve and replace it with a computer." He preferred a system that would increase the money supply at some fixed rate, and he thought that "leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement". In contrast to Friedman's argument that the Fed did too little to ease after the crisis,
Murray Rothbard Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian ...
argued that the crisis was caused by the Fed being too loose in the 1920s in the book ''
America's Great Depression ''America's Great Depression'' is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austrian School economist and author Murray Rothbard. The fifth edition was released in 2000. Brief summary Rothbard holds the inte ...
''.


Global financial crisis (2007–08)

Some economists, such as John B. Taylor, have asserted that the Fed was responsible, at least partially, for the
United States housing bubble The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...
which occurred prior to the 2007 recession. They claim that the Fed kept interest rates too low following the 2001 recession. The housing bubble then led to the
credit crunch A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
. Then-Chairman
Alan Greenspan Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. ...
disputes this interpretation. He points out that the Fed's control over the long-term interest rates (to which critics refer) is only indirect. The Fed did raise the short-term interest rate over which it has control (i.e., the federal funds rate), but the long-term interest rate (which usually follows the former) did not increase. The Federal Reserve's role as a supervisor and regulator has been criticized as being ineffective. Former U.S. Senator
Chris Dodd Christopher John Dodd (born May 27, 1944) is an American lobbyist, lawyer, and Democratic Party (United States), Democratic Party politician who served as a United States senator from Connecticut from 1981 to 2011. Dodd is the List of United Sta ...
, then-chairman of the
United States Senate Committee on Banking, Housing, and Urban Affairs The United States Senate Committee on Banking, Housing, and Urban Affairs (formerly the Committee on Banking and Currency), also known as the Senate Banking Committee, has jurisdiction over matters related to banks and banking, price controls, ...
, remarked about the Fed's role in the 2007-2008 economic crisis, "We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure."


Fractional reserve banking

The
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
does not actually control the money supply directly and has delegated this authority to banks. If a bank has a
reserve requirement Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...
of 10% and they have $10 million dollars in
bank deposit A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...
s, they can create $100 million dollars to loan out to borrowers or make other investments if it is an
investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
. It is essentially going on
margin Margin may refer to: Physical or graphical edges * Margin (typography), the white space that surrounds the content of a page *Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...
10:1 without having to pay interest on the margin because it is money that they created themselves. This is the reason there are
credit cycle The credit cycle is the expansion and contraction of access to credit over time. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the ...
s or
business cycle Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...
s, because money supply creation is not under any single entity's control and is decentralized among many banks that are trying to do the best they can. The Federal Reserve indirectly controls this process by manipulating the
Federal Funds Rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
that sets the tone for interest rates on new debt throughout the economy, and intentionally puts the economy into a
recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
(hard landing) or slow the economy without a recession (soft landing) to tame
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
.


Republican and Tea Party criticism

During several recent elections, the
Tea Party movement The Tea Party movement was an American fiscally conservative political movement within the Republican Party that began in 2009. Members of the movement called for lower taxes and for a reduction of the national debt and federal budget def ...
has made the Federal Reserve a major point of attack, which has been picked up by
Republican Republican can refer to: Political ideology * An advocate of a republic, a type of government that is not a monarchy or dictatorship, and is usually associated with the rule of law. ** Republicanism, the ideology in support of republics or agains ...
candidates across the country. Former Congressman
Ron Paul Ronald Ernest Paul (born August 20, 1935) is an American author, activist, physician and retired politician who served as the U.S. representative for Texas's 22nd congressional district from 1976 to 1977 and again from 1979 to 1985, as we ...
(R) of Texas and his son Senator
Rand Paul Randal Howard Paul (born January 7, 1963) is an American physician and politician serving as the Seniority in the United States Senate, junior United States Senate, U.S. senator from Kentucky since 2011. A member of the Republican Party (Un ...
(R) of Kentucky have long attacked the Fed, arguing that it is hurting the economy by devaluing the dollar. They argue that its monetary policies cause booms and busts when the Fed creates too much or too little
fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometim ...
. Ron Paul's book '' End the Fed'' repeatedly points out that the Fed engages in
money creation Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
"out of thin air." He argued that interest rates should be set by market forces, not by the Federal Reserve. Paul argues that the booms, bubbles and busts of the business cycle are caused by the Federal Reserve's actions. In the book Paul argues that "the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy." David Andolfatto of the Federal Reserve Bank of St. Louis said the statement was "just plain false" and "stupid" while noting that legitimate arguments can be made against the Federal Reserve. University of Oregon economist
Mark Thoma Mark Allen Thoma (born December 15, 1956) is a macroeconomist and econometrician and a professor of economics at the Department of Economics of the University of Oregon. Thoma is best known as a regular columnist for ''The Fiscal Times'' through ...
described it as an "absurd" statement which data does not support. Surveys of economists show overwhelming opposition to abolishing the Federal Reserve or undermining its independence. According to Princeton University economist Alan S. Blinder, "mountains of empirical evidence support the proposition that greater central bank independence produces not only less inflation but superior macroeconomic performance, e.g., lower and less volatile inflation with no more volatility in output." Ron Paul's criticism has stemmed from the influence of the Austrian School of Economics. More specifically, economist
Murray Rothbard Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian ...
was a vital figure in developing his views. Rothbard attempted to intertwine both political and economic arguments together in order to make a case to abolish the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
. When first laying out his critiques, he writes "The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of...its operations." This argument from Rothbard is outdated, however, as the Federal Reserve presently does report its balance sheet weekly as well as get audited by outside third parties. Rothbard also heavily critiques the Federal Reserve being independent from politics despite the Federal Reserve being given both private and public qualities. The acknowledgment of the Federal Reserve being a part of government that exists outside of politics inevitably becomes a "self-perpetuating oligarchy, accountable to no one." This ignores the fact that the Federal Reserve Board of Governors is a Federal agency, appointed by the President and Senate.


Private ownership or control

According to the
Congressional Research Service The Congressional Research Service (CRS) is a public policy research institute of the United States Congress. Operating within the Library of Congress, it works primarily and directly for members of Congress and their committees and staff on a ...
: According to the web site for the Federal Reserve System, the individual
Federal Reserve Bank A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve ...
s "are the operating arms of the central banking system, and they combine both public and private elements in their makeup and organization." Each of the 12 Banks has a nine-member board of directors: three elected by the commercial banks in the Bank's region, and six chosen – three each by the member banks and the Board of Governors – "to represent the public with due consideration to the interests of agriculture, commerce, industry, services, labor and consumers." These regional banks are in turn controlled by the
Federal Reserve Board of Governors The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the m ...
, whose seven members are nominated by the
President of the United States The president of the United States (POTUS) is the head of state and head of government of the United States of America. The president directs the Federal government of the United States#Executive branch, executive branch of the Federal gove ...
and confirmed by the Senate. Member banks ("about 38 percent of the nation's more than 8,000 banks") are required to own capital stock in their regional banks. Until 2016, the regional banks paid a set 6% dividend on the member banks' paid-in capital stock (not the regional banks' profits) each year, returning the rest to the US Treasury Department. As of February 24, 2016, member banks with more than $10 billion in assets receive an annual dividend on their paid-in capital stock (Reserve Bank stock) of the lesser of 6% percent and the highest yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. Member banks with $10 billion or less in assets continue to be paid a set 6% annual dividend. This change was implemented during the
Obama Administration Barack Obama's tenure as the 44th president of the United States began with his first inauguration on January 20, 2009, and ended on January 20, 2017. A Democrat from Illinois, Obama took office following a decisive victory over Republican ...
in order "to implement the provisions of section 32203 of the
Fixing America's Surface Transportation Act The Fixing America's Surface Transportation Act or the FAST Act is a funding and authorization bill to govern United States federal surface transportation spending. It was passed by Congress on December 3, 2015, and President Barack Obama signed ...
(FAST Act)". The Fed has noted that this has created "some confusion about 'ownership'": In his textbook, ''Monetary Policy and the Financial System'', Paul M. Horvitz, the former Director of Research for the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
, stated, In the ''American Political Science Review'', Michael D. ReaganNot to be confused with Michael Edward Reagan, the son of President
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
.
wrote,


Transparency issues

One critique is that the
Federal Open Market Committee The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), is charged under United States law with overseeing the nation's open market operations (e.g., the Fed's buying and selling of United States Treas ...
, which is part of the Federal Reserve System, lacks transparency and is not sufficiently audited. A report by
Bloomberg News Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg T ...
asserts that the majority of Americans believes that the System should be held more accountable or that it should be abolished. Another critique is the contention that the public should have a right to know what goes on in the Federal Open Market Committee (FOMC) meetings.


See also

* ''
America's Great Depression ''America's Great Depression'' is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austrian School economist and author Murray Rothbard. The fifth edition was released in 2000. Brief summary Rothbard holds the inte ...
'' *
Black Friday (1869) The Black Friday gold panic of September 24, 1869 was caused by a conspiracy between two investors, Jay Gould and his partner James Fisk, and Abel Corbin, a small time speculator who had married Virginia (Jennie) Grant, the younger sister of ...
Covers the gold scandal of 1869 * ''
The Case Against the Fed ''The Case Against the Fed'' is a 1994 book by Murray N. Rothbard criticising the United States Federal Reserve, fractional reserve banking, and central banks in general. It details a history of fractional reserve banking and the influence that ba ...
'' *
Causes of the Great Depression The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The sp ...
* Criticism of the United States government#Criticism of agencies * '' End the Fed'' *
Federal Reserve Police The U.S. Federal Reserve Police is the law enforcement unit of the Federal Reserve System, the central banking system of the United States. History Federal Reserve System Law Enforcement Officers derive their authority from Section 11(q) of ...
*
Fractional reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserv ...
* Free banking *
Gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from th ...
*
Great Contraction The Great Contraction is the recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book '' A Monetary Hist ...
*
Murray Rothbard Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian ...


References


External links


New monetary target, ''Financial Times''
(registration required)
''The Case Against the Fed''
PDF book by Murray Rothbard
''The Creature from Jekyll Island''
PDF book by G. Edward Griffin
''End the Fed''
PDF book by Ron Paul {{DEFAULTSORT:Criticism Of The Federal Reserve
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
Federal Reserve System Great Depression Monetary policy of the United States Monetary reform
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...