100 Years Later, Federal Reserve Still Hasn't Proven Its Worth

December 17, 2013

After 100 years of the U.S. central bank, does it deserve another try?


[This article first appeared on BullionVault.com and is republished here with permission.]


On December 23, it will be 100 years since the Federal Reserve was born.

The purpose in 1913 was to form a regulatory body to help stem the tide of bank failures in the United States. The Fed's proponents—Senator Nelson Aldrich, Senator Owens, Congressman Glass and others—believed that if an agency controlled the flow of money and the banking institutions, it could prevent many of the economic collapses that plagued the early years of the U.S.

Whatever its faults 100 years on, has the Fed at least performed its charter well in actuality?

The establishment of such a power was in no way a unanimous decision. There were many in the government who opposed it, as G. Edward Griffin details in his history of the Fed, The Creature from Jekyll Island. The name itself, the Federal Reserve, was in part intended to address their concerns.

Washington avoided calling it a "central bank," because many of the congress were also opposed to the centralization of power, especially monetary control to one agency in the government. So those supporting the central bank concept had to devise a similar method of control, but avoiding the appearance of direct control. That idea gave birth to the Federal Reserve.

The institution created to obfuscate the appearance of a central bank has 12 Reserve Banks across the country, which report up to the higher authorities within the system. This higher authority is the nine-member board of directors, of which six are appointed by the 12 district banks themselves, and the remaining three are appointed by the Board of Governors.

This of course is a centralization of power. It is apparent that the Board of Governors is the controlling arm of the Federal Reserve. Where do they come from? The board consists of seven members, appointed by the president of the United States and confirmed by the senate.

Each member may hold this position for 14 years (though the renewable terms are every two years). From among this board, the president also chooses the chairman and vice chairman, which are ultimately the final decision-makers.

Voila! We do have a central bank, yet it has only been recently that our government has openly admitted that the Federal Reserve is the "central bank" of the United States. This agency literally controls the entire banking system. It has the ability to turn on and off the spigot of cash that flows through the banking network.

Is that control a good or bad thing? Any benefits of the Federal Reserve System have as yet not been proven. Because if we take a look at the economic history of the United States over the last 100 years, the picture "ain't pretty," as Tony Soprano would say.

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