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More Powerful Than The Government? A Review Of The Federal Reserve

2310 words - 9 pages

When most people think of the Federal Reserve, they think of the national debt, inflation and bailouts. The Federal Reserve is charged with monetary policy as well as regulation. Starting with the Great Inflation, the Fed has played an increasing role in the economy. In response to the Great Recession in 2008, an independent Federal Reserve played its largest role yet in a financial crisis. Many have criticized the Fed's response and questioned their influence. Since its inception in 1913, the Federal Reserve has had a major increase in its power and role in monetary policy, is this power to great in one single entity or is there enough oversight in what it does?
The Federal Reserve came from humble beginnings. In the 1800's "bank runs" were normal. In times of financial panic, concerned consumers would withdraw all of their money. These mass runs would cause a shortage in currency. As a result many banks went under when they ran out of money and where unable to honor deposits. Following years of economic instability the Federal Reserve Act of 1913 was passed by Congress. The Federal Reserve was charged with control and regulation of the financial industry and monetary policy. The Fed would loan money to member or charter banks to make sure there was enough money available in the economy. Each member bank was also regulated by the Fed and required to hold a deposit with one of 12 Federal Reserve Banks. (Timberlake). The Federal Reserve was a lender of last resort for member banks and the Federal government. The intention was to alleviate fears and to stabilize the economy. The Federal Reserve also monitored the transition from the gold standard to a paper currency. It was necessary for the transition to be regulated since gold sets its own value and currency while paper currency needs it's value to be set. The Federal Reserve was created in order to maintain short term financial stability and to achieve, through policy, long term monetary goals.
Since 1913 the Fed has seen many extensions and revisions to their power and responsibility. The first came with the passing of the Charter Extension of 1927 by Congress. This extended the charter of the Fed as the national bank from 20 years to indefinitely. The Fed can only be dismantled by a vote of Congress. The Fed saw the biggest change come with the Federal Reserve Accords of 1951. Prior to 1951, one role of the Fed was to guarantee government bonds. In order to guarantee or protect bonds, the Fed would hold interest rates until the end of the sale. During the Korean War the Fed was asked not only to guarantee government war bonds but to also finance the Federal debt. The chairman believed this would cause to great of a strain on the economy and demanded more independence. The accords agreement allowed Fed independence from having to protect government bonds and complete control of monetary policy. The accords also laid out three responsibilities for the Fed, maximum employment, price stability...

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