The Federal Reserve Bank And The Decline Of The U.S. Economy

3539 words - 14 pages

There is perhaps no other political issue in our contemporary society that is more pertinent, pervasive, and encompassing than a nation’s economy. From the first coins used in Greece and the Asia Minor in the 7th century BCE, to the earliest uses of paper money, history has proven time and time again that the control of a region’s economy is absolutely crucial to maintaining social stability and prosperity. Yet, for over a century scholars have continued to speculate why the United States, one of the world’s strongest and most influential countries, has one of the most unstable economies. Although the causes of this economic instability can be attributed to multiple factors, nearly all economists agree that they have a common ancestor: the Federal Reserve Bank – the official central bank of the United States. Throughout the course of this paper, I will attempt to determine whether or not there is a causal relationship between the Federal Reserve Bank’s monetary policies and the decline of the U.S. economy. I will do this through a brief analysis of the history and role of this institution, in addition to the central banking system in general. In turn, I will argue that the reckless and intentional manipulation of the economy by the Federal Reserve Bank, through inflation and the abolishment of the gold standard, has led to the current economic crisis in the United States.

Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies: the fractional reserve banking system.
The fractional reserve system can be traced all the way back to the goldsmiths of Europe during the 16th century. It was one of the earliest monetary policies to institute the circulation of paper money on a national level. Customers would deposit their gold coins for storage into a bank for a small fee. In return, they received bank receipts, which were then used as paper money in place of valuable elements like gold. The idea of using bank notes as paper money quickly gained popularity because they were, of course, much easier and more convenient to transport and exchange than heavy gold coins.

Initially, bank receipts merely served as a substitution for gold. For example, 100 bank receipts could be given in exchange for 100 pieces of gold, which meant that a customer could redeem their gold at any time. However, the early goldsmiths soon recognized an enormous potential for increasing their profits: more bank receipts could be printed and lent out at interest. Consequently, 5 or 10 bank receipts could be lent out for every piece of gold, which meant that these bank receipts would be worth only a fraction of that gold. In other words, only a fraction of the receipts were...

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