Examination of the Federal Reserve: Inflation and United States Debt

            The Federal Reserve is the central banking system of the United States. It was created in December, 1913 during what is known as the progressive era. When created, Congress established three main objectives for its monetary policy—maximum employment, stable prices, and moderate long-term interest rates. However, the Federal Reserve’s duties and policies have expanded over the years, including conducting the nations monetary policy and regulating banking institutions. Despite the effort, many; such as Senator Ron Paul, believe that the Federal Reserve System should come to an end. The Federal Reserve System causes more harm to the nation as a whole than the help it gives, and thus should be heavily restructured or ended.

            After a series of financial crises such as the Great Depression, many people called out for a more powerful centralized bank, in order that private banks such as J.P. Morgan would not have to bail out the United States in times of crisis. What was created was a quasi-socialized organization that would regulate monetary policy for the entire nation. The hope was that with this centralized bank, it would be promise that banks would not fail like the way they used to before 1913. The question is whether this is a good thing in a capitalist economy? Ron Paul answers with an objection when he says,

If businesses are not allowed to fail, what guarantee is in place that will give them incentive to succeed with soundness and productivity to the common good? In a capitalist economy, the prospect of failure imposes discipline and consumer service. It is an essential aspect of the competitive marketplace, whereas a promise against failure only entrenches inefficiency and in-competency (End the Fed).

            While likely made with good intentions, it seems that the outcome of the creation of the Federal Reserve System is in actuality, worsening the economic status of the United States. The most common objection toward the Federal Reserve is that it is the primary cause of inflation in the United States. Since the United States is in a monumental amount of debt, the Federal Reserve indirectly pays for U.S. government bonds by printing more and more money. The Federal Reserve purchases these U.S. government bonds and sells them to other entities, making profit. The more the government spends the more interest the government also has to pay. In the fiscal year 2011, the U.S. government paid $454 billion dollars just in interest on this national debt.

            One may ask themselves why the average American citizen doesn’t know a thing about the Federal Reserve. This is primarily a mixture of the boring and complex nature of economic and monetary policy as well as the mass government bureaucracy. When the Freedom of Information Act was implemented and a Bloomberg request was issued for their information, they refused stating that they were, “not a government agency” and therefore not subject to the act. The people running the Federal Reserve are not elected in any way, but are rather appointed. Furthermore, the Federal Reserve has never gone through a true audit since it was created. A proposal to audit the Federal Reserve failed in the House of Representatives 229-198 in 2010.

            In conclusion, the Federal Reserve is detrimental to the economy of the United States because of its vast, unregulated control over nation interest-rates and inflation, as well as the Federal government’s dependence upon the Federal Reserve. If you think about it, the whole concept of the Federal Reserve is weird. Why should the US government have to have a semi-governmental organization buy U.S. government bonds in exchange for currency, which gets devalued in the process? If you look at a dollar bill, you will see at the top the words, “Federal Reserve Note”, it belongs to the Federal Reserve. While this is indeed a bad economic situation, it is not irreversible. The most important thing for the average citizen to do it becomes educated about what is happening. Once done, the more you tell people what is actually happening the more others will become educated and cry out to their representatives for change. 

Works Cited

Anderson, Clay J. "A Half Century of Federal Reserve Policymaking, 1914-1964." 1965: Xiii-198.

Federal Reserve Bank of Philadelphia, 27 Feb. 2002. Web. 01 Dec. 2012.

Paul, Ron. End the Fed. New York: Grand Central Pub., 2009. Print.

Romer, Christina D., and David H. Romer. "Federal Reserve Private Information and the Behavior of  
Interest Rates." The National Bureau of Economic Research. American Economic Review, July    cf    1996. Web. 01 Dec. 2012.