It’s no secret that I’m not a big fan of the Federal Reserve. In fact, I said as much just a couple weeks ago in Nashville, Tennessee, at the Irrational Economics Summit.
Our central bank has been around our entire lives (well, unless you’re over 100 years old!), and many believe it’s a necessary evil, like paying taxes and tolerating our government.
Since its inception, Fed officials have led us to believe that its main functions are regulating banks, deciding on monetary policy to help guide the economy through booms and busts, and keeping the financial system chaos-free. Its purposes are, of course, in the public’s best interest.
Well, if you’re convinced that’s true, the Fed’s strategy worked.
The Fed isn’t a government agency, and it sure wasn’t created in your best interest.
Before the Federal Reserve System was created in 1913, there were three failed attempts to launch a central bank in the U.S.
They all failed because the money they created out of nothing was for the sole purpose of funding the government. This led to high inflation and resulted in a currency of dubious value. The public realized that notes issued by those central banks declined in value, and then sentiment for the central banks evaporated.
Thomas Jefferson, one of the Founding Fathers and the third President of the U.S., was a vocal critic of central banking. He argued that it was unconstitutional, and that even if it were, it would lead to the nation’s ruin.
Jefferson’s second term ended in 1809, and the end of the second attempt at a central bank followed two years later.
But it didn’t take long for Congress to intervene after the War of 1812 and start the Second Bank of the United States, the third try at a central bank on these shores. This time, Congress gave the bank the mandate to provide a stable currency, which ushered in monetary policy for the first time.
And, after creating high inflation in the first couple years by issuing notes to the U.S. government, the bank was forced to “put the brakes on inflation” by severely tightening lending requirements. That sent the economy into a major depression.
