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The Federal Reserve Act

To understand the benefit that the Federal Reserve provides for our economy, you
first need to look at the economic history of the United States. There is a lot more to the
economic happenings of our nation than is commonly known. Often, people look at the
Great Depression and the fact that the Federal Reserve was created in 1913; without
bringing into examination the great economic turmoil that occurred in the U.S. between
the 1850s and 1910. It would take a textbook to explain the detailed happenings of that
timeframe, however by looking at a few key elements, we can understand the outcome.
Although some will argue that the Fed is detrimental, perhaps even unconstitutional, I
feel that has been hugely successful and a is necessary part of a thriving modern
economy.
The Federal Reserve Act is an act of congress that created and set up the Federal
Reserve System, the central banking system of the United States of America, and granted
it the legal authority to issue Federal Reserve Notes (now commonly known as the U.S.
Dollar) and Federal Reserve Bank Notes as legal tender. President Woodrow Wilson
signed the act into law the Fed, as it is commonly known, is truly what holds up the
economy. The Fed buys US Debt to lower interest rates and stimulate the economy; in
many ways, the Fed is more impactful to the economy than the President.
The Federal Reserve Act was never pushed quickly through Congress. The
document took careful consideration and criticism before it was put into place. People
started to realize that our economy needed a central bank after the Panic of 1907. To
study other economies and what could be done to help lessen the affect of banking

panics, Congress established the National Monetary Commission. Senator Aldrich and
the Commission were surprised after studying the economies of Europe. They had found
that Great Britain and Germany recovered quicker from their recessions and depressions
than the U.S. had, and it was all due to their central banks. They also came to find that the
German Mark and the British Pound were more widely used in the buying and selling of
goods between sovereign nations than the dollar was. Several different plans were
developed because of these findings. Once the Glass-Owen bill (the Federal Reserve Act)
was presented, the debate stopped. On December 23, 1913 the Federal Reserve Act was
successfully passed by congress. In opposition to conspiracy theories, congress was not
on break yet. In order for important legislation to pass, there was need for them to stay
late into the year. Perfection takes time and that was not the only year Congress had to
stay through the December break.
The Federal Reserve is privately operated, which makes its success almost
completely dependent on the state of the nations wellbeing. In the modern world, Private
ownership creates accountability, which breeds growth and success - Making money
makes money for them. This incentivizes leaders of this enterprise to maximize efficiency
and stimulate economic growth; win-win situation. It doesnt belong directly to any of the
three branches of government the leaders are appointed instead of elected. This is what
defines privacy.
The Federal Reserve has been extremely beneficial over the past 70 years. The
U.S. economy now is infinitely more complicated than it was in the 19th century.
However, even though it is more complicated, the length and intensity of depressions and
recessions is less with the exception of the Great Depression. The Long Depression is a

great example of a 19th century depression. Before the Federal Reserve, it was left up to
the largest private banks and their owners to ensure that the banking system survived
panics. J.P. Morgan actually had to help bail out the U.S. Treasury.
In the earliest years of the Federal Reserve, it maintained a kind of hands-off
approach to economic manipulations. This is partly to blame for the Great Depression.
However, it is the governments insistence on maintaining a gold standard that caused the
Great Depression to last longer than it should have. It is a documented fact that countries
that abandoned the gold standard recovered from the Great Depression earlier than
countries that maintained a gold standard.
The U.S. Government doesnt pay all the interest on the debt to the Federal
Reserve; The Government borrows money by issuing US Treasury securities. These are
known as T-Bills, T-Notes, and T-Bonds. The treasury sells these at auction where anyone
may buy these securities, even you. Interest on the debt is paid to the holders of the
securities. Only the banks hold a fraction of the debt. In Fact, the largest holder of U.S.
Government debt is the U.S. Government. The Federal Reserve does not purchase the
securities that it holds at auction.
The Federal Reserve currently holds good standing with the U.S. treasury,
meaning $800 billion. However, it is required by law, that all of the Federal Reserves net
earnings be paid to the U.S. Treasury. The U.S. had approximately $22.9 billion in debt,
which the Federal Reserve collected in 2009. The Federal Reserve then paid
approximately $47.4 billion to the U.S. Treasury. Therefore leaving the U.S. Government
gaining money from the Federal Reserve. This can be seen on the independently audited
financial statements of the Federal Reserve.

Anti-Fed conspiracy nuts throw around the 95% devaluation of the dollar like it
actually means something. There is always some amount of inflation or deflation in ANY
economy. Other than the 1970s, the inflation since the 1950s has been rather tame. In
fact, since 1913, the worst year for inflation was actually 1920. A 95% devaluation over a
period of 97 years would take an average annual inflation rate of 3.2%, which is small
compared to many industrialized economies.
In essence the Fed actually does control economic growth through money supply.
Think about it, for every product and service provided by someone, the money used for
the transaction came from the Fed. Economic growth is largely affected by supply and
demand Of course businesses/ people/ government or whatever entity has to provide
products and services that are demanded and money is needed to produce and purchase
these products and services, however, in the end the money essentially came from the
Central Bank (the Federal Reserve in our case). In our society, no business can function
without money and in most cases, they borrow that money from the bank, who may have
borrowed that money from a bank and so on and so on to the point the money came from
the Federal Reserve.
The Federal Reserve controls the economy through the money supply making it
so that we can only do with the money that is in circulation, otherwise we have to have
money loaned or given credit, and this money loaned out is based off of future money
to be put in place by the Fed. We dont know just how much power we give the Fed.
Obviously if the Fed puts a lot of money in circulation, and demand for consumer goods
and services isnt high enough, there would be an excess of currency thus devaluation or
inflation of currency.

The world was a very different place prior to 1913, and is once again a different
place now. The United States runs a huge trade deficit. There is something called the
Current Account and it must balance. (The Fed is, in fact, responsible for making certain
that it does.) If the United States runs a trade deficit, it must have an approximately equal
outflow in the Capital Account to offset this.
Backing the currency with a precious metal or using some form of fixed exchange
rate is an entirely untenable plan for the United States, unless it manages to balance its
trade deficit or run an actual surplus. (There is a reason; after all, that Mercantilism was
so popular for centuries.) Without doing so, we would quickly run out of International
Reserves and be forced to devaluate our currency in order to print more money to settle
the current account. This would have all kinds of nasty repercussions on the U.S.
economy, not least of which is that inflation would spiral entirely out of control.
In conclusion, we should not go back to the gold standard. There were just as
many, if not more, booms and busts in the 19th and early 20th centuries. And people were
poorer in general. Gold and silver values are, in any case, not stable, as sometimes we
find more or less, or we have more or less uses for them (think of Spain in the 16th
century with massive devaluation of gold after the American conquests).

BIBLIOGRAPHY
Primary Sources
The Federal Reserve Banks, Combined financial Statements as of and for the years
Ended December 31, 2009 and 2008 and Independent Auditors Report
http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt200
9.pdf
Friedman Milton and Schwartz Anna J. A Monetary History of the United States,
1867- 1960. Princeton University Press, 1963.
http://books.google.com/books?
id=Q7J_EUM3RfoC&pg=PA244#v=onepage&q&f=false
Lawrence Broz J. Origins of the Federal Reserve System: International Incentives
and the Domestic Free-rider Problem. International Organization, 53, pp 3970
http://journals.cambridge.org/action/displayAbstract?
fromPage=online&aid=172925&fileId=S0020818399440627
Parthemos James. The Federal Reserve Act of 1913 in the stream of
U.S. Monetary History. Federal Reserve Bank of Richmond
http://www.richmondfed.org/publications/research/economic_r
eview/1988/pdf/er740403.pdf
Pujo Paulin A. Money Trust Investigation, 1912-1913
https://fraser.stlouisfed.org/title/?id=80#!23658
Warburg Paul. Crusade to Establish a Central Bank in the United
States. Federal Reserve bank of Minneapolis
https://www.minneapolisfed.org/publications/the-region/paulwarburgs-crusade-to-establish-a-central-bank-in-the-unitedstates
Wheelock David C. Monetary Policy in the Great Depression: What
the Fed did, and why? Federal Reserve Bank of St. Louis
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr
1992.pdf
Secondary Sources
Axilrod Stephen H. et al., Is the Federal Reserves Monetary Control
Policy
Misdirected? Ohio State University Press, February
1982