Is the Federal Reserve Necessary - Research Paper Example

One such mistake, in United States history, that seems to be repeating its self, is the Great Depression. The Great Depression was a twelve year span, lasting from 1929 to 1941, in which the U.S. market was down and unemployment was at an all time high. It is, by far, considered one of the lowest points in U.S. history, but what is really intriguing is it was preceded by the “roaring twenties” a time of great economic growth and wealth. Many are comparing this with the recent economic boom of the late nineties, early two thousands; followed by the “recession” the U.S. is currently in.

So the question arises, what led to these two periods of growth, followed by a severe recession? By taking a look at what, the value of a dollar is, what fractional reserve banking versus free banking are, and what caused the increase in moral hazard; and by looking at the arguments for and against each of these, we can identify the factors that led to this tragic example of history repeating itself. This first factor we are going to uncover is what determines the value of the U.S. dollar, how it has changed over the years, and we as a nation are now suffering from those changes.

The majority of governments use to base their circulation of paper money, or notes, on the amount of gold that backs up the notes; this is known as the gold standard. Toward the end of the great depression many individual still did not trust banks and so they were holding on to a large portion of gold. This led to a deficit of gold to support the dollar, so President Roosevelt ordered the gold confiscation of 1933 in which all individuals were required, with some exceptions, by law, to bring their gold to the U.S. treasury in exchange for a dollar equivalent.

Another by product of the great depression was the Bretton Woods System; this is a system that was agreed upon by most of the world’s powers in 1944 which hoped to govern the monetary regulations of the nations. As a result they established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. One of the major implications to the U.S., however, was the fact that they agreed maintain exchange rates by tying its currency to the U.S. dollar.

Then in 1981, under the presidency of Nixon, the U.S. terminated the convertibility of the dollar to gold. This meant that the dollar is now a fiat currency backed by nothing but the promise of the federal government; this, in essence, did away with the gold standard. Proponents of doing away with the gold standard based their logic on the fact that they assumed the U.S would remain the number one world power. Though this held true for the first fifteen plus years after the gold standard was removed, that reign soon ended.

Now with the U.S. owing over fourteen trillion dollars, and rising, to other nations, and our economy in a deep recession, many are left to wonder if allowing our currency to be backed by only our government’s worth was such a good idea. Other groups against this move away from the gold standard, also argue that these nations which the U.S. government now owes are growing weary of whether or not the will be repaid. This is leading them to do more trading and lending with the still gold based European market, pushing our country deeper into the recession.

This leads to where the dollar is distributed and stored by individual Americans and corporations, which is the U.S. banking system. There are two types of