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History and purpose of the Federal Reserve System: Then and Today - Research Paper Example

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History and purpose of the Federal Reserve System: Then and Today History and those visionaries must always be regarded with gratitude because they were the ones who have laid the foundation through which America achieved its status today. For instance, there is the sophistication of the current American financial system that effectively provides the capacities and requirements of the contemporary corporate-industrial system…
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History and purpose of the Federal Reserve System: Then and Today

Download file to see previous pages... It is the central bank of the United States, a unique governmental entity mandated to safeguard the economy. This paper is an investigation of this agency – its story and its importance to America. History The aftermath of the Civil War, in addition to the instability and conflict happening elsewhere, specifically, in Europe, led to the critical environment that required the foundation of an agency such as the Federal Reserve System. The turmoil of the period created instability in the American domestic banking sector. A series of banking panics occurred in the years 1873, 1884, 1893 and 1907. The panic of 1907 is particularly regarded as the most severe, prompting bankers to clamor for a centralized banking. The crisis was serious because by that year, the number of banks operating in the US was nearly twenty five thousand and that approximately seven thousand were under national law (Preston, 204). The lack of centralization posed a crippling problem especially in area of regulation, control and unity necessary in taking effective actions. According to Rothbard (2008), “the bankers found that the helpful centralization of the national banking system was not sufficient,” and that a central bank was required to play the role of the lender of last resort – one who would always ready to bail out banks in trouble (230). The fundamental reasoning is that the lack of regulation and control in a sector characterized by rapidly expanding supply and flow of money is in always in danger of contracting and collapsing every time panics, crisis and depressions occur in the economy. The general consensus back then was to abandon the laissez faire attitude and adopt the progressive approach by establishing the central bank, which would have an absolute monopoly of note issue and reserve requirements in addition to ensuring a multilayered pyramiding on top of its notes and the responsibility of helping banks in distress and controlling currency movements (Rothbard 2008, 233). Through the efforts and recommendations of the National Monetary Commission, the Federal Reserve Act was enacted. The Act clearly stated that its primary aim is “to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision in the United States, and for other purposes” (Grey 2002, 10). Oppositions The passage of the Act, however, was met with resistance coming from several sectors. The most pervasive of these was the critics’ perception that centralized economic institutions were equated with the ‘money-power’ or the north-eastern financial establishment. They were opposed to the idea of a central bank, fearing that it would most certainly come under its influence. There was also the argument that a central bank would reduce the private bank’s influence. Opposition also was not confined to the banking sector alone. There are those who raise questions about the need for Congress to fund the central bank given the fact that banking is an entirely private enterprise. The reason for this is that other sectors raised the problem of trustworthiness of bankers and the banking industry with their values exclusively guided by profit and ...Download file to see next pagesRead More
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