Money and banking - Essay Example

Brief Outline of the Federal Reserve’s History A great deal of our economic history can be traced to the development of our central banks, which culminated in the creation of the Federal Reserve System in 1913. With the current financial crisis in full swing, a lot of people cannot help but blame the Fed’s policies. In order to appreciate the role of the Fed in our crisis, it is essential that we understand its history. The year 1791, which was just a short time after the US Constitution was ratified, marked America’s first attempt at having a central bank.

During this period, Treasury Secretary Alexander Hamilton and State Secretary Thomas Jefferson quarreled as to whether the Constitution mandates Congress to make a central bank. Jefferson argues that since no mention of any mandate was present, Congress had no such right. Hamilton dismissed Jefferson’s arguments by citing that Congress has “necessary and proper powers” to implement the nation’s fiscal and monetary policy. He added that a central bank fits perfectly into this scheme, by making it easier for Congress to do the job.

If there were one central bank coordinating all banks, Congress could easily hold one accountable. Eventually, Hamilton’s arguments won, and this would set the practice of establishing central banks for the years to come, beginning with the First Bank of the United States of America. (Johnson 7) This should be viewed actually as the triumph of the power of money over democracy. Money could be represented by paper marked by the government as legal tender. In itself, it is harmless to democracy.

But left to the hands of unscrupulous individuals and bankers, money can be used to damage democracy as can be seen in the succeeding events. During the term of James Madison, the bill seeking to renew the First Bank’s Charter was defeated by a narrow margin. Madison liked the outcome, but chaos ensued. The War of 1812 made the US Government to focus its effort in surviving against England. As a result, state-chartered banks began issuing different fiat currencies with little value. Proponents of central banking then blamed Madison for such troubles.

Near the end of his term, Madison was forced to sign the charter of the Second Bank of America, as this was the popular clamor of Representatives. (Johnson 9) Thus, although there were hopes that democracy will prevail over the system of credit, central banking won. This episode illustrates clearly the fact that because of money, efforts to implement what is good for the general public can be undermined. Fast forward to 1907, investors panicked. Investors feared that the economy will collapse.

There trigger the measures and debates that will pave the way for the rise of the Federal Reserve. The next year, Congress passed the Aldrich –Vreeland Act which allowed the money supply to be “more elastic during emergency times.” (Johnson 16-17) Just a year prior to the establishment of the Fed, Pres. Wilson (then Governor of New Jersey) stated that "The greatest monopoly in this country is the money monopoly.” [Emphasis in the original] However, Rep. Glass had managed to convince Pres.

Wilson to approve the Federal Reserve Bill. By 1913 up until present, the Federal Reserve has been the central bank of the United States of America. (Johnson 21-22)The main responsibility of the Federal Reserve is to implement policies that will regulate the money supply. To do this, it cuts or raises interest rates as the case may be. (Anonymous, n.d.) Several concerned individuals like Rep. Ron Paul have the criticized the Fed’s role in the business cycles of booms and bust which plague America.

By printing money beyond what the US economy could reasonably back, the Fed has enabled the United States to “live beyond its means.” With the credit system in place, the economy will eventually collapse, but the people have been oblivious of this fact, since to live with easy money is consistent with human nature. (Paul 2003)In conclusion, the Federal Reserve will still continue to exercise authority over the monetary policy. Often to the detriment of Americans, money has eroded the democratic institutions by forcing the government to follow policies that well-informed citizens and even most of the founding fathers would have not approved, and this includes the creation of the Federal Reserve System.

WORKS CITEDAnonymous. “History of the Federal Reserve.” 5 April 2009 < http://www.essortment.com/all/historyfederal_rlnh.htm>.Johnson, Roger T. Historical Beginnings…The Federal Reserve. Boston: Public and Community Affairs Department of the Federal Reserve Bank of Boston, 1999.Paul, Ron. “Fiat Paper Money.” 12 September 2003. 5 April 2009 < http://www.lewrockwell.com/paul/paul125.html>.