INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM

This research considers the issue of the independence of the Federal Reserve System. The focus of this research is on the advantages and disadvantages of making the Chair of the Federal Reserve System a member of the presidential cabinet.

Before one may effectively address the question of the independence of the Federal Reserve Board, one must gain an understanding of why the Federal Reserve was created, what the agency is expected to do, and why the Federal Reserve was created as a quasiindependent agency within the American governmental structure. The creation of the Federal Reserve Systems dates to the early years of this century.

Why the Federal Reserve System Was Created, and What the Is Expected To Do

A severe financial crisis occurred in the United States in 1907. Unfortunately, the crisis was just the latest in a long line of such crises. The crisis of 1907, more than most, however, exposed severe weaknesses in the country's national banking system (Kidwell and Peterson, 1992, p. 124). The creation of the Federal Reserve System through the Federal Reserve Act of 1913 was intended to correct those deficiencies. The Act had four stated goals, as follows:

1. The Federal Reserve System was to act as the central monetary authority for the country. In this capacity, the agency was expected to expand and contract the country's money supply according to the needs of the economy. 2. The ag

. . .
sumes great importance. The President of the Federal Reserve Bank of Richmond in the mid1980s, Robert Black (1984, p. 5), stated that "an excessive preoccupation with current conditions can lead to policy actions that destabilize the economy rather than stabilize it." Black (1984, p. 5) was promoting a longrange policy objective approach for the system, as opposed to the shortrange perspective that had characterized the Board's policymaking activities in the early1980s. Black (1984, p. 7) also held that the mandate for the system is far too broad to serve "as a practical guide to monetary policy." Black (1984, p. 7) thought that the mandate should be narrowed significantly. Others observers have agreed that the mandate often seems to be selfdefeating. Marvin Goodfriend (1981, p. 17), also associated with the Federal Reserve Bank of Richmond, contended that attempts by the Federal Reserve to manage interest rates required the agency, in essence, to "give up control of money growth and inflation." In this context, Goodfriend (1981, pp. 1118) claimed that policy objectives based on one element of the Federal Reserve System's mandate would invariably conflict with those objectives based on another element of the mandate.
. . .

Some common words found in the essay are:
Reserve System, Federal Reserve, Board Governors, Robert Black, federal reserve, Reserve System's, federal reserve system, reserve system, Created Expected, Office President, President Board's, Reserve Act, Congress Congress, board governors, monetary policy, monetary authority, black 1984, policy mandate, independent monetary, independent monetary authority, board governors federal, agency expected, governors federal, governors federal reserve, independence federal reserve,
Approximate Word count = 1867
Approximate Pages = 7 (250 words per page)

More Essays on INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM