The Federal Reserve System

Presidents and their economic advisors routinely find themselves by actions or statements of the Federal Reserve that go contrary to their expectations or desires. The Federal Reserve is nowhere mentioned or even implied in the Constitution, and has no legal status save that of an Act of Congress. Another Act of Congress could, in principle, radically restructure or even abolish it. Yet no President or senior member of Congress dares even suggest any substantial threat to the independence of the Federal Reserve; simply to do so would be to risk triggering a major financial panic and therefore a national political crisis.

With respect to economic policy the Federal Reserve has taken on some of the qualities of an unelected fourth branch of government, an economic Supreme Court. (Even when it was first established, and long before its full influence was understood, President Woodrow Wilson referred to the Federal Reserve Board as the "Supreme Court of Finance."). Yet the United States existed for nearly 140 years w

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backed entirely by specie; only that some reserve ratio of currency be so held. The need for the money supply to respond in some way to actual economic activity was understood. The question was how this should be achieved. Much of the monetary debate of the period centered upon the "real bill" doctrine, which held that bank credit should be based upon production, signified in the form of short-term commercial bills. In the wake of the 1907 panic, stabilization of the banking system at last became a matter of national concern. The first leading figure in the move to establish a modified form of central banking was Paul M. Warburg, who had emigrated to the United States in 1902, and by 1907 was a prominent financial figure. Another leading figure was New York Senator Nelson Aldrich, who had close ties to financial circles. In 1908, he proposed establishment of a bond-based currency, backed by federal bonds and by those of major industrial firms such as the railroads. This proposal, however, met with harsh opposition, particularly in the West, where few banks held their reserves in the form of such securities. In the West, the preference was for asset-backed currency, a basis that would allow the West to compete economical
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Approximate Word count = 7012
Approximate Pages = 28 (250 words per page)

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