CAN AND SHOULD THE FEDERAL RESERVE CONTROLTHE SUPPLY OF MONEY?
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, 1990). 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 System was to act as the central monetary authority for the country. In this capacity, the System was expected to expand and contract the country's money supply according to the needs of the economy.
2. The System was to act as a lender of last resort. In this role, it was expected to furnish additional funds to member banks during periods of financial crisis.
3. The System was to establish and operate an efficient system for the clearing and collecting of checks. This payment system was to be operational nationwide.
4. The System was expected to add vigor to bank supervision in the country. Although the System was charged with specific responsibilities with respect to bank supervision, its responsibilities were limited, and the System was not the exclusive federal bank supervision agency.
From the beginning, it was officially recognized that the purposes for which the System was formed were, in fact, elements of broader economic and financial objectives of the country (Wallich and Brady, 1988). Thus, over the years, the System has been increasingly charged with (1) the maintenance of economic stability in the country, (2) the maintenance of high levels of employment, (3) the maintenance of stability in the purchasing power of the dollar, and (4) the maintenance of a reasonable balance of payments with respect to international tra...