Monetary Policy and the Federal Reserve System
President Woodrow Wilson signed the Act establishing the Federal Reserve System on December 23, 1913, thus creating a permanent organization performing central bank functions (Dykes, 1989). The Federal Reserve System (commonly referred to as the "Fed"), which consists of a Board of Governors and 12 regional Federal Reserve Banks, serves any number of economic functions. It includes chartered banks in its membership and regulates the daily activities of these banks; it implements and, some would suggest, shapes monetary policy, impacting at both the macroeconomic and microeconomic levels of the market (Solomon, 1990). Managing the money supply in such a way as to stave off economic crises such as a repression or a depression, excessive inflation or stagnation, or currency value fluctuations, are among the chief tasks of the Fed (Solomon, 1990). Given this general background, this report will consider current actions of the Fed as those actions impact on monetary policy, analyzing comments on this issue offered by economist John Kenneth Galbraith in a recent editorial in The New York Times.
In March 2001, John Kenneth Galbraith (2001, p. A15) stated that "the reliance on the Federal Reserve and its cuts in the discount rate proceeds from the wonderful convenience of having an action available that is above politics and much more mentally agreeable than anything of substantive value." It is Galbraith's opinion (2001) that the Bush administration is making or poised on the brink of making a series of major mistakes with respect to both monetary and fiscal policy. While Galbraith (2001) points out at the beginning and the conclusion of his relatively brief article that neither he nor others view him as a plausible political adviser to the Bush or any other Republican administration, he felt strongly that it was time for him to speak out on monetary and fiscal policy.
Galbraith...