The Federal Reserve System
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The Federal Reserve System is one of the most powerful institutions of the United States government, and one of the least "democratic." It is also one of the least understood (Greider, 1987: 11-12). The Federal Reserve -- often called simply the "Fed" -- is charged with the responsibility for managing the American money supply, ensuring that sufficient money is available to lubricate the wheels of the economy, while not flooding the economy with so much cash that inflation runs wild, perhaps ultimately reducing the currency to worthless paper. Because of its role, the Federal Reserve has a great influence -- but not, as recent events have shown, an unlimited influence -- on the direction of the U.S. economy. By promoting "easy money," or the growth of the money supply and of credit, the Fed can drive down interest rates, and (under most conditions) promote more rapid economic growth ... at the risk of future inflation. Or, contrarily, it can squelch inflationary pressures ... at the risk of triggering an economic downturn. Apart from the economic state's obvious influence on ordinary Americans, it can have an immediate impact on politics, especially in an election year. As this is written, in late July 1992, some polls show Democratic presidential challenger Bill Clinton with up to a two-to-one lead over incumbent President George Bush. This was not a state of affairs that would have been imagined little more than a year ago, when Bush was basking in the Persian Gulf
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by either Fed decisions or other changes in the immediate state of the economy. Nevertheless, changes in the short-term rate usually appear, after a while, in long-term rates as well. But in 1992, long-term rates have remained stubbornly high, even as short-term rates approached levels not seen in a generation.
A further Fed tool, control of the money supply through "open market operations," has been complicated by the development of new financial instruments. "Ml," the basic money supply, used to be defined as cash plus checking deposits (Greider, 1987: 57-59). But now even stock-market mutual funds offer check-writing features. This complicates the very definition of "money" for Fed managers.
The current economic troubles began, in an immediate sense, in the late summer of 1990, shortly after the Iraqi invasion of Kuwait. The economy stalled and went into a dip, widely attributed at the time to anxiety about the prospects of war in the Gulf. After the military success in the Gulf in the early spring of 1991, the economy began to recover. This recovery was sluggish, and it quickly stalled in turn. The economy went into a "double dip" recession. In the spring of 1992, another recovery began, again sluggish. Even thi
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Approximate Word count = 3208
Approximate Pages = 13 (250 words per page)
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