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 War's military success. It was scarcely imaginable a few months ago, when Clinton failed to win the first Democratic primary in New Hampshire. It is a state of affairs, due, largely, to the sluggish state of the economy ... and because of it, the Bush Administration has been "yelling at the Federal Reserve to cut interest rates" in order to get more rapid economic growth ("Business Outlook: Why the Rebound Has So Little Oomph," 1992: 23).
In an ideal world...