A Brief Analysis of the History of the Federal Reserve System from 1967 to 1997

When the Federal Reserve Act was created just past the turn of the century, the intent was to grant the Fed only one basic tool of monetary policy, the control of discount loans to member banks (Mishkin 1997). These powers were broadened during the Great Depression when the Board of Governors was given the authority to control the Reserve Funds (Mishkin 1997). From 1960 on, the Federal Reserve has assumed even greater powers, and the accrual of these powers is attributed to the man who has directed it for almost 10 years, Allen Greenspan.

The Federal Reserve Bank is a strange governmental creature (Mishkin, 1997). It consists of 12 regional Federal Reserve banks, each with a president, board of directors, officers, and research staff, plus the Washington-based board of governors, with the largest group of research economists. A recent article in Fortune describes the Fed:

The Fed is secretive by nature, suspicious of outsiders, and possessed of an esprit de corps that borders on fanaticism. When Greenspan was appointed chairman in 1987 by Ronald Reagan, he was greeted with some suspicion (Norton, Davies, Urresta, Welsh, 1996, 39).

The reason for this attitude is likely because "the Federal Reserve has extraordinary independence for a government agency and is one of the most independent central banks in the world. Nevertheless, the Fed is not free from politica

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of them move in even stranger orbits (Norton, et. al. 1996, 41). Pressure to Maintain Independence As Mishkin (1997) explains, "the strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart an inflationary bias to monetary policy. In the view of many observers, politicians in a democratic society are shortsighted because they are driven by the need to win their next election." Granted, the Fed formulates and carries out its policy directives without democratic input, accountability, or redress. Not only has the Fed's monetary restraint at times deliberately pushed the economy into deep recession, with the attendant loss of millions of jobs, but its impact on the structure of interest rates and dollar exchange rates powerfully alters the U.S. distribution of national income and wealth (Norton et. al. 1996, 42). By keeping a close rein on the money supply and its attendant correlation of interest rates and inflation, the Federal Reserve's actions during the last several years have generated economic consequences that are typically considered by proponents of independence to be at least equal to the potential impact of major tax legislation tha

Category: Economics - A