Friday, October 14, 2011

How the Fed Came to Be (and Why it Must Remain Independent)

An interesting brief history of banking in the US, 1811-1913. More here.
Early efforts to reform the financial system were limited to the First and Second Banks of the United
States (1791-1811 and 1816-36, respectively). Both institutions were short-lived because of public misgivings
about concentrated economic power. A period of laissez-faire (or free-market) banking followed, rife with
flawed banking practices and instability. In 1863 and 1865, Congress enacted the National Banking Acts
to stabilize the financial system. Without a central bank, however, problems remained—financial crises and
banks failures continued to be frequent and severe. Two characteristics of the National Banking System (NBS),
created by the 1863 Act, exacerbated this volatility: (i) immobile bank reserves in a system lacking a lender
of last resort and (ii) an inflexible supply of currency. [Emphasis added.]
So, you might say, we should just put central banking under direct control of the government. How wonderful and democratic that would be! Do that, and I can almost guarantee higher rates of inflation as Congress has the incentive to use the money supply to "monetize" its deficits and debt.

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