“Republican Presidential candidate, Congressman Ron Paul, got it right when he said, “There is no greater threat to the security and prosperity of the United States today than the out-of-control, secretive Federal Reserve.”

  • The Federal Reserve System (aka Federal Reserve and the Fed), America’s central banking system, was created December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics.
  • Its duties today include serving as the nation’s Central Bank; managing the nation’s money supply through ‘monetary policy’ to keep the economy growing, achieve maximum employment, stable prices, and moderate long-term interest rates; supervising and regulating banking institutions; maintaining the stability of the financial system; and providing financial services to depository institutions, the U.S. government and foreign official institutions.
  • ‘Monetary Policy’ refers to actions taken by the Fed to influence the availability and cost of money and credit to help promote national goals and a sound economy.
  • The Fed has the authority to use the following tools to accomplish its assigned tasks.
    • The power to issue money to purchase bonds, including US Treasury Bonds, in the open market.
    • The power to set interest rates for loans it makes to banks (with money that it issued).
    • And, the power to set reserve requirements for banks.
  • These tools manage the money supply in circulation in the economy. Too much money causes inflation and an unstable currency. Too little money causes deflation and an unstable currency.
  • Presently, the Fed is essentially printing money out of thin air, manipulating interest rates and interfering in the free market, all with very little oversight from Congress. As a result, there is great public distrust and lack of confidence in the Fed as it exists today.
  • This virtually unlimited power is part of the problem in Washington. There are no limits on the amount of money the Fed may issue. There are no limits, high or low, on the interest rates the Fed can charge (high interest rates reduce the money supply). There are no limits, high or low, on the reserve requirements for banks (when a bank’s reserve requirement is too low, the risk of failing is very high; when a bank’s reserve requirement is too high, it restricts the dollar amount of loans it can make and thus reduces the money supply).
  • Currently, Congress lacks, in large measure, the authority necessary to thoroughly audit the Fed. GAO audits are limited and do not cover most of the Fed’s monetary policy actions or decisions. Specifically, the GAO may not audit the Fed’s dealings with other governments and other central banks, along with other crucial actions.
  • At a minimum, Congress needs to pass the Federal Reserve Transparency Act, which would broaden the scope of the audits and bring more transparency to the actions of the Fed.
  • At a minimum, Congress needs to assume full statutory oversight responsibility of the Fed and its actions. This being said, however, I am reluctant to completely abandon the semi-autonomous nature of the Fed given my lack of confidence in Congress’ ability to effectively manage the U.S.’ financial system without falling prey to the political whims of the moment.
  • At a minimum, Congress needs to reassess the Fed’s current slate of responsibilities, particularly the added responsibility of keeping the economy growing, as this responsibility may be in conflict with other monetary policies. Instead, the Fed’s primary responsibility and focus should be on keeping America’s banking system sound with a low inflation rate.
  • At a minimum, Congress needs to consider curtailing some of the powers currently assigned to the Fed.
  • The bottom line: The U.S. money supply in circulation must be effectively managed. How this is best accomplished, in a transparent and reliable manner, remains the question. Some would propose totally and immediately dismantling the Fed as it stands today. Others would assign responsibility to the Congress. And, still others might advocate doing away with any sort of central bank altogether, and returning to the gold standard.
  • Clearly, something needs to be done to restore integrity and trust in the current Federal Reserve System. However, dismantling it or rushing to implement some untested solution may not necessarily be the answer. Even Congressman Ron Paul, author of “End the Fed”, acknowledged in a recent presidential debate he did not want to end the fed…at least for the moment.
  • Instead, Congress should take action to implement the above recommendations as quickly as possible. Any decisions impacting the future of the Fed must then be guided by the facts as they are revealed. Allowing popularist anti-Fed sentiment and the opinions of ‘armchair economists’ undue influence over this process might only lead to more devastating, unintended consequences for the U.S. financial system and our nation’s economic security.