The Central Bank of the United States

Back in the old days (starting around 1900 and continuing to 1971) the Federal government tried to stabilize the value of the dollar by backing it with gold. During WWI our government temporarily suspended the gold standard and even created a new currency for a period of time - this in response to US corporations’ debts payable to other countries leading to huge outflows of US gold reserves.  In 1913, it created a central bank, the Federal Reserve System (the FED), to better manage similar situations in the future.

Congress wanted, as much as possible, to keep monetary policy out of the political arena. So the FED was structured with an appointee system similar to the Supreme Court's. The Fed is run by 7 governors who are appointed by the President and who each serve a 14 year term.  A new Governor is appointed every 2 years - this spreads the governors across different Presidents. Congress supplies no funds to the FED – The FED is financially independent and pays its employees from its own earnings. 95% of the FED’s earnings after the FED’s operating costs are passed over  to Congress yearly. The chairman of the Governors (Bernanke today) is appointed by the President. The President can terminate a governor with “cause”. From Wikipedia: The Federal Reserve is independent within government in that "its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government." Its authority is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight.

Over the period from 1915 to 1971, and notably in the Great depression when all major currencies temporarily went off of the gold standard, several more financial emergencies occurred which led our federal government to temporarily take the dollar off of the gold standard. Attempts to maintain gold backing of the dollar in the end proved futile - the gold standard was simply not sufficiently flexible for our economy.  Eventually in 1971 Nixon took the dollar off of the gold standard permanently.

Over this same time period Congress had many times issued new legislation to modify the roles and responsibilities of the FED. The FED’s objectives were morphed beyond the original ones of attaining maximum employment, stable prices, and moderate long-term interest rates, to further include: conducting the nation's  monetary policy, 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. [12]

In summary, the gold standard was tried for many years and it failed time and time again. Our elected leaders further realized there was too much power in the currency that serves as the working fluid of our economy to let that currency drift in the wind. There was no organization or branch of our government that could be entrusted to control our money supply and the value of the dollar.  So our government created and tailor made the FED to do this job.

-------

Personally I believe one of the most important roles of the FED is to maintain a moderate level of inflation (between 2 and 5% in normal times).  There are three very good reasons for having moderate inflation: 

1. to have a stable currency (in order to facilitate trade and to advantage our currency over others);
2. to effect healthy turn-over of wealth (Having the wealthy pass on their wealth to their heirs through generation after generation goes counter to the American ideal of individuals thriving and succeeding on their own merits.  The same holds for big business.); 
3. to diminish debt (federal, state, local and individual). In that it diminishes debts, inflation is forgiveness in the financial world. And, very much like conventional forgiveness, the forgiveness that comes from inflation is difficult to rationalize, but the world is a better place for having it.

-------

It is undeniable that the powers wielded by the FED are huge. The US Treasury prints dollars, but the FED's power goes way beyond that – it sets the bank holding rates that determine the multiplication factor of the printed dollars and this sets the actual money supply and, as a result, the value of the dollar.   

Some individuals (and institutions – such as our political parties from time to time) are very dismayed regarding the amount of power wielded by FED, and regarding the FED’s separation from politics (I very much believe this is a good thing!). Just because the FED wields tremendous power does not automatically mean it is evil.  

“Power corrupts and absolute power corrupts absolutely” goes the old, and very true, adage. This adage says do not give the FED absolute power (which we do not).  And it warns us to always keep an eye open for corruption (which we do). 

If we believe that: 1) the Congressional oversight of the FED’s actions; 2) the Presidential authority to oust any of the FED governors; plus 3) the preventive checks and balances built into the FED’s systems and power structure are together insufficient - then let’s have Congress legislate better controls! Congress has many times in the past changed the constitution of the FED, and there is nothing to stop it from doing this again.

Here are some of the many bits of mis-information and unfounded claims concerning the FED (these are from Griffin’s book The Creature from Jekyll Island – A Second Look at the Federal Reserve - 1998 Edition,  discussion on this book from Wikipedia):

• The FED originated out of a secret meeting of 7 bankers and politicians on Jekyll Island in 1910 
• The FED is nothing but a legalized cartel – a group of what should be independent businesses, joined together to collude in reducing competition and increase the profitability of banks
• The FED manipulates Congress to bail out failing businesses so that the banks do not lose profits due to the debts owed to the banks by these businesses
• The FED colludes with our legislative and executive branches of government by bailing them out from their failed "socialist projects" (such as the S&L crisis in the late 1980’s)
• The FED is the protégé of the IMF/World Bank and is an accomplice in their totalitarian, socialist and communist desires
• The FED is further in collusion with the IMF/World Bank and has plans to build the “New World Order” in which the IMF will be the overlord.

Conspiracy theories of evil doings by and within the FED are fine entertainment – but let’s not use these unfounded notions to try destroy the institution that has been a cornerstone in making the American financial system the envy of the rest of the world.