As interest rates rise, the news brings longstanding critiques from the “End the Fed movement” back into the mainstream. Before we dive into why there’s always a raucous crowd calling for the abolishment of the Fed, let’s review its general role and a bit of history of how it came to be.
Crash course in Fed history
The Federal Reserve operates as the Central Bank of the United States. Before it existed, every few years banking panics would ravage the American economy and shake confidence. Super tycoon J.P. Morgan forced the government’s hand into creating an entity to control the monetary supply and print money when needed.
Congress charged the Fed with “maximizing employment, stabilizing prices and moderating long-term interest rates” although its scope has expanded over the years.
The Fed was created “to serve the public interest,” but admittedly is somewhat private in its structure, something that remains a sticking point for many of its fiercest critics.
Depression not averted
The Fed did a piss-poor job averting the Great Depression by not lowering interest rates enough during hard times. Critics claim that much more could have been done to avoid so much human suffering during those years of economic calamity.
Ultimately, World War II spending, not Fed interference, would lift the country out of the economic morass that went on for far too long. Fortunately, many of the lessons learned from the Great Depression helped guide the Fed during the Great Recession. Many argue Chairman Ben Bernanke, a Depression-era expert, helped avert another Great Depression.
Of course the “End of the Fed crowd” doesn’t believe any of those arguments and is more apt to believe that the Fed caused the Great Recession, and didn’t do much to help in its aftermath.
So long Gold Standard!
During the Nixon Administration, what remained of the Gold Standard was abolished, meaning that currency was no longer based on the value of Gold. Instead, currencies around the world are fiat money, and are understood to have value because governments mandate payment in those currencies.
Many in the End of Fed crowd see the ending of the Gold Standard and the ability of the Fed to print as much money as they want as one of the reasons we’ve seen so much inflation, or the steady increase in prices. Inflation is a hidden tax on consumers, as their purchasing power is eroded over time.
If there’s one figure in the Fed’s history that laid the foundation for an anti-Fed movement, it’s Alan Greenspan, who was Fed Chairman for almost 20 years. Many argue he lowered interest rates too aggressively, causing a massive real estate bubble that led to the Great Recession.
In all fairness, Greenspan presided over one of the most spectacular periods of economic growth in American history, but that’s not the narrative that the anti-Fed folks like to emphasize.
Ron Paul sets the stage
After the economy tanked in 2008, former Congressman Ron Paul wrote a book called End the Fed that made the case for a freer economy without Fed intervention. He warned that lowering interest rates to near-zero, which the Fed did for a whopping seven years, would cause massive inflation.
Inflation never happened
While those inflation predictions never came to pass, and the economy eventually recovered, End the Fed continues to give fodder to the Fed haters. In fact, the audit the Fed movement gained steam during the height of the Great Recession and enjoyed support from fans on the both sides of the aisle.
Now, the economy is humming along, and there’s little doubt that Fed interference had something to do with the economy’s slow and steady recovery.
The movement lives on
There’s still a great deal of skepticism about the Fed across many demographics in America. The hardline calls to outright abolish it have grown quiet as it becomes more and more apparent that the Fed handled the aftermath of the Great Recession quite adeptly.
Nevertheless, there is a large crowd of skeptics, and they will not go away quietly. They believe that the Fed needs to be reformed to better serve regular American people’s interests.
Time will tell whether these calls to reform the Fed will continue, but as history shows us, people tend to make the most noise during bad economic times.
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