A Federal Concern

By Cat Boyle

There’s no doubt that Presidential hopeful Ron Paul is having an effect on the dynamics of the Republican Party. And although his fan base is relatively small, it is extremely devoted.  His economic policies on fiscal responsibility and deficit reduction have a front row seat on that side of the aisle.  But then he says, “The Federal Reserve System has got to go!”  Whoa… The usher quickly steps in and asks for his ticket to check his seat number.

The fact is that many Americans don’t even have a clear understanding of the Federal Reserve’s affect on the economy.  A 2001 Gallup poll of American investors revealed that nearly half of those who participated said that they are “unsure” or “don’t know” if they approve or disapprove of the Federal Reserve’s current interest rate policy.

The Fed, as it is commonly referred to, is the central banking system of the United States. It was created 99 years ago with the enactment of the Federal Reserve Act, largely in response to a series of financial panics during that era. Since then, the role of the Fed has expanded with evolving responsibilities.

In short, the Fed was established to control monetary policy with a mandate to keep prices stable and moderate long-term interest rates. Today it regulates banking institutions, maintains the stability of the financial system and provides financial services to depository institutions, the U.S. government, and foreign official institutions.

Other than Paul, Presidents Lincoln and Kennedy took steps to dismantle the Federal Reserve. Lincoln issued Greenbacks, which were taken out of circulation after his death. Kennedy issued an Executive Order returning the power to the Treasury to print money without having to go through the Federal Reserve. The Treasury issued US Notes, which were being printed when Kennedy was assassinated.

That assassination was followed by four decades of unprecedented economic growth. Nobody complained.

More recently, the US economy has floundered while the mortgage debacle as turned otherwise supportive patriots into suspicious citizens. Paul supporters especially have questioned the necessity of the Fed. Others, scattered on both sides of the aisle, have voiced concerns about the effectiveness or efficiency of the Fed.

Many in favor of the Federal Reserve ascribe to a Keynesian economic theory i.e., when government spending increases in an economy, earnings increase too. Those opposed point out that the U.S. economy was more stable and ran smoother in pre-Federal Reserve days.

Some believe that abolishing the Federal Reserve is merely a smoke screen deflecting attention away from issues like tax code reform.  They argue that if the wealthiest one percent paid their fair share of taxes, the government’s need to print money would diminish.

Many Paul supporters who followed from his earlier libertarian digs, are generally in favor of reducing the size, or abolishing some government departments altogether. Okay!  Sure, why not the Fed!

Of course the big question is, what would be the affect on the US and global economies if the Fed was in fact, dismantled?

Would our currency return to the gold standard and be limited by its gold equivalent? As the 1913 dollar was worth 40 cents in gold, what would a 2012 dollar be worth? Today, there is three times as much currency in circulation than there is gold in the Federal Reserve.

Economists have similar but varying takes on what would happen if the Fed was closed. But throughout the stacks of dissertations on the subject, the word “confidence” is used generously. All economists agree that consumer confidence is the framework of our economy, while the answer to the question of “lost confidence” is easy to answer with many historical references.

It happened during the Great Depression when countries around the world tried to convert their dollars into gold based on that standard, while the Fed quickly reacted by closing its gold exchange window. Later in 1971, as a result of too much money being printed, President Nixon removed the dollar from the gold standard, altogether!

Like all political topics, the Fed has it proponents and opponents, but unlike other topics such as healthcare, abortion and gun control, this support (or lack of), is not clearly divided by an aisle.

Much of Ron Paul’s appeal, especially with younger voters, is that he often voices strong opinion about semi-taboo subjects. His side of the aisle often cringes when Paul gets a hold of the microphone.

All voters today grew up with “The Fed”, even when we didn’t fully understand its purpose or impact.  Throwing stones at such institutions has become our only answer to what we don’t fully understand.

Check out our blog page for more information and editorial on the Fed and who they are…

Posted by at February 16, 2012
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