The Federal Reserve has not been all praise – it has taken a lot of criticism, especially lately. Some Americans would even prefer to abolish it.
Washington – For 100 years, the Federal Reserve in Washington has watched over the well-being of the American economy. Its decisions can boost or shake the global economy. But some Americans would like to abolish the central bank.
When U.S. President Woodrow Wilson on 23. December 1913, U.S. President Woodrow Wilson created the Federal Reserve (Fed) system, two similar attempts had already failed. In 1791, Congress established the First Bank of the United States. But the establishment of a central bank was so controversial that political fronts formed in the cabinet of the first president, George Washington, over it. So suddenly Americans had not only a central bank, but also the two-party system.
Three trials
The controversial experiment ended after only 20 years, but was repeated again in 1816 to curb unsustainable inflation. But the "Second Bank" did not even make it two decades. President Andrew Jackson no longer wanted it, considering it elitist: "If laws succeed in making the rich richer and the powerful more powerful, then the humble members of society – the farmers, mechanics and workers – have a right to complain about the injustice of their state," he said.
Attempt no. 3, the Fed of today, probably no longer needs to fear for its existence. It is considered the most powerful central bank on the globe, is indispensable to the world's largest economy and can look back on several successes in its hundred years of existence. It has had to steer the nation's economy through the Great Depression, through wars and about a dozen recessions. Largely independent of politics, it controls and regulates banks and influences lending conditions. Their main goals: The highest possible employment and stable prices.
Seven members of the Board of Governors, appointed by the U.S. president for 14-year terms, and the heads of 12 local central banks have had their hands in the weal and woe of the U.S. economy through their monetary policies. But the face of the Fed is its chairman. Names like Paul Volcker (1979 – 1987), Alan Greenspan (1987 – 2006) and Ben Bernanke (since 2006) are not only familiar to economists. They all had their own crises to contend with, and scholars and historians argue passionately about their achievements. Janet Yellen is to take over the post for the first time in early 2014.
Much criticism of the Federal Reserve
But the Fed is anything but safe from criticism. Its help to the economy after Wall Street's Black Tuesday of 1929 was considered by many to be too weak. Volcker's massive rate hikes to fight inflation dragged the country into recession in 1980. Greenspan is accused of not only overlooking but also encouraging the housing bubble that led to the worst financial crisis since World War II in 2007. And Bernanke faces charges of overreacting with his ultra-cheap money policy in response.
In any case, as with the "First Bank" and the "Second Bank," there are enough Americans who would rather abolish the Federal Reserve today than tomorrow. Next year, according to the will of some Republicans in the U.S. Congress, it will come under extensive scrutiny. It acts "without rules, without any responsibility," complains outspoken Fed opponent Rand Paul, for example. "The American people have a right to know what the institution is doing with this nation's money supply," the senator wrote in a newspaper commentary. "The Federal Reserve needs to be reviewed."
The Fed now views such attacks with equanimity. "We're certainly happy to work with Congress if there's anything they think could be done better or more effectively," Bernanke says. But he still can't resist a side blow to the opponents. Policymakers need to understand that it is a very old profession, that every major country has a central bank, and that there are many experts. He hopes Congress will send someone for the audit who knows how to do it. (APA/dpa)
The Federal Reserve System turns one hundred. A look at the history of the Federal Reserve and its predecessors:
1791-1811: The U.S. Congress establishes a central bank, the First Bank of the United States. Its headquarters is Philadelphia. Your 20-year concession contract expires without being extended.
1816-1836: The Second Bank of the United States is founded as another attempt at a central bank. Their charter is also expiring after 20 years, and the bank is slowly dissolving amid political controversy.
1836-1863: Era of "free banking": banks exist only at the state level. They exchange money for hard currency such as gold or silver.
1863-1913: The National Banking Act enables the creation of thousands of nationwide banks that issue currency printed by the U.S. government.
1907: Stock market speculation in New York unleashes a nationwide run on banks. In view of the financial panic, it proves to be a problem that the USA is the only major state without a central bank.
1912: National Monetary Commission recommends reforms to banking and monetary system.
23. December 1913: U.S. President Woodrow Wilson signs the Federal Reserve Act. This establishes a central banking system that includes 12 regional banks. Among other things, you should mitigate the impact of Wall Street on your finances.
1933-1942: At the trough of the Great Depression, a number of legislative changes are introduced, including the establishment of the Open Market Committee, which guides the Fed's monetary policy.
1951: An agreement between the U.S. Treasury and the Fed clarifies the division of roles between the two: The Fed acts as an independent watchdog over monetary policy, while the Treasury is responsible for government finances.
1971: The U.S. Congress passes a series of reforms that impose a dual mandate on the Fed: It is thus responsible for stable prices, but also for ensuring the greatest possible employment in the labor market.
1979-87: Fed Chairman Paul Volcker fights galloping "stagflation" – a dangerous combination of economic stagnation and inflation – by raising interest rates, fueling the 1982-83 recession. In return, prices remain relatively stable in the years that follow.
1987-2006: Fed chief Alan Greenspan introduces practice of providing information on central bank policy after meetings. His words are closely analyzed on Wall Street for possible clues to future interest rate levels. Greenspan, in the end longest-serving Fed chief, maneuvered through 1987 stock market crash and 1997-98 Asian financial crisis.
After 2008: In the worst financial crisis since World War II, Greenspan comes under fire. He had raised interest rates after the 11. September 2001 kept interest rates too low for too long, fostering the housing market price bubble whose bursting triggered the crisis. He is also accused of not keeping a close enough eye on banks' risk appetite in light of bad mortgage loans.
31. January 2013: Fed President Ben Bernanke is using ultra-loose monetary policy to combat a weakening economy and persistently high unemployment. The key interest rate remains close to zero – as it has since December 2008. In addition, it is announced that it will buy up $85 billion in bonds every month. At the end of December, Bernanke announces the gradual start of the exit from this program.
1. February 2014: If confirmed by the U.S. Senate, former Vice Chair Janet Yellen becomes Fed President, the first woman to hold the post after 14 male predecessors. (APA)