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Fed critics still suspicious after 100 years

DPA Washington | Updated on March 12, 2018

Republican Senator Rand Paul accuses the Federal Reserve of operating “free of rules, without any accountability” and is pushing for a vote in Congress on his “Audit the Fed” legislation.

“The American people have a right to know what this institution is doing with the nation’s money supply,” he wrote last month in the conservative Washington Times.

“The Federal Reserve does not need prolonged secrecy; it needs to be audited.” Fed critics like Paul accuse the central bank, which has kept its benchmark interest rate at an unprecedented near-zero for five years, of harming small savers while Wall Street financiers profit from access to the Fed’s cheap money.

The Federal Reserve System is 100 years old this month, but the same populist suspicions of central banking date back to the republic’s agrarian infancy.

Looking back

In 1791, Congress chartered the First Bank of the United States. Only 20 per cent owned by the government, it mimicked the Bank of England and sparked the first serious rift in President George Washington’s unity cabinet, spawning the factions that grew into the US two-party system.

The central bank’s opponents allowed it to die when its 20-year charter expired, but by 1816 a similar, Second Bank of the United States was authorised.

President Andrew Jackson killed the second bank’s charter renewal in an 1832 veto that echoes through American history: “When the laws undertake ... to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics and labourers — ... have a right to complain of the injustice of their government.”

University of Tennessee historian Daniel Feller wrote in 2008 that Jackson’s unprecedented veto language “furnished a political grammar since claimed by Populists, Progressives, New Deal liberals, socialists, free marketeers, libertarians — in short, by just about everybody.” There was no central bank from 1836-1913. Intermittent bank runs during those decades culminated in the Panic of 1907. As the only major country without a central bank, the US was seen as lacking an elastic money supply to respond to financial crises.

Finally, President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, establishing the central banking system.

All federally chartered banks, and eventually all depository institutions, were required to keep reserves in the Fed’s regional banks while accessing short-term loans, intended to bridge liquidity gaps and stabilise the financial system.

Fed did too little

In the Great Depression, critics on the left argued that the Fed did too little to spur the economy after the 1929 financial crash.

Congress gradually expanded Fed powers over monetary policy and banking regulation, and set a dual mandate for maximum unemployment and price stability.

“The Federal Reserve’s extraordinary response to the (2008) financial crisis and the Great Recession that followed was, in one sense, nothing new,” Fed chief Ben Bernanke said Monday at a commemoration of the central bank’s centennial.

“We did what central banks have done for many years and what they were designed to do: We served as a source of liquidity and stability in financial markets, and, in the broader economy, we worked to foster economic recovery and price stability.”

Published on December 20, 2013

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