by Roger Bourke White Jr., copyright July 2015
Assignment: Explain the Federal Reserve System. Include a short history of money and banking in the US.
Money is a human invention. The original goals for having money were two-fold:
o to make trading and cooperating easier between people, and organizations
o to provide a way for people and organizations to save their current gains so they could be spent in the future
These are the "commodity uses" for money. (my term) Once money was invented and became widespread in use, "surprise uses" also were developed. (also my term) One of these surprise uses was borrowing against future income -- loans in their many forms. Many others followed. These many uses are lumped under the term financing.
Money is one of the more arbitrary things humanity has invented -- very different from, say, food. This means it is unfettered by physical restraints so its form can change easily and arbitrarily. And over the centuries it has constantly done so.
Colonial-era Americans were among the vigorous innovators in the money arena. They came up with widely-spread and widely-used paper monies. Monies is plural because many organizations in colonial America, and then in the United States, developed paper money. Alternate standards of the time were "hard money" -- gold and silver coins -- and promises of various sorts.
These were wild and wooly times for paper money usage. What kind you used depended on where you were, and which organizations in the area you trusted. There were many attempts to make these monies more reliable, one example being state charters, another being publishing "rate books" that listed how reliable and valuable various monies were. These were early experiments. And, as mentioned earlier, money is so arbitrary that in addition to benefits, both mistakes and abuse are easy. There was constant experimenting going on to make paper money work better.
This experimenting went on through the booms, busts and wars of the 1800's.
Then in 1907 a particularly bad bust happened -- the Panic of 1907 --and the US government decided to see if federal government intervention could stabilize things. The Federal Reserve system was authorized.
The Federal Reserve was created in 1913 to act as a central bank for the United States. Central banks had already been created for Western European nations such as Britain and France, but this was a first for the US, and it was operated differently than the European central banks. One difference, the Federal Reserve is owned by the banks, not the government, although the President and the Senate pick the leaders.
The original goal of the Federal Reserve was to stabilize the banking system, so that bank panics would be shorter and smaller in duration. Over the years that goal has been joined by others. These days the goals include keeping unemployment low by keeping the economy stimulated and keeping inflation controlled by raising and lowering inter-bank interest rates.
Money and finance are still not well-characterized activities -- falling objects are a lot more predictable than rising and falling stock markets. There is still lots of inventing going on, and lots of surprises being experienced.
One spectacular example of not getting it right was the Great Depression. The Federal Reserve did not succeed in making that 1929 Stock Market panic a short-lived and mellow affair. It became deep, spread widely, and lasted a full decade. And there have been plenty of other surprises through the decades since then. The current example is the very slow recovery in spite of low interest rates from the 2007 panic.
The Federal Reserve has taken over most of the paper money activity in the US. It has done well enough at this that US money is now the reserve currency for most of the world.
Yes, The Fed has done really well.
But money is still arbitrary. There is still lots of experimenting going on -- cyber currencies and crowd funding being just two examples. And there are still many financial surprises in store for all of us.
You can keep holding on to your hats, the wildness of the monetary ride is not finished yet.
--The End--