Criticism Of The United States Federal Reserve Finance Essay

Since 1913, the Federal Reserve System has faced a batch of unfavorable judgments. Federal Reserve established to centralise all the Bankss in U.S. under one system. Federal Reserve was established after the Federal Reserve Act formed. Set up of Federal Reserve Act was strongly argued based on the right and place in political country. This happens since Woodrow Wilson, the 28th president of U.S. has more power in political country.

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At first, Federal Reserve being debated on its constitutionality, private ownership and the degree of centralisation. Among the celebrated early critics were Thomas Jefferson, James Madison and Andrew Jackson. After that, more and more unfavorable judgments began to emerge because the consequence brought by cardinal banking or Federal Reserve System go more evident.

A batch of confederacy theoreticians and mainstream economic experts do hold sentiment on this cardinal banking system. Most of them were knock it.

Congressman Louis t. McFadden said that Federal Reserve is the chief cause to Great Depression. He is the president of the House Committee on Banking and Currency from 1920-31. After he lost the station, he did given several addresss related to Federal Reserve. He claimed that Federal Reserve was really operated by Wall Street Bankss and other related European banking house.

Many Congressmans have criticized Federal Reserve. The most of import one is Ron Paul. He is the current member of Monetary Policy Subcommittee. He seek difficult to battle Federal Reserve by introduce the measure to destruct Federal Reserve System. However, these all have been unsuccessful. He failed to raise the resonance from cosponsor. After that, Paul becomes more success with the established of Federal Reserve Transparency Act in 2009. This clip, he able to pull a figure of cosponsors since the measure has yet to let go of.


Peter Temin is the one amongst the critics who said that the pecuniary policy is excessively tight. He is a widely cited economic expert and economic historiographer. He argues that lower involvement rate will take to higher employment since the demand for goods had increased. It will be more advantageous for U.S. if the unemployment rate lessening.

However, there is a possible issue will go on if lower down the involvement rate is rising prices could happen. Inflation will deprecate the existent value of debt, no affair foreign or domestic. This means that the existent value of the money is non every bit high as the money borrows out before. By this, Paul Krugman introduces a lower dollar. This lower dollar will be suited to utilize if high rising prices occurs. It brings advantages to U.S. exporter by prevent it from immense trade shortages to a much more stable international position.

Federal Reserve sets the federal financess rate by utilizing a particular expression which called “ Taylor regulation ” . Below is the expression of the regulation:

it =federal fund rate

Iˆt =rate of rising prices

=target rate of rising prices

ytA =logarithm of GDP

=logarithm of possible end product

This Taylor regulation is the tool that Federal Reserve used to alter the nominal involvement to cover with the mark rising prices rate and GDP trade with the possible end product. It was introduce by the U.S. economic expert John B. Taylor in 1993. However, during the mid 1990s and mid 2000s, the financess rate was set higher or lower than the existent economic system needed. Since the financess rate was set by Federal Reserve, this attracts more unfavorable judgments. During 2007 and 2008, Federal Reserve one time once more decreases the financess rate more than five per centums points. This action is in line with its historical behaviour.

Excessive New York City Influence

Many people argue that New York City ‘s have a great influence toward banking industries in U.S. This issue happens because the New York representative is the lone fixed member of the Federal Open Market Committee ( FOMC ) . For other regional Bankss, they are rotate in two and three intervals. The FOMC ever chose the president of the Federal Reserve Bank of New York to go its frailty president. This action is done by under jurisprudence. A research said that, New York Bankss ever have more affect on statute law greater than their banking resources in United States. The research believes that the great affect of the New York City bankers on the fundamental law is the chief ground lead to set up of Federal Reserve.

Global Financial Crisis

One of the most serious planetary fiscal jobs is United States lodging bubble. John Taylor, an economic expert said that Federal Reserve was responsible or at least partly responsible to this job. Federal Reserve had kept the involvement rate excessively low during the recession happened in 2001. So, this makes borrowers or investors to be reckless in investing. The lodging bubble so causes the recognition crunch. However, Federal Reserve did non do much rectification due to this low involvement rate job. This can be seen through the Federal Reserve did raise the short term involvement rate but the long term involvement remain unchanged.

Many critics had been knocking on Federal Reserve ‘s function as a supervisor and regulator because it has found ineffective. If remarked Federal Reserve ‘s function in the present economic crisis, it can be said that was worst since they responsible to protect consumer and modulate banking system.

The Great Depression

The most right unfavorable judgment of the Federal Reserve was foremost made by Milton Friedman and Anna Schwartz. Both are the celebrated economic expert in U.S. The unfavorable judgment formed because Federal Reserve had cause the 1929 recession become worst and turn it into Great Depression. It was the longest, widespread and deepest economic crisis. Since the stock market collapsed in 1929, the Federal Reserve continues to diminish the money supply and do non desire to deliver Bankss that are short of money to go on their operation due to the loss of large volume of clients. This error had cause a comparatively mild recession bend into a catastrophe.

Crowds were garnering on Wall Street after the 1929 clang.

Before 1913, the Federal Reserve had non been set up yet. During that clip, the banking system solve the Panic of 1907 by halt convert the sedimentations into currency which means lessening the money supply. The banking system about collapsed in 1907. So, the bankers ask to set up a cardinal bank to work out this job from 1910 to 1913. Friedman suggests that the Federal Reserve should rapidly halt the forced to sell off of assets at down monetary value merely like the manner to work out the Panic of 1907 which is decrease the money supply.

Actually, monetarist feels that the Great Depression was caused by the lessening of money supply. Friedman and Schwartz show that from the great alteration of economic system state of affairs, the stock of money fell earnestly which is one tierce. Great Depression is the period that had lower income, lower goods and services monetary values, and higher unemployment. These effects were caused by the tally abruptly of the money supply. Peopless decide to salvage more money alternatively of spend it. So, this caused a lessening in production and employment because the bead of goods and services monetary values. Federal Reserve had failed to recognize the job and failed to work out it on clip. So, the economic downswing occurs.

Friedman and Schwartz ‘s theory was supported by many peoples, even the recent Federal Reserve president, Ben S. Bernanke besides agreed with them. Bernanke promises to the universe that Federal Reserve will non reiterate the same error once more.

Non-mainstream Economicss

The Federal Reserve ‘s control of involvement rates will non do any consequence in the economic system. Harmonizing to Austrian School theory, involvement rates should be low if there is extra money in the bank. Contrary, it should be high if the lendable money is less. The unfavorable judgment argues that put a basal loaning rate will do the economic system to step rearward, such as centralised economic planning, rising prices occurs, and incremental redistribution of wealth.


CPI ( comparative to 1967 ) since 1800

Federal Reserve System criticized by peoples because of the failure in handle rising prices job. It failed to carry through its legislatively mandated responsibility because handle the rising prices jobs is one of the issue stated in Federal Reserve Act. Inflation brings a batch of bad effects to U.S. the critics most concentrate on rewards and nest eggs issue. They argue that the existent rewards has really decreased at the terminal of 2004 since there is rising prices occurs. Besides, critics besides said that the buying power of U.S. dollar has gone down over 95 % . This shows that Federal Reserve failed to execute its occupation good.

In April 2009, even the former Federal Reserve president, Paul Volcker besides said that Federal Reserve ‘s construct was incorrect. Since Federal Reserve attempt to stable the monetary value, there is still a 2 % rising prices rate persist. This 2 % is able to cut down half of a consumer ‘s buying power within a coevals.

Based on Austrian School theory, rising prices defined as an addition in the money supply in claim this will affect to monetary value rising prices. They besides said that as the existent value of money decreased due to the addition in money supply, it will lose buying power. Since all economic systems today are obligated under a centralized banking system, about all new money supplied into economic system as recognition. Austrian economic experts believe that when the Bankss increase this sort of money supply which is recognition will give chance to organize volatile concern rhythms. This will give a bad impact to economic system system due to its unstable characteristic.

In add-on, the Austrian School had interpreted rising prices in another point of position. They claimed that bulk of peoples merely give attending to the consequence of rising prices and make non recognize the existent phenomenon which is depreciation of currency. They focus on happening the solution to work out this currency depreciation job. They found that maintain a stalls of money supply is the best manner to work out this job. By this, they measure the existent sum of money which had supply, which means that what is the sum of new units of money that are ready to utilize in the economic system. However, the Federal Reserve has taken a wholly different action. Besides, they besides province that the increasing of money supply will be magnified if the enlargement of recognition took topographic point.

Furthermore, they claimed that the provinces get fund to run its activities by practising rising prices alternatively of taxing and adoption. So, they can explicate the ground to make new money and how to utilize the money, such as military disbursement. The manner to get fund via practising rising prices will non burthen the authorities. On the other manus, the Federal Reserve may seek to forestall bankruptcies by addition the money supply. So, they can borrow the money to work out the jobs since the involvement rate is low due to extra money supply.


Federal Reserve System can be said that is an unconstitutional section. The most concerned issue is the no deputation issue. United States gives the right to Congress to coin the money, so Congress should non to authorise Federal Reserve System to coin it. The Fundamental law does non state so Congress has this right. In add-on, it besides does non authorise the Federal Reserve to act upon the American life via making inflationary pecuniary policy.

However, all the statements are being rejected. Congress created the First Bank of the United States which serves to centralise the banking system. The bank was free to publish bank notes without any perturbation from provinces. Congress has great power in define the money. Several statements such as the authorities should deliver all the paper currency with “ cherished metal ” were systematically rejected.

Private Ownership

The Federal Reserve operates the cardinal banking system. The elements to makeup this cardinal banking system include both public and private. There are nine member boards of managers in each bank. The member board of managers is elected by the commercial bank itself and the Board of Governors. Then, Federal Reserve Board is the 1 who controlled all these Bankss.

Member Bankss cover about 38 % which means more than 8,000 Bankss in U.S. They required maintaining capital stock in their regional Bankss. Then, the regional Bankss will return 6 % of the net income as dividend to the stockholders. After issue the dividend, the remainder of the net income will travel to the U.S. Treasury Department. This has created ownership confusion.

Federal Reserve Banks issue the portions to the member Bankss. However, these portions are different from keeping portions of private company. The portions can non be sold, traded, or converted into loan.

In the instance of information geting, Federal Reserve do has its ain manner to response to it. To forestall travel against the freedom of Information Act when petition for information by Bloomberg, the Board will said that the records were stored at the Federal Reserve Bank of New York. Since Federal Reserve Bank of New York was non an authorities bureau, hence will non subjected to the Act.

Since the Federal Reserve System able to conceal the information from cognizing by the populace, it can be said that it is a wholly private bank. Some peoples have criticized that the system needs to be privatized because its chief intent is to obtain greatest possible net incomes by utilizing people ‘s money.

Transparency issues

One of the issues which concerned by many peoples is the transparence of Federal Reserve. by the manner, populace has a right to understand what really go on in the Federal Open Market Committee ( FOMC ) meetings. So, the Federal Reserve Transparency Act had established. Ron Paul, the congresswoman who put frontward this act has 300 protagonists in Congress. The measure required Federal Reserve to reformed audit groups before the terminal of 2010. However, this measure had been supporting by the Federal Reserve. Federal Reserve said that negative effects will happen if it was wholly crystalline such as affected the confidential of establishments which borrowed money from Federal Reserve.

In fact, there are 386 economic experts supported Federal Reserve to stay privateness in information. Besides, since Federal Reserve supports most of the pecuniary economic research in the U.S. , so it can be said that the research workers will be non make bold to print any harmful findings related to Federal Reserve.


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