Federal Reserve System (Also Known

¶ … Federal Reserve System (also known as the Fed in informal terms ) marks the United States of America's central banking system. This therefore makes it the only financial entity accorded utmost permission by the U.S. government to be in charge of introducing the circulation of paper currency on the U.S. soil. It came into being on December 23, 1913 through the passing of the Federal Reserve Act under the presidency of President Woodrow Wilson (Johnson, 1999). The Federal Reserve was created by the U.S. government in order to solve the problems associated with fractional-reserve banking. The main element of this is the bank panics- a situation that results whenever a large number of customers to a certain bank rush to withdraw their deposits while haboring the belief that the bank is in danger of becoming insolvent. Through the support of various private banks, the Federal Reserve acts as one of the major solutions to complications that cannot be easily handlead by the forces of demand and supply. Since its inception in 1913,the functions of the Feds has gradually increased and its structure diversified. The Fed is obligated by the Administrative Procedure Act (APA) of 1946 to give the public knowleadge of its organization as well as its rules and procedure. The main duties of the Fed are:

1. To conduct the United State of America's monetary policy through the appropriate influence of both monetary and credit conditions of the U.S.'s economy in order to result in maximizing employment, bringing about price stability and moderating long-term interest rates.

2. It maintains the stability of the overall financial system and acts as a protection of the financial system from various forms of systemic risks that usually rock the financial markets.

3. It supervises and regulates the overall banking institutions in order for a safe and sound working environment to be achieved in the financial system. It is also mandated to provide protection to the credit rights of customers.

4. It provides financial services to various depository institutions. These institutions include the U.S. government and various other foreign institutions.

Despite all the merits associated with the roles of the Federal Reserve System, there exist various forms of criticisms against this financial establishment. In this paper we present these criticisms and the rationale behind them. The criticism of the Federal Reserve is not new. It started from the early days when the Federal Reserve Act was enacted. The act made it compulsory for all nationally chartered banks in the United States of America to become members of the Federal Reserve System. This condition made several bankers to criticize the bill for it assaulted the "private rights" of these banks as suggested by Johnston (1999). The next criticism at that same period was mainly political. There was the general feeling that most bankers were conservatives and Democrats then the bill was merely a measure by the Democratic party to control the financial system.

Several groups and individuals have a lot of criticisms against the Federal Reserve.The criticisms are of varied nature and degree. There are those that are related to inflation and some towards the practice of fractional reserve banking. There were even issues related to its former chairman Alan Greenspan. The criticism was based on the doubt on the organization's credibility on the basis of the cult of personality that surrounded Alan Greenspan.

Since its inception, the Federal Reserve System has been under fire for a myriad of reasons.

The Great Depression

The Federal Reserve was under intense criticism as a result of the Great Depression. Some economists from the Chicago School of economics and the Australian School want the Federal Reserve System abolished. Their basis of criticism is that it had very expansionary monetary policy in the early days that gave room for misallocation of various capital resources. This lead to various undesirable economic scenarios such as the support of a massive stock price bubble. It has been argued that even though the Federal reserve did not cause the Great depression, it mitigated it through the unnecessary contraction of the money supply which was not necessary at that time since the markets by that time needed to be liquidated (Friedman, 1985).He argued that the Fed should be overhaulead and then replaced by a specialized computer system whose role would be to set rates that are derived from the standards econometrics. However, the Australian School economists have argued that the Fed's manipulation of the supply of money in order to put a halt on "gold flight" away from England lead to serious financial malinvestment which resulted to the Great Depression.

Opacity

The fact that the Federal Reserve is covered and operates in secrecy is a great cause of criticism. This is because of the difficulty in accessing their meetings which are held behind closed doors and whose transcripts are released with a time delay of five years. This makes it very impossible for even the expert policy analysts to air their opinions and thought on the Fed's policies and decisions. The lack of clear communication between the Fed and media is also criticized as being full of jargons while being opaque at the same time. Critics argue that their opacity results to greater volatility in the market and therefore as the market speculates; it remains to have very little information about the possible policy changes in the future.

Employment

Critics of the federal Reserve such as Temin (1976), have a conviction that the monetary policy set by the Feds is too tight. Their argument is that the lower interest rates is a demerit to the U.S. economy since it culminates to unemployment because of an increased demand for goods. In line with his argument, the possible fall that accompanies inflation should therefore be positive. It is well-known fact that inflation leads to a general decrease in the real value of both domestic and foreign debt. This is also true for the decrease in real interest rates for commodities borrowed at fixed nominal rate.