The Federal Reserve: Purpose, Criticism, and Reform
This paper examines the Federal Reserve's origins, stated mission, and controversial role in American economic policy. Drawing on sources including Ron Paul's End the Fed and essays from The Road Ahead for the Fed, the paper outlines the Fed's four core functions — monetary policy, bank regulation, systemic risk containment, and financial services — before turning to sharp criticism of its practices. Key reform proposals include abolishing fractional-reserve banking, curbing excessive credit creation, and allowing failing institutions to collapse rather than receiving taxpayer-funded bailouts. The paper argues that a long-term perspective on monetary consequences, as advocated by George Shultz, is essential to improving the Federal Reserve's legitimacy and effectiveness.
- Introduction: Overview of the Fed's contested economic role
- What Good Is the Fed?: The Fed's stated mission and core functions
- Criticisms of the Federal Reserve: Critics argue the Fed enables inflation and inequality
- Improving the Fed: Reform Proposals: Long-term thinking and credit restraint as solutions
- Fractional-Reserve Banking and Its Dangers: Why fractional-reserve banking destabilizes the economy
- Conclusion: Summary of reform needs and Fed's core failings
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What makes this paper effective
- The paper balances competing viewpoints — proponents and critics of the Federal Reserve — before clearly staking out a reform-oriented position, giving the argument intellectual fairness.
- It grounds abstract monetary concepts (fractional-reserve banking, debt monetization) in concrete analogies, such as the comparison to a Ponzi scheme, making the argument accessible to a general academic audience.
- Multiple credentialed sources are woven together cohesively, with Paul's End the Fed serving as the primary critical voice and Shultz and Kohn providing institutional perspective, creating a genuine multi-source dialogue.
Key academic technique demonstrated
The paper demonstrates effective use of source synthesis: rather than summarizing each source in isolation, the author cross-references critics and proponents to build a layered argument. For instance, Halloran's call for improved regulatory regimes is immediately connected back to Paul's specific proposal on fractional-reserve banking, showing the student can integrate sources rather than simply quote them.
Structure breakdown
The paper opens with a framing introduction establishing the Fed's controversial status, then devotes a section to its stated purposes before transitioning to critiques. A dedicated reform section draws on Shultz, Kohn, and Paul in sequence, with fractional-reserve banking receiving extended analysis as the centerpiece reform proposal. The conclusion restates the thesis concisely without introducing new material. The structure is logical and moves from description to analysis to prescription.
Introduction
The Federal Reserve was created in 1913 and acts essentially as a central bank. However, its value to the economy is controversial. As Ron Paul (2009) notes, "Part of the public relations game played by the chairman of the Fed is designed to suggest that the Fed is an essential part of our system, one we cannot do without" (p. 10). On the other hand, proponents of the Federal Reserve assert that the Fed serves a necessary role in the stabilization of the economy. This paper examines the good that the Federal Reserve does and provides suggestions on how it might be improved.
What Good Is the Fed?
According to Federal Reserve chairman Ben Bernanke, the Fed is a tool by which the "government can always generate higher spending and hence positive inflation" (Paul, 2009, p. 7). Initially created to deal with the several bank panics of the late nineteenth and early twentieth centuries by rescuing banks over-extended on credit, the Federal Reserve has grown to take on several additional roles. The Federal Reserve's mission statement defines its purpose across "four general areas," which include "influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates; regulating banking institutions…; containing systemic risk…; and providing financial services" to governments and banks throughout the world (Mission, 2009).
While these purposes are broadly delineated, the overall picture of the Fed's powers can be summarized by comparing it to a kind of central bank for the entire world — a bank that is granted the power to oversee the American economy as well as the power to loan and create money for institutions in need.
References
Halloran, M. (2009). Systemic risks and the Bear Stearns crisis. The road ahead for the Fed. Hoover Institution Press.
Kohn, D. (2009). Monetary policy in the financial crisis. The road ahead for the Fed. Hoover Institution Press.
Mission. (2009). Federal Reserve. Retrieved from http://www.federalreserve.gov/aboutthefed/mission.htm
Paul, R. (2009). End the Fed. Hachette Book Group.
Shultz, G. (2009). Think long. The road ahead for the Fed. Hoover Institution Press.
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