Abolishment of Federal Reserve System

2376 words (10 pages) Business Assignment

27th Apr 2020 Business Assignment Reference this

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Introduction

As argued by Williams (2007, p. 7), the continued establishment and functioning of the Federal Reserve System (FED) is unconstitutional, given that the U.S constitution does neither under any section mention the need for the country to have a central bank, nor  does openly offer the federal government that mandate and powers to establish such a bank. So, going by this fact, it is apparent that the federal government of the United States lacks any power to continue supporting the existence of FED, as there is no authority specified to allow it establishes such a system to monitor and control the flow and movement of money across the country (Koba, 2017, p.1). This way, it is apparent that FED ought to be abolished, given that its existence already continues to violate the constitution of the U.S, given that this federal system continues to be too closely connected and linked to the private sector, thus making it easy to be manipulated by powerful and influential people with personal vested interest.

Going by the enumerated powers by the U.S constitution, it is evident that the Article 1, section 8 of the country’s constitution stipulates that the enumerated powers to monitor the flow of money are the sole duty of the U.S Congress (Gaitan, 2017, p.2).  Under such enumerated powers, the U.S Congress is the only mandated body that has the mandate to coin money in the country, as well as to both establish the currency and determine its value. This means that there is no other body or a system that should purport to play such roles.

According to Carson (1965, p. 14), FED is not mentioned by any article of the country’s constitution, and that the U.S constitution does not under any section refer to a centralized bank when stipulating which institution has powers to coin currency as well as determine its value. This way, as stated by Gaitan (2017, p.3),  it is illegal for FED to continue functioning without any back-up of the law, given that the 10th amendment in the U.S constitution also clearly states that the federal government has the capacity to exercise the powers that are expressly granted by the constitution; and given that there are no powers granted to the federal government  by the constitution to establish an institution such as FED, then the continued existence of this reserve system is illegal. The federal government under the expressed powers of the constitution had no authority to establish the FED, and thus from the beginning, the creation of this body itself was a great violation of the constitution.

Apart from being an illegal institution, the fact remains that FED has already served its purpose, and thus it is no longer needed in the modern-day American economy. A critical look at the formation of the FED, it is evident that this body was created back in 1907 as a reactionary move by the country to the panic of 1907, whereby there was an economic crisis that almost threatened to collapse the economy (Breger & Edles, 2015, p. 15). Before the FED was established, American private business owners were heavily counted on as the key players who will help revive the country’s economy during the 1907 economic crisis. So, to overcome the crisis, the American wealthy businessmen including the likes of J.P. Morgan were able to flood the system with capital, thus rescuing the banks and businesses from collapsing (Carson, 1965, p. 19). This was the main purpose as to why FED was created; however, looking back then, it is evident that the problems that the system was established to help solve does no longer persist in the modern-day U.S economy, and thus as it stands, the Federal Reserve System has already served its usefulness in the country’s economy, thus becoming rationale for it to be abolished.

Additionally, the composition of FED is in such a manner that it allows the private sector players to have more power and influence over the government, a scenario that leaves a loophole for continued policing of bad behavior in the country’s economy. As argued by French (2016, p.1), there are 12 regional FEDs in the country, that are under the supervision of a governor, who has a chair at that board of governors of the Federal Reserve. The independent board and its chair are nominated by the country’s president, and then vetted and confirmed by the senate.  However, the regional bank presidents are appointed by the BOD, which is mainly made up of private sector representatives (Gaitan, 2017, p.2). The fact remains that these officials from the private sector with the absolute power to appoint the BODs normally have close relations and connections with the country’s private banks that they are mandated to monitor and supervise; and thus board of director members tends to mainly get easily compromised when policing bad behavior by the country’s banks.

The fact that the FED members, who should serve as public policymakers are appointed by a quasi-private structure is unconstitutional since it means that the private sector players have the power to appoint public policymakers whom the government cannot even have powers to remove (Carson, 1965, p. 22). This way, these loopholes leave more powers to private players to control the appointments in the public policy space, thus creating gaps for worse policing, and corruption. FED has powers to create economic policies that heavily influence the United States national economy and the financial dealings of this country across the world (Breger & Edles, 2015, p. 19). This way, it means that with fewer powers on who is appointed at the Federal Reserve System board, the federal government through the FED hand over the powers of ensuring transparency and accountability in the country’s banking and monetary sector to private players, a move that has potential to cause chaos in the economy.

The accusations of FED being the institution aiming at mismanaging the U.S economy has been made by some economist such as John B. Taylor, who argues that FED was largely responsible for the 2007-2008 American financial crisis, given that it significantly contributed to the U.S housing bubble, which took place back in 2007 recession (French, 2016, p.3). According to Gaitan (2017, p.4), the FED as an institution established to monitor the currency and monetary flow in the country, went ahead and kept the interest rates too low following the 2001 recession. The very low-interest rate then triggered the housing bubble, which in the long-term resulted in a credit crunch in America. This clearly shows that the FED role as a supervisor and regulator of the country’s monetary sector has largely been ineffective, thus meaning that the ideal move is to abolish it.

Its ineffective economic policies have attracted massive criticism and attacks from politicians including the Republican politicians and Tea Party politicians, thus showing how unpopular FED has become in the modern American era, thus leaving its abolition as the ideal solution to end all the dissatisfaction held by Americans and their leaders (Mullins, 2018, p. 33). For example, as  argued by Koba (2017, p.7),  FED has become the contemporary institution of attack by the Republican politicians ranging from the former U.S congressman known as Ron Raul from Texas, and Rand Raul a senator of Kentucky, who holds the view that FED has already exhausted its usefulness, and thus ought to be abolished. According to the above two politicians, FED policies have in recent times been hurting the American economy instead of cushioning it (Gaitan, 2017, p.4). For example, the FED’s move to devalue the dollar has been termed as an irrational move, given that it has greatly hurt the U.S economy rather than boosting it to grow.

The complaints by politicians across the country paint FED as an institution that lacks adequate capacity to make effective economic policies, by citing the fact that most of its past monetary policies have largely ended up hurting the country’s economy (Mullins, 2018, p. 31). The argument is that FED in most of the times has ended up pushing for monetary policies that either create too much or too little flat money. In Ron Paul’s book “End of Fed”, he goes ahead to repeatedly critique FED for always engaging in money creation process out of thin air.

According to many politicians including Ron Raul, FED has always involved itself in the process of setting the interest rate, a move that has made the country’s economy highly volatile (Williams, 2007, p. 7). The argument projected by these politicians is that FED is mainly involved in activities that it should not be engaged in, thus causing more harm than good to the country’s economy. As stated by Raul, for the American economy to become highly robust, the interest rate should be set by the free interplay of demand and supply forces in the economy  (Koba, 2017,p.  23). Thus leaving the interest rate to be set by market forces is economically rational than allowing an institution such as FED to continue pushing for ineffective interest rate policies down the economy, thus forcing it to stagnate (Mullins, 2018, p. 36). In fact, as Williams (2007, p. 27) argues, the ineffective economic policies set up by FED have been the main causes of the booms, bubbles, and bust of the country’s business cycle, thus making the American economy highly volatile and unattractive for investment. Thus, to avoid such occurrences in the future, these politicians believe that the best way to go is to abolish the FED, as it presently creates more economic problems to the American people.

As stated by Koba (2017, p. 21), the FED  has become a body that is operating as a CARTEL to cushion wealthy businesses and business people in America, while at the same time undermining the welfare and economic benefits of the general American people. This argument has been projected by Williams (2007, p. 33), who clearly states that the key objective of FED is to engage the federal administration as a proxy for shifting the unavoidable financial harms from proprietors of the banks to the American people, who are the taxpayers. Since FED was established, it has always held its position to the favor of the banks and other country’s corporations, citing that if these banks and corporations are left to collapse, then the country as a whole will suffer from massive unemployment and economic disruption.

By this defense to the country’s banks and other corporations have perpetuated the arts of impunity and corruption, whereby, bank managers tend to be highly corrupt and goes on embezzling corporations and banks under the cushion of FED, while knowing that even in the event of going bankrupt, the federal government under the advisory role of FED will bail them out (Koba, 2017, p. 5). This has worked against the welfare of the American people, who are taxpayers, as their taxes are used to bill out fraudulent financial institutions and companies, instead of using such revenues to bring development to the general public in terms of infrastructure development and growth.

However, even though the existence of FED has been unconstitutional, the fact remains that this body has played a key role in watching over the U.S economy. As stated by Carson (1965, p. 19), FED has played crucial roles in several occasions including the fact that it was the main body that played a very instrumental role in guiding the economy out of great recession. This way, it can be said that FED has in a great way played a huge role in managing the continuation of America’s good economic times, especially in the 1990s. This means that, while FED has not been able to manage all America economic recession’s, the fact as stated by Gaitan (2017, p.3) remains that its existence does enhance economic stability and growth in the bigger picture of the American economy.

Conclusion

Overall, it has been noted that the existence of FED as a monitoring body in America’s financial market is unconstitutional, and thus automatically qualifies for its abolishment. Even though FED has in a great way played a huge role in managing the continuation of America’s good economic times, the fact remains that most of its economic policies have been ineffective, thus resulting to more harm than good for the American economy. The fact remains that in many instances, FED has been involved in crafting unpopular policies that have always appeared to cushion the wealthy business people and companies from bankruptcy under the expense of the American people. This way, FED has in a huge way contributed to the exploitation of the genera, taxpayers, whose hard-earned taxes are used to bail in wealthy tycoons businesses at the expense of the taxpayers. Overall, from the above argument, it is apparent that the rational move to deal with FED is to abolish it.

Works Cited

  • Breger, Marshall J., and Gary J. Edles. Independent Agencies in the United States: Law, Structure, and Politics. Oxford UP, USA, 2015.
  • Carson, Deane. ““SHOULD FEDERAL RESERVE FLOAT BE ABOLISHED AND ITS CHECK ACTIVITIES CURTAILED?”: REPLY.” The Journal of Finance, vol. 20, no. 3, 1965, pp. 503-503.
  • French, Douglas. “Another Case for Abolishing the Fed.” Home – Foundation for Economic Education, 5 July 2016, fee.org/articles/another-case-for-abolishing-the-fed/.
  • Gaitan, Lance. “Should We Abolish the Federal Reserve Altogether?” Economy and Markets, 13 Nov. 2017, economyandmarkets.com/economy/central-banks/abolish-the-fed/.
  • Koba, Mark. “If The Federal Reserve Is Abolished, What Then?” CNBC, 21 June 2017, www.cnbc.com/id/46241902.
  • Mullins, Eustace. The Secrets of the Federal Reserve — The London Connection. Lulu.com, 2018.
  • Williams, Parker. Case Against the Fed, The. Ludwig von Mises Institute, 2007.

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