The Federal Reserve System has faced a considerable amount of opposition over the course of its existence. The first debates primarily regarded its constitutionality, private ownership of a central bank, and the degree to which the economy should be centrally planned, with luminaries such as Thomas Jefferson and James Madison being some of the first central bank detractors. As the effects of the Federal Reserve System became more apparent, new criticisms began to emerge, such as complaints about: inflation, transparency and employment. Critics of the Fed come from a variety of sources, ranging from amateur conspiracy theorists to main stream economists. Some speculate that the complexity of the Federal Reserve has led to erroneous accusations by the uninformed.
Perhaps the most accepted criticism regards the Fed's role in the Great depression. The theory that the Fed was the primary cause of the depression was first proposed by economists Milton Friedman and Ann J. Schwartz and later adopted by numerous others, including the current Federal Reserve Chairman Ben S. Bernanke. In loose terms, the criticism is that the Fed's failure to increase the money supply and save small banks, which were in threat because of bank runs, from failing ultimately turned what would have been a relatively mild recession into the catastrophe of the 1930s. A less accepted view among economists is that the Fed kept interest rates too low in the 1920s resulting in the exorbitant stock prices of 1929, which inevitably had to deflate.
There has been considerable debate over a lack of transparency as to what is discussed in Federal Open Market Committee meetings. Since the FOMC sets monetary policy, which affects the entire U.S. economy, many people feel that it is important to know what the FOMC is doing.
The heterodox Austrian School, holds that the Federal Reserve's control of interest rates is an unnecessary and counterproductive interference in the economy. According to this theory, rates should be naturally low during times of excessive consumer saving (because lendable money is abundant) and naturally high when high net volumes of consumer credit are extended (because lendable money is scarce). These critics argue that setting a baseline lending rate amounts to centralized economic planning, and inflating the currency amounts to a regressive, incremental redistribution of wealth.
Others state that the Federal Reserve System supports fractional-reserve banking, which they claim resembles an unsustainable pyramid scheme. According to the Austrian Business Cycle Theory, a fiat money system is unsustainable, because the money supply must expand exponentially in order for all loans to be paid back with interest.. This theory is dismissed among some mainstream economists and contradicts some evidence from mainstream economic studies about business cycles.
A major area of criticism focuses on the failure of the Federal Reserve System to stop inflation; this is seen as a failure of the Fed's legislatively mandated duty to maintain stable prices. These critics focus particularly on inflation's effects on wages, since workers are hurt if their wages do not keep up with inflation. They point out that wages, as adjusted for inflation, or real wages, have sometimes gone down (such as at the end of 2004). Milton Friedman alleged that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve. In April of 2009 former Fed Chairman Paul Volcker criticized Fed's notion that a roughly 2% inflation rate is consistent with promotion of price stability, noting that with 2% inflation rate people in a generation are going to be losing half their purchasing power. United States Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy (of the House Banking Committee), has also criticized Federal Reserve policy for creating and downplaying excessive inflation.
One of the first criticisms of the private nature of the Federal Reserve system was Charles August Lindbergh who criticized the problem of private banks working against the best interests of the citizens: "The financial system has been turned over to the Federal Reserve Board. That Board administers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money."
The Federal Reserve Act (ch. 6, 38 Stat. 251, enacted December 23, 1913, 12 U.S.C. ch.3) is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed into law by President Woodrow Wilson.
Connect that with The Law That Never Was (Link)
The Sixteenth Amendment (Amendment XVI) to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results. This amendment overruled Pollock v. Farmers' Loan & Trust Co. (1895), which greatly limited the Congress' authority to levy an income tax.
It was "ratified" on February 3, 1913.
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