Saturday, May 12, 2012

About That Federal Reserve

This is the fourth entry on the subject of finance and the discussion of an American Depression.

The Federal Reserve in the United States was born in 1913.  An incredible amount of wrangling and discussion took place, and in Congress and the Senate, the final bill was a compromise between many who had different ideas of what it should be.  Originally, it was to be a back-up lender of last resort, in order to soften the blows of periodic contractions of the economy, where commercial banks might not be comfortable in lending during a period of economic contraction.  It was created to be, "the lender of last resort".  The function of this bank has grown since then to include the following activities in order to soften the negative effects of expected national economic contractions:

1. The setting of the discount rate by which banks borrow.
2. The changing of reserve requirements.
3. Open market operations.

     In short, our Federal Reserve has found ways of stretching and thinning the money supply in order to soften the blow of economic slowdowns which occur periodically anyway.  Most Americans don't understand the Fed, its history and why it was created, and how it functions now, largely because they don't want to. They can make adjustments with impunity without criticism from the American people, because we are so largely ignorant of what they do, and its short term and long term effects.

This is probably the best explanation I have found:

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