The Federal Reserve System: A critique of the call for its abolishment
The Federal Reserve system has come under attack in recent years and that attack has only intensified with the recent financial collapse of 2008. Opponents of the Fed usually advocate a return to the Gold standard, something that was done once in US history with disastrous consequences, and are almost always aligned with an extreme right, libertarian ideology, or conspiracy laden mindset. The accusation of the opponents of the Federal Reserve are that the system is controlled by big banks that manipulate the US currency for their own gain and somehow make a profit from it. There is no evidence to support this but the more extreme theories usually involve radical speculation, misleading claims, quote mining and alternative history. The most mainstream proponent of this view is three time Presidential Candidate Ron Paul, and while Dr. Paul never lets his arguments digress into outright fantasy, he does blame the Fed for our current economic crisis and advocates a return to the gold standard. My analysis will be based on the claims of the .org "Abolish the Federal Reserve" which are almost point by point the same arguments made by the majority of proponents of abolishing the Federal Reserve. I will also occasionally deal with some fringe claims.
CLAIM #1 THE FEDERAL RESERVE IS A PRIVATE FOR PROFIT CORPORATION
This claim is completely false. If the advocates for abolishing the Fed would keep their claim to the Fed is not a completely federal organization, and has some private elements, then they could be said to be telling the truth. But they go on to make some pretty outrageous and completely false claims about the Federal Reserve.
"They are no more a part of the Federal government than is Federal Express. The Federal Reserve is actually a privately owned corporation, owned by a secret group of international bankers."
The first sentence is complete nonsense. The Fed is made up of 12 federal banks that are owned by private banking institutions but these banks are regulated by a board of governors. This board is appointed by the President and approved by congress. They are also subject to congressional oversight.
If Federal Express was subject to the oversight of a federally appointed board, not only would these people who call the Fed private not consider that private but they would probably scream socialism. The way the Federal Reserve works is not analogous to Federal Express, it is in fact analogous to how the Post Office works, operating privately with government oversight as a non-profit entity. Also, the process is pretty transparent. The Fed publishes many documents each year, including an annual report that is available via their website. Also if the Federal Reserve was abolished all assets would revert to the US Government which kind of settles the question of who owns what.
CLAIM #2 THE FEDERAL RESERVE LOANS MONEY TO THE UNITED STATES GOVERNMENT AT INTEREST
Nope, this is just not true. In fact, this is such a blatant lie that debunking it is just too easy. The purpose of the Federal Reserve is to regulate the banking industry and control interest rates. A complete report of what the federal reserve actually does is here:
I will bring up here that even if the claims of those that want to abolish the Federal Reserve were true (which they aren't) a better solution would be to nationalize the Federal Reserve, not abolish it. A main argument of those that want to abolish the Fed is that big banking interests are in control of our money system. So their solution is to take away the regulatory institution and just let the banks and the free market have total control. If anything, the banks would LOVE IT if we abolished the Federal Reserve. Their worst nightmare would be if we Nationalized it. this is what President Obama already did with the student loan process and guys like Ron Paul hated it, even though it gives college students more money and lower interest rates.
CLAIM #3 THE FEDERAL RESERVE IS UNCONSTITUTIONAL
Here is a claim that was made by Ron Paul about the constitutionality of the Fed.
"The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy."
The problem with this is that the United States Supreme Court disagrees. In every case that has been argued on these kinds of grounds, about the governments regulation of commerce or currency the Supreme Court has held up the Government's authority on this score. This specific argument has never appeared before the Supreme Court, but judging by the precedence that have been set in the past, they would likely never even feel obligated to hear such a case. By the way, let's see what the constitution says about the Supreme Court:
"The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States...."
So basically the constitution itself says that the Supreme Court has authority to say what is and isn't constitutional. Have they made bad calls before? Of course they have, but if your only argument is that something is unconstitutional and the Supreme Court doesn't back you up, then you can't make that argument. Ron Paul also disagrees that the Supreme Court have now said that "corporations are people" but he has arguments that extend beyond simply saying "this wasn't what the founders intended."
As a side note, many who want to abolish the Fed also claim that collecting of income tax is unconstitutional. (Once again, the courts disagree but this is a more complex issue having to do with interpreting the 16th Amendment.) A lot of their argument about the Fed being unconstitutional have to do with the income tax being enacted by the same President around the same time. So Woodrow Wilson apparently just hated the constitution and everything that happened under his administration was an intentional attempt to undermine constitutional law.
CLAIM #4 THE FOUNDING FATHERS NEVER INTENDED FOR THEIR TO BE A NATIONAL BANK AND THE GOLD STANDARD IS BETTER
There is a logical fallacy called "Appeal to Authority." This is when a person makes an argument based on the authority of somebody who is either not an expert on the subject at hand, or is an expert but is going against the consensus of other experts on the subject. People who use this often are conspiracy theorists and if you watch films about the federal reserve that put forward the conspiracy they are filled with quotes from people that are out on context, sometimes taken from fiction, sometimes falsely attributed and occasionally genuine quotes by people who have no real authority on the subject.
The Abolish the Federal Reserve site features quotes from Thomas Jefferson, James Madison, Andrew Jackson and Abraham Lincoln.
The first Thomas Jefferson quote is pretty accurate. Jefferson opposed big banking interests. The second quote appears in the movie Zeitgeist and a number of other places but nobody, including Jefferson scholars, has any idea where it comes from. This suggests that it is probably fabricated. The United States has had central banking in one form of another since its founding, with only 1837-1862 being free from having a central bank of the United States. (more on that later.)
The second quote is from James Madison. It is an anti-bank quote from Madison about private banks. The problem with this is that Madison was one of the biggest proponents of a central banking system for the United States, and was directly involved in the forming of The Second Bank of the United States, which he believed would control inflation. Quoting Madison to make a point against central banking is like quoting Colonel Sanders to try and disparage chicken.
The next quote is from President Andrew Jackson who did indeed abolish central banking in the United States and return us to the Gold standard. Oh, and by the way, the economy almost immediately collapsed and created the depression of 1837, which lasted between four and six years depending on who you ask. While the causes of the depression are debated, the return to the Gold Standard is usually considered one of the main causes by the majority of experts.
The quote by Lincoln has absolutely nothing to do with the Federal Reserve. It is based on two lies about the Federal Reserve, the first being that they print money and the second being that they loan money at interest to the US Government. While the Federal Reserve does advice the US Treasury on the printing of money, they do not print money themselves and I have already debunked the second claim. If you believe the first two lies, then the Lincoln quote seems to be about the Fed but it isn't.
CLAIM #5 THE FEDERAL RESERVE CAUSES FINANCIAL CRASHES ON PURPOSE
The people who claim that the Federal Reserve should be abolished usually claim that the organization has so much power that they can cause "boom and bust" cycles all on their own. Not only is this crazy, since they are overseen, audited and report to congress on a regular basis but this also seems to have a US currency is the center of the universe type mindset. While the United States economy is pretty important to the overall world economy, the idea that big banks in the United States can purposely manipulate the economy to react any way they want it to should be seen as outright ridiculous by anybody who has taken even a rudimentary economics course or read anything on the subject.
This is a common trope of conspiracy theories. The shadowy "them" has so much power that their motive for what they do starts to seem suspect, since what do they have to gain, already having complete control of everything?
The claims are so numerous that going through each individual one is just too time consuming. There is a debunking of most of them in this article on the section of the internet film Zeitgeist having to do with the Federal Reserve.
Many claim that the Great Depression was orchestrated by the bankers through the Fed. Anybody can read a book or article about the numerous and complex causes of the Great Depression and an article could be written by me just on that subject. But one thing that people don't argue a lot about is what was caused by the Great Depression, which would have been the ends that the bankers were shooting for and provide them with a motive.
In the United States the obvious result of the depression was the New Deal. This included:
The GI Bill
Much stricter anti-trust laws
Fair Labor Standards Act
Correct me if I'm wrong but aren't these all things that the right wing has been trying to get rid of ever since? Why would bankers want all these things to happen? What is the motive? Once again this reveals what the motives of those interests who spread this theory around really are. They want to take away the regularity power that the Fed has but let the banks do what they want.
The second, and much less positive thing caused by the depression was World War 2. Depending on what kind of conspiracy theorist you are, this was plotted by the reptilian lizard men, Illuminati, New World Order or the federal reserve. The idea that the Fed intentionally caused World War 2, is even more ridiculous than the lizard men theory. At least the aliens would have advanced technology and shape-shifting abilities. The Fed is just a bunch of banks, overseen by a board of governors, appointed by the President, subject to the oversight of Congress. Way less evil if you ask me. And even less plausible.
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