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:

Social Security

Unemployment Insurance

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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Comments 13 comments

HSchneider 5 years ago from Parsippany, New Jersey

Excellent analysis Robephiles. I totally agree with all of your points. The Federal Reserve has become a convenient whipping boy for both the Far Right and the Far Left. There would have been much more drastic business cycle swings in the past years without The Fed to regulate the banking system and money supply. They are far from perfect but they do the best with the economic data they have. I believe Ben Bernanke has been brilliant dealing with this financial meltdown and keeping the economy and banking system afloat. Alan Greenspan deserves a lot of blame for first priming the pump with low rates for too long. Also for convincing the Clinton Administration to go with his Ayn Rand philosophies of free markets by killing Glass-Steagall. That action set the wheels in motion for unscrupulous and greedy financial people to game the system and allow it to spin out of control.


Robephiles profile image

Robephiles 5 years ago Author

Bernanke has done a great job with inflation. People keep saying he hasn't but I expected much more rise in inflation then we have had. People perceive it as being worse because of the lowering of the average income. I am shocked at how low the average US income has gone. I'm not an economics expert but I am pretty shocked by how many people have jumped on these "abolish the Fed" movements, with the flimsiest of arguments. If I can see through them, then most people should be able to, with a little research.


chefsref profile image

chefsref 5 years ago from Citra Florida

Hey Robephiles

I will take issue with the notion that Bernanke has controlled inflation. Back during the Carter administration the drivers of inflation were removed from the CPI. We no longer count food or fuel as part of the index. The crash in housing prices (If they are even in the CPI?)would further reduce the apparent rate of inflation. In short inflation is low because they don't count the stuff we buy every day.

As to the Fed, My issue is that so much power over the economy has devolved into so few hands. Alan Greenspan is an acolyte of Ayn Rand and he was all but worshiped as some kind of financial god. His policies, in part, helped lead us into the crash of 2008. Paul Volker had saner policies but he was probably drummed out of the Obama admin.

I don't have a replacement for the Fed, nationalizing it would hand the power to the politicians with disastrous result guaranteed. My reluctant conclusion is that we have to accept the Fed as the lesser of evils.

The real danger we face is the hoard of people that take an anti-Fed position without ever researching the issue. A gold standard would lead to widespread poverty as the money supply contracted and force the world into a depression


Robephiles profile image

Robephiles 5 years ago Author

I have seen some analysis that has made the claim that Bernanke has controlled inflation much better than past heads of the Federal Reserve. But once again, I am not enough of an expert to really pick such analysis apart for biases or flaws. Still, I was expecting a much bigger increase in inflation then we have seemed to have had.


chefsref profile image

chefsref 5 years ago from Citra Florida

You're right but I am still outraged that the stuff we need is not counted toward inflation. I too have been surprised that inflation is not even worse and that does go to Bernanke's credit. The problem remains,Is our economy dependent on the decisions of one man (or the board)

? That is at the heart of my issue with the Fed but what can we do about it?

Good hub, well researched and presented!


Whit 4 years ago

I agree with most of what you say, but I take exception to the idea that the banks and investment firms did not cause the most recent recession. I don't think it was a big conspiracy, but they knew what they were doing giving out subprime loans at the rate they were and hedging, double-dipping, taking HUGE bonuses even though their companies were in the red. The cause of most recessions is ignorance and when the public, government and the media fail to check the balances of the people who keep track of the money. Politicians, the public and journalists didn't seem to know enough to ask the right questions until it was too late, and the government did not have enough power (and truthfully seemed to blissfully ignore a burgeoning problem that it should have foreseen) to alter the monetary policy. That said, I don't know if I need to do some more research, but the Libertarians arguing about further transparency in the Fed seem to be arguing the opposite of their usual stance, no?


Ben McLean profile image

Ben McLean 4 years ago from Kansas City, Missouri

OK there are at least two serious problems with your analysis here. First, your comments suggest that the Supreme Court has had some semblance of judicial restraint or basic sanity and actually makes some consistent attempt to follow what the text of the Constitution actually says rather than randomly pulling opinions out of their pants. In actual practice, the wizards in black robes simply make crap up. So when someone on the Right says something is unconstitutional, they are not making a claim about the arbitrary decrees of the monarchy .... I mean judiciary. They're addressing the Constitution textually: what the world would be like with a Supreme Court that sometimes at least tried to act like a court rather than trying to pass themselves off as a third house of the legislature.

Second, you fail to address the main argument: "The Federal Reserve creates unlimited effective taxation through inflation by creating money out of nothing. No one should be able to create money out of nothing." That is the main and primary reason given by these "gold standard, anti-Fed" folks to abolish the Fed. I'm not sure how valid of an argument this might be and was hoping to hear some analysis that addressed this claim because I am not an economist and so am not very well equipped to bring relevant criticism to this claim. I was disappointed not to find it here.


Robephiles profile image

Robephiles 4 years ago Author

My references to the supreme court are merely to point out the fallacy of using unconstitutionality as the ONLY criteria for criticizing a certain practice. Also, one assumes that the constitution was not intended to be a "living document" when they try to make a very literal constructionist interpretation. The text is open to interpretation. That is why the text itself created a branch of government whose sole purpose is to interpret it.

Secondly, the gold standard is arbitrary. If you doubt this then think to yourself, why Gold? Why not diamonds, steel or anything else. Gold is heavy and soft and has very few uses outside of making shiny trinkets. So why should this metal serve as the basis for value?


Ben McLean profile image

Ben McLean 4 years ago from Kansas City, Missouri

-- "My references to the supreme court are merely to point out the fallacy of using unconstitutionality as the ONLY criteria for criticizing a certain practice."

It is a perfectly valid criteria. There are additional checkpoints a practice of the federal government might need to go through after constitutionality to be justified but if the practice can be shown to be unconstitutional then that is sufficient to illegitimize it.

-- "Also, one assumes that the constitution was not intended to be a "living document""

Yes one does, because documents are not alive and to pretend otherwise is insane, like talking to inanimate objects and believing them to be alive kind of insane.

We are supposed to have a federal government of specifically enumerated powers in a written Constitution that was written and not left unwritten like the British constitution but specifically written so that the only legitimate way for the federal government to get additional powers or mandates was the amendment process and that's all. Any other view is simply opposed to the Constitution, not interpreting it. This is not an open, debatable question, it is honesty vs dishonesty.

-- "Secondly, the gold standard is arbitrary. If you doubt this then think to yourself, why Gold? Why not diamonds, steel or anything else."

Anything of real value would work. The issue is a materially backed paper currency versus a baseless one.


Robephiles profile image

Robephiles 4 years ago Author

"It is a perfectly valid criteria. There are additional checkpoints a practice of the federal government might need to go through after constitutionality to be justified but if the practice can be shown to be unconstitutional then that is sufficient to illegitimize it."

You are speaking in a legal sense. But Legality is informed by ethical constructs not the other away around. Something is not "right" because it is backed up by the law, though ideally the law should be based on what is "right."

"Yes one does, because documents are not alive and to pretend otherwise is insane, like talking to inanimate objects and believing them to be alive kind of insane.

We are supposed to have a federal government of specifically enumerated powers in a written Constitution that was written and not left unwritten like the British constitution but specifically written so that the only legitimate way for the federal government to get additional powers or mandates was the amendment process and that's all. Any other view is simply opposed to the Constitution, not interpreting it. This is not an open, debatable question, it is honesty vs dishonesty."

This, first of all, is taking the word "living document" to mean something other than what it means. If we can just change the definitions of terms to suit us then there is not only no point to this conversation, but no point to this seemingly "infallible" legal document.

The second point is completely ignoring the role of the supreme court in the process. That branch of government is part of the process and by dismissing it outright but then treating every other part of the process as sacred, you are only proving my point.

"Anything of real value would work. The issue is a materially backed paper currency versus a baseless one."

Really? Then we better get the government some physical assets. It is a good thing we have people to point out that the government owns nothing, therefore our paper money has nothing to back it up. All value is arbitrary in some ways. There is no such thing as objective value.


Ben McLean profile image

Ben McLean 4 years ago from Kansas City, Missouri

-- "You are speaking in a legal sense. But Legality is informed by ethical constructs not the other away around. Something is not "right" because it is backed up by the law, though ideally the law should be based on what is "right.""

When I say justified I mean ethically justified. Circumventing the ammendment process to give the federal government unconstitutional powers is unethcal.

-- "This, first of all, is taking the word "living document" to mean something other than what it means. If we can just change the definitions of terms to suit us then there is ... no point to this conversation"

Exactly. See what I did there?

"I entirely concur in the propriety of resorting to the sense in which the Constitution was accepted and ratified BY THE NATION. In that sense alone it is the legitimate Constitution. And if that be not the guide in expounding it, there can be no security for a consistent and stable, more than for a faithful exercise of its powers. If the meaning of the text be sought in the changeable meaning of the words composing it, it is evident that the shape and attributes of the Government must partake of the changes to which the words and phrases of all living languages are constantly subject. What a metamorphosis would be produced in the code of law if all its ancient phraseology were to be taken in its modern sense! And that the language of our Constitution is already undergoing interpretations unknown to its founders, will I believe appear to all unbiased Enquirers into the history of its origin and adoption."

- James Madison in a letter to Henry Lee, June 25, 1824


Ben McLean profile image

Ben McLean 4 years ago from Kansas City, Missouri

The "living constitution" view is the view that "we can just change the definitions of terms to suit us." My "talking to inanimate objects" comment was applying it to itself.

-- "All value is arbitrary in some ways. There is no such thing as objective value."

There's a big difference between economic value and moral / ethical values. There certainly are objective moral values. There isn't objective economic value other than that set by a market, but there are some economic values that are better than others. The contention of these gold standard folks seems to be that our currency would retain it's buying power against inflation if it was backed by some real commodity like rare metal and that inflation is actually a tax because it takes away the buying power of our dollars which actually goes to the government. I'm not sure how much of their contention is really based on sound economics but I haven't learned it here as of yet, that's for sure.


Shrutee 3 years ago

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