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The Federal Reserve: A Slippery Slope to Economic Disaster

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The Federal Reserve is a monopolistic, government-run, machine which prints money out of thin air to support the groups and organizations of their choice. Since its creation in 1905,  it has been way too secretive, decreases the value of the dollar, causes inflation, and consistently makes poor projections which subsequently leads to unemployment among other problems.  Furthermore, the Fed is to blame for not only advancing the Great Depression, but also causing the 2008 Housing Bubble Crisis. In it’s 105 years of existence, the Fed has had several changes to it’s policies, in an attempt to “fix” its mistakes, but all of these so-called “fixes” have actually been more detrimental to the US economy.  In this essay, I will be discussing some possible solutions to one of the biggest problems of the United States economy: The Federal Reserve.

Structure of the Fed

My interest:

I chose this topic because I have always been interested in money, economics, and business.  I also read Fortune magazine regularly, and have attended a summer program at the Haas School of Business in Berkeley, California.  The mix of these two topics drew me into coming up with this topic for this project, along with my prior knowledge of United States monetary policy and banking system.  My interest really advanced following my overseas trip to Singapore and India last year. I saw the exchange rates and purchasing power of the US dollar in different countries and how they have changed over the years…   with ominous results. There are many reasons for this, and a very important reason for this is due to the actions of the Federal Reserve. After all, a dollar is formally known as a Federal Reserve Note. To learn more about my personal interest and a brief summary on the Fed, click here.

Note: Throughout this article, after most sections, I have attached links to some of my essays which contain more in-depth descriptions and analysis of the material covered in this article.

Structure and Functions of the Fed Video

History of the Fed

The concept of a national banking system in the United States arose well before the passage of the Federal Reserve Act in 1913.  It started during the time of Alexander Hamilton, when he and Thomas Jefferson fought over the constitutionality of a national banking system.  The arguments continued between the two main political parties of the time: The Federalists and the Anti-Federalists, with the latter arguing against the system.  In the early years after the passage of the act, few banks were willing to join the Fed, as it is commonly called. But after the Great War in the late 1910s, banks had to repay their debts, which is where the Fed took its first giant step to major economic power.  The Fed promised to help the banks if they joined the reserve system, and the banks readily agreed. At the time, this seemed like a good thing, but it really was just a monster in disguise.

The so called “help” given by the Fed was actually just printing more money and bailing out the banks, which led to inflation, and gave the government a mindset that the Fed could always bail out failing institutions by simply printing more money, leading to high-risk activity among stockbrokers and the government alike.  Inflation rose, and the Fed hiked up their interest rates in an attempt to combat it. This led to a short recession, as companies were forced to lay-off workers to pay the rates, and throughout the 1920s, the Fed would alter the interest rates without any public approval or say in the matter. Several market prediction failures led to bad calls by the Fed to alter the rates, which led the minor recession of the early 1930s to change into the biggest economic depression in history → The Great Depression.  

This graph shows the average inflation rate in the years before and after the Federal Reserve Act’s passage. Inflation actually decreased from 1774-1912, but it increased at an average rate of 3.3% after the Fed was created.

Yet banks didn’t have a choice, and only member banks would get benefits, so many more joined the fed and once again turned to them for help, even though they were the cause of the problem! Once again, this just goes to show how anti-capitalist and anti-free-market the Fed really is.  

Similarities to Communism

In fact, the Fed’s policies are very similar to the negative side effects of Communism!  In Communist countries, the citizens, though oppressed and constantly monitored, still have to rely on the government giving them their rations, people still support their communist candidates because they have a mindset of “Who will give me my rations if a Communist doesn’t win. They still provide their labor, but since it goes entirely to the Communist regime to be rationed, the people start to put less effort, leading to less output. It is a futile effort to vote against the Communists, however, because of their extent of control, yet the people still support and vote for them, because in their mind,without the Communists, they won’t get their food, housing etc. The banks of America have a similar mindset nowadays. They become lazy and take too many unnecessary risks, knowing the Fed will help to bail them out by distributing money not only through their printing presses, but also the membership fee to be a reserve bank, knowing that they are not directly reliable for the state of the economy. The banks know that the Fed is very controlling and manipulative, yet they still rely and support them because without the Fed, who will help them when they are in trouble?  Who will bail them out? This sends the entire American banking system into a downward spiral of deep reliance for the Fed, regardless of the negative consequences, simply because with the Fed’s monetary policy, it’s existence has started to become a necessity.  The United States has to rebel against this communist-esque system, and reincorporate the free market.

To learn more about the history of the Federal Reserve, please click here

Modern Failures of the Fed

When FDR became president, he gave the Fed even more power leading to more boom-and-bust cycles throughout the early 20th century.  In the 1970s, Chairman Paul Volcker created new policies in an attempt to combat the problem, but the “fixes” where only short term; they eventually led to even more long term harm.  

The Fed is buying $45 billion per month of Treasury debt. This keeps long-term interest rates low… encouraging business and individuals to borrow, and discourages them from saving.”

-Peter Schiff

In the 1990s, when Citibank suffered from its unnecessary risk taking and over reliance on the Fed, they started to suffer.  However, instead of the Fed admitting their mistake, the secretive organization attempted to cover up the failure by not releasing their records.  However, this was legal, but only because of the authoritarian principles of the Fed.  They helped to pass the Federal Records Act in 1950 which legalized this activity, because of the consistent failures of the system.   But why would the Fed want to hide the reports in the first place? This is in order to prevent the public from knowing that the bank’s losses were heavily influenced by the Fed’s monetary policies.  The truth is that for the “80 years prior to the creation of a federal backstop, the bank had been rock-solid” (Freeman).

The Fed did a lousy job in monitoring the interest rates during the Housing Bubble
Recession is the gray area in the graph.

Arguably, the biggest disaster in Federal Reserve monetary policy was the 2008 Housing Bubble Crash.  Excessive risk taking, poor projections, and a necessity to remain quiet and secretive of their failures (in order to keep their commanding power) resulted in the recession to get out of hand.  At the time the Fed was under the control of Alan Greenspan, and these crooked techniques to give the economy a mask of a no-danger situation in order to keep the public’s trust, was known as the Greenspan Put.


The Federal Reserve has rarely achieved sustained periods of relatively stable growth and low inflation”

-Allan Meltzer

Many of the Fed’s “solutions” involved just giving themselves more control over the economy.  Another “solution” was to bail out banks through taxes. This was a huge grasp for power, as it meant taking the public’s money to help private institutions, furthering increasing the vulnerability of non-member banks, and the power dynamic between them and the American people. Another poor policy, which is currently being implemented, is known as QE, or quantitative easing, which behind all the layers, is just another excuse to print money out of thin air.

To learn more about the modern effects of the Federal Reserve, please click here.

Institutional Change

There are several possibilities of institutional change to combat the Fed.  One solution is to just let failing institutions fail. This will prevent an over-reliance on the Fed from banks, it will save taxpayers’ money for more useful causes, and will help to curve the country on the right track of being a “nation of savers” rather than a “nation of borrowers”, with a perpetual amount of unnecessary risk (Schiff).  Another possible solution would be to prevent the Fed from controlling interest rates and printing money at will. This will help to curb inflation, and let a true free market continue. Furthermore, it is really illogical that a handful of people can supposedly make better decisions than millions of American citizens, and this is backed by the constant failures of the Fed’s predictions over the years, and how their control over the interest rates have been detrimental to economic success. After all, the country survived without the Fed for over 125 years with little inflation, yet still with great economic benefit (ex: transcontinental railroad, manufacturing, international trade). An understanding of these solutions will prompt the reader to see the obvious solution that the issues with the Fed are so extensive that the real solution would be just to eliminate the Fed altogether, and go back to the gold standard, where money is printed only after being backed off gold. Click here to see an Investopedia article to learn more about how money can be backed by gold.

Episode from Peter Schiff podcast on the Fed


Grassroots Change

It would be vacuous to boycott currency altogether, yet a reduce in the reliance of credit would be beneficial.  With less credit, the Fed will print money at a slower rate, which can help slow down inflation. The most important way for the average citizen to get involved in solving the problem would be to actually get educated on monetary policy in the United States.  After all, readers surely would have found that many common misconceptions were cleared over the Fed, and the US economy in general, after reading this article, and the attached, more in-depth essays (see end of each section). Some other useful people and organizations that can help to educate the public on this topic are enumerated below:

This site, https://www.federalreserveeducation.org/ provides information on the structure, function, and historical successes, (the reader will find that there are few compared to the) failures, and important leading figures in the Fed.

Read more about my solutions to the Federal Reserve Essay, Click Here!

After reading the article and watching my video on what the Fed will do in the case of another recession, (see above) please take the quiz at the bottom of the page to see how simple it really is to understand the Federal Reserve and how it is bad for the nation’s economy.

Listen/Watch economists talk about monetary policy.  Try Peter Schiff, CEO of Euro Pacific Capital Inc., who famously predicted the crash in 2008.  He has a podcast, with 2-3 hour-long episodes per week, and he educates the public in a way that people from the average citizen to the professional economist will understand and be able to formulate their own opinions.  not only on the Fed, but taxes, capitalism vs communism, savings, credit, bull vs bear markets, stocks, bonds, and loans, among many more. For a thorough, entertaining, and information-packed read targeted at people of all ages, I recommend reading this book: How an Economy Grows and Why It Crashes by Peter Schiff.  This is one of the places I first started in learning about American economics, and I still constantly refer to it. When people start to learn about the truth behind the myths of American economics, they will be able to make better informed decisions, vote for the right candidates, and help to take measures to counter the Fed’s authoritative policies.

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The questions on the quiz covered only a trivial amount of the information from this article and my attached essays. Yet, after seeing your results of the quiz, it is quite obvious to see that once people get educated on the Fed, they will be able to make smarter decisions, which as a combination of the nation’s population, can help to overthrow one of the most oppressive economical dictatorial body in the world: the Federal Reserve. Please input and questions or comments below.

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COMMENTS: 12
  1. April 26, 2019 by Eric Reply

    Interesting connection between the Fed and communism. I have never thought about that before

  2. April 26, 2019 by Subash Reply

    Nice, very insightful

  3. April 26, 2019 by Paul T. Reply

    It is truly amazing to see how an increase of federal powers has led to the weakening of the country as a whole, and how anti-free market systems like the Fed are worsening the country.

  4. April 27, 2019 by Ben Reply

    Well researched and presented on a timely topic. Few Americans are aware that US Dollars are IOUs, “Federal Reserve Notes” as you have pointed out. Just as no fiat currency in history has lasted forever.

  5. April 27, 2019 by Jai Reply

    Well researched! I definitely think this needs to be talked about more.

  6. April 27, 2019 by John Cena Reply

    This was very cool and I liked how you explained everything well

  7. April 28, 2019 by Henry Reply

    I thought that your topic was very interesting but I am having a hard time of understanding how you can compare the U.S. economy and the Fed to communism. I see no correlation between the American economy and a communist economy. The Fed is essential to economic stability and controlling the business cycles so that we never enter too big of a boom or too devastating of a bust, and I think that it isn’t productive to claim that an apolitical body such as the Fed is actually tipping our economy to communism.

    • April 29, 2019 by Vivek Jayaraman Reply

      Hello Henry,
      Thank you for reading my article. The Fed is endangering the free market to such an extent that it is resembling a form of oppression seen in Communist countries. In your comment, you pointed out that you couldn’t see the correlation between the American economy and a communist one. This may be so, but it is not the American economy that I am comparing. In fact, the ideal American economy before the Fed was formed in 1913 was really a good one, with little to no inflation over the span of the founding of the country to the passage of the Federal Reserve Act. Yet the Fed itself is endangering this free-market capitalistic society, leading to inflation and banks having an immense reliance of the Fed, among others. For more information on this, please see my attached essays which dive more in depth about the Fed. They can be found at the end of each paragraph. Furthermore, when you state that the Fed is there so that “we never enter too big of a boom or too devastating of a bust”, I would like to point out that the Fed further enhanced the Great Depression and the 2008 Crisis. To see my explanation on these topics please click here and here. Furthermore, if you haven’t seen my video on the article, please see it, as it describes the state of the economy, and how the Fed’s decisions have put us in a major trap. If you still have questions, please email me or reply to this comment. Thank you!

  8. April 29, 2019 by Ben Tanenbaum Reply

    I found your evaluation of the Federal Reserve and its consequences to be very thorough and well thought through. All of the graphs added a lot to the webpage as a whole and visualizing the problem made it much easier to understand! I also thought that both of your solutions were extremely insightful and the video that you recorded at the end was a great summary of the problem!

    • April 29, 2019 by Vivek Jayaraman Reply

      Hello Ben,
      I’m glad you enjoyed reading my article, especially the video. It is very important for the Fed to be either abolished or seriously reformed, and I would like to thank you for reading the facts that support this argument.

  9. April 30, 2019 by Kyong Pak Reply

    Great job, Vivek! You have a solid point of view, grounded in extensive research and knowledge. Your passion shines through in your presentation. Your graphs and videos clarify what for many is a complex topic – I personally learned a lot about the workings of the Fed through your essays. I wonder what your take is on President Trump recently calling on the Fed to lower interest rates. Thoughts? Overall, impressive presentation!

  10. May 09, 2019 by John Cena Returns Reply

    Good job

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