Question

In: Finance

The Federal Reserve is not responsible to the Public, the Congress or the President. They are...

The Federal Reserve is not responsible to the Public, the Congress or the President. They are not directly elected.

How is that a legitimate control in a Democratic Republic, such as the USA?

Solutions

Expert Solution

The federal reserve system is the central banking system of the USA. It is in other words a central bank, which determines the the monetary policy, independantly.

The federal reserve is considered an independant authority , with respect to its powers, and it does not have to report to anyone including the President of the country.

While the federal reserve is still very much a segmant of the government , it's independance is vital to be free of political and personal bias, since the entire fiscal structure's success is based on the decisions taken.

The following are the functions of the federal reserve:

1. It acts as the banker to all other banks : Accepts deposits, makes loans
2. It acts as the banker to the government : for its various schemes, projects through the approved budget
3, Controls the currency flow
4. Regulator of banks
5. Controls the monetary policy, including the currency in the economy, restricting or increasing it based on the goals it seeks to achieve.

While the federal reserve does not require the approval of congress or the president for its decisions on any of the matters it is responsible for, it's performance is subject to review by the congress.

Hence the federal reserve can be considered more of a quasi-independant body, which ultimately is subject to appointments by the government. However the appointments do not coincide with the presidential terms, making it more independant of elections.

While the federal reserve is required to be transparent in its workings, and ensure high quality responsive functioning for the well being of the economy, it is also fundamentally an unelected body, having independance, which some critics argue is unconstitutional.

However, to be free from political biases, and to function without interference, is paramount in their view, and hence it continues in its current structure and form.


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