In: Economics
Is the Federal Reserve Bank (the Fed) too powerful? Explain the pros and cons of having a central bank controlling the money supply.
The Federal Reserve is considered the most powerful economic
institution in the world because of its ability to influence access
to the world's most influential currency: the US dollar. Despite
the controversy of the dollar as an international reserve currency,
especially in the wake of the 2007-2009 financial crisis, it is
still held in large amounts in the forex reserves of numerous
central banks across the world. As a result, many countries trade
in US dollars because of its versatility.
Since the US Federal Reserve System is the only institution* that
has the power to print and destroy USD, it is therefore considered
the most powerful central bank in the world. The Fed has the power,
for instance, to print more dollars and devalue the currency and in
turn the value of its debt to foreign lending institutions.
List of Pros of Federal Reserve
1. It established a national currency.
Before the Fed system was implemented, there were tens of thousands
of currencies used in the US. Then, it made a single currency valid
throughout the country, helping the economy to run smoothly.
2. It increases transparency and predictability.
The rule-based systems used in the Fed’s monetary policy increase
predictability and transparency, helping the Central Bank with
explaining its actions to the public and helping the market to
predict what the Fed would do. This has a significant impact on
people’s lives, like low interest rates benefiting debtors over the
creditors.
3. It ensures a sound financial system.
The Federal Reserve System functions by conducting the country’s
monetary policy by influencing credit and money conditions in the
economy to ensure full employment and stable prices.
4. It represents the country and its financial interests.
Without such a system, interests would be represented by banks and
would not be clearly the best financial option as these
institutions are normally more concerned about private sector than
the public. Also, the Fed requires banks to subject themselves
under impartial and external audit. And if the system did not
exist, all audits would just have taken place internally, which can
lead to corruption among banks.
5. It increases the credibility and accountability of future
policy actions.
By setting rules, the Fed is able to reduce the incentive to later
renege on their promises. Without a rule-based system, it is argued
that a central bank will still be able to promise to keep inflation
low, but it would later be tempted into printing money just to
generate revenue for the government.
6. It contains systemic risks in the country’s financial
system.
The Federal Reserve works to maintain financial system stability
and contain systemic risk that would arise in the financial
markets. Also, it provides certain financial services to the US
financial institutions and government, as well as foreign official
institutions. Aside from this, it plays a major role in overseeing
and operating the payments systems in the country.
List of Cons of Federal Reserve
1. It is considered as invasive and unconstitutional.
The Federal Reserve System is often regarded as anti-capitalism, as
finances will be controlled by a huge government organization,
instead of a group of private businesses. This means an expansion
of government size, which is criticized by many people.
2. It is created as a means of enslaving the government with
debt.
Actually, the US government could only go into debt if it chooses
to. Many people speculate that the government would one day simply
decide to print as many US dollars as it wants and then pay off all
debts of the government.
3. It is often seen as favoring private interests over public
interests.
It is stated that private interest and lobby groups have a great
deal of influence over the Federal Reserve, allowing individuals to
benefit rather than the whole society and taking away the
well-being and rights of the public
4. It is believed to increase instability.
Contrary to the belief that the Federal Reserve has alleviated the
bank panics in the past, some people believe that the Central Bank
cannot adequately manage a country’s monetary policy and can
actually increase economic instability. And while some people
believe that it is highly willing to accommodate political
administrations and allow asset bubbles to inflate, other people
think that it interferes in the economy too much.
5. It manipulates the US economy by setting national interest
rates.
As it can keep rates low or high, the Fed has the capability to
foster growth or hinder it. It can inflate massive bubbles and then
just pop them up. While many Americans give much credit and blame
to the presidents on how the economy is doing, these leaders
actually do not much control over it compared to the Fed.