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What Would the United States Look Like Without the Federal Reserve?

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American Banking News
Thursday, Sept 3, 2009

Since H.R. 1207 was introduced by Dr. Ron Paul in Congress this February, there has been a growing movement questions whether the Fed should continue to operate without more oversight and some question whether or not the Federal Reserve should continue to operate at all.

Currenty, Paul’s “Audit the Fed” legislation has 282 co-sponsors and there are two similar pieces of legislation in the senate. If the legislation is passed, it will allow the Government Accountability Office (GAO) to review the Federal Reserve’s balance sheets and their policy deliberations and monetary transactions. Currently Federal Reserve Chairman, Ben Bernanke, opposes the plan, saying it would undermine the Fed’s independence.

The “Audit the Fed” act has a real chance in passing, but some supporters of the legislation, including Ron Paul, want to take it further than that by ending the Federal Reserve all together. Paul introduced a piece of follow-up legislation, entitled H.R. 833: The Federal Reserve Board Abolition Act which would wind down and eliminate the Federal Reserve over the course of the year. Currently, the act has no co-sponsors, but is gaining a lot of grass-roots support. Paul hopes that members of Congress will join his movement to end the Federal Reserve after they see the results of a full audit of the Federal Reserve. Paul also authored a book about his proposal to end the Federal Reserve, entitled “End the FedWhat Would the United States Look Like Without the Federal Reserve?  .”

Although the movement is in its infancy and still gaining momentum, it’s not too crazy to think that the United States wouldn’t be better off without the Federal Reserve. Since the Federal Reserve System was brought into force into 1914, the United States economy has grown at a slower pace than it did before 1914, despite significantly improved productivity. The rate of inflation has been substantially worse since the introduction of the Federal Reserve, despite the fact that the Federal Reserve was around during the greatest period of deflation in US History—the Great Depression.

What Would the United States Look Like Without the Federal Reserve?  150709banner2

Apologists for the Fed would certainly have a different take. They would note that the United States was in recession half of the time between the Civil War and 1914 and only 21% of the time since the Fed came into force. However, the frequent down-turns before 1914 weren’t the result of a lack of a central bank, but more-so because of poorly thought government regulations, such as bans on branch banking making it so that banks could not survive localized economic trouble. The Federal Government also forced banks to trade notes at a discount whenever the bank offering the note was from another area.

Throughout the Civil War, state bank notes were taxed into oblivion to make the way for nationalized banks. Since national banks were forced to accept each other’s notes at their face value, the currency was uniformed, but those national bank notes had to be backed by Federal bonds. That requirement proved disastrous after the Civil War because of a shortage of bonds, which resulted in 4 currency panics between 1873 and 1907, which prompted the establishment of the Federal Reserve.

  • A d v e r t i s e m e n t

Until 1907, many reformers simply hoped to abolish the restrictions placed on banks during the Civil War, and allowing them to issue notes and allowing banks to branch nationwide to standardize currency instead of the requirement to have the backing of government bonds. Reformers looked to Canada where a similar system had been functioning successfully for several decades.

Although Congress did consider several pieces of legislation similar to what Canada had, none of those made it out of Congress because local bankers were determined to block any proposal for branch banking that would threaten their local monopolies.

After the adoption of a system similar to Canada’s failed, only then did reformers consider the establishment of a central reserve bank. As a result, the Federal Reserve Act allowed for the creation of 12 new banks to do what other banks were prevented from doing themselves, establishing branch networks and issuing currency backed by commercial assets.

The Federal Reserve was a poor substitute for deregulation. Since the Fed had monopoly privileges in issuing currency, it allowed them to cause unchecked inflation. By 1919, the US Inflation rate jumped to nearly 20%. Since the Federal Reserve had a monopoly on currency, it also had to make sure that there was enough currency in the market to avert a crisis. Soon after, two of the worst monetary contractions in history, the first in 1921, and the second between 1929 and 1933 took place.

Would a Canadian-style asset-based currency have survived the Great Depression any better? It turns out that Canada’s did. Between 1929 and 1933, 1/3rd of the United States’ money stock was wiped out and Canada’s monetary supply only dropped by 13%. In Canada, there were no bank failures, where as there were over 6,000 in the United States! Although Canada fared better during the great depression, it moved to Central Banking in 1935 because of a movement to get more easy money.

If it were 1934, a call to end the Federal Reserve would not have been considered anywhere close to crazy. 75 years and several crisis’s later, we’ve all but forgotten what the world would look like without the Federal Reserve system, but that doesn’t mean the idea is any less valid than it was during the Great Depression.

Be sure to read our follow up article, “What Would the United States Look Like Without the FDIC?

This article was posted: Thursday, September 3, 2009 at 4:00 am





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