History of Central Banking in the US

[ivanm]

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The following article by wikipedia gives a lot of information about the history of the Federal Reserve System, which is the present central bank of the US.
A brief history of central banking is also given.  I think that before dissing the FRS one must first see why it was created and what it is supposed to be doing.

http://en.wikipedia.org/wiki/Federal_Reserve_System

[ivanm]

 
From the previous link:

In 1690, the Massachusetts Bay Colony became the first in the United States to issue paper money, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade.[17] Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies.[18] However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate.[17]

The first attempt at a national currency was during the American Revolutionary War. In 1775 the Continental Congress began issuing its own paper currency, calling their bills "Continentals". The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. As a result, the value of a Continental diminished quickly. The experience led the United States to be skeptical of unbacked currencies, which were not issued again until the Civil War.[17]

In 1791, which was after the U.S. Constitution was ratified, the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811.[17] Unlike the prior attempt at a centralized currency, the increase in the federal government's power, granted to it by the constitution, allowed national central banks to possess a monopoly on the issuing of U.S currency.[19] Nonetheless, the First Bank of the United States came to an end under President Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under President Jackson when its charter expired. Both banks were based upon the Bank of England.[20] Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.

[edit] Timeline of central banking in the United States1791–1811: First Bank of the United States
1811–1816: No central bank
1816–1836: Second Bank of the United States
1837–1862: Free Bank Era
1846–1921: Independent Treasury System
1863–1913: National Banks
1913–Present: Federal Reserve System
Sources: "Remarks by Chairman Alan Greenspan – "Our banking history"". May 2, 1998. http://www.federalreserve.gov/BoardDocs/Speeches/1998/19980502.htm. , "History of the Federal Reserve". http://www.federalreserveeducation.org/about%2Dthe%2Dfed/history. , "Historical Beginnings...The Federal Reserve" (PDF). 1999. http://www.bos.frb.org/about/pubs/begin.pdf. , Chapter 1
[edit] Creation of First and Second Central Bank
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The fact that the Contintentals were backed by future tax revenues sounds familiar, as that is basically what we have now for backing, the promise to make good on the outstanding Trreasury securities that back our fiat money.

People associate fiat money with FRS, but fail to realize that such a concept was being used by the early colonists.  Paper currency in a sense is fiat money as its intrinsic worth is not what the denominations says it is, but there are reasons for using paper money, and some of that is pointed out in the article.
It isn't practical to mint coins to replace the paper because of the huge demand for currency, and using coins has a few disadvantage, particularly if the coins are made of precious metal.  At todays prices for nickel and copper one could say that even nickels and pennies are made of  precious metals. So what happens, people melt the coins down and sell them for scrap metal.
 
One dfisadvantage of using a par value coin of gold or silver is that it can be shaved or melted down. Another is that a lot of them are heavy to carry around.
With todays prices you would need a cart at the store to carry your money, and another to carry your purchases.  If a coin of precious metal is lost then that is a genuine hit but if a bill is lost then its intrinsic value is not significant even though the monetary loss to the former holder is very real. Given the fact that the higher circulation small bills deteriorate rapidly and are replaced on an ongoing basis, the loss to the monetary system of a paper bill is not really significant in  terms of cost to replace it.

The beauty of fiat money is that most large transactions are done without actually using currency, and involve changes in account balances. This feature makes our modern monetary system very flexible and very portable.  As an example, I frequently buy things online from sources that are hundreds of miles from here, and I usually use a credit card to make the purchase and an EFT to pay the bill when it comes in each month.  I would guess that most vendors would not otherwise ship the goods until they received a check or cash from me, and that might takes several days.  The way it is, my mail order prescripions are filled, shipped, and billed to my credit card, and the order arrives within a few business days. I don't think we could do such a thing if it were not for fiat money and ETFs because using coins would be slow, risky, and expensive in terms of postage or freight.

Fractional reserves are associated with fiat money and can work to our advantage. Keep in mind that only a small portion of major transactions are actually done with the actual exchange of currency.  The fractional reserve concept was discovered and used by early merchants who provided storage for people's valuables, including money, and they realized that at a point in time only a small amount of the total amount entrusted by depositors to them for safe keeping would be needed to meet the demands of those who came for withdrawals.  Off hand I do not know the multiplicaton factor, but I would guess that for every ten dollars in circulation only one is actually on hand somewhere in an account. As long as people have faith in the system it will work, and it has worked for a few centuries here in the states, but if a bunch of fear mongers stir up doubt in people's mind then our currency system can come under pressure.

People will likely mistrust the banking system and will hoard their cash at home, which can be a foolish practice. Once money is hoarded then people decrease their spending levels and we have a recession brought on by mistrust of the monetary system. So right now it is a dumb thing to be promoting the idea that our monetary system is against us.  There may be some chicanery going on amongst the money changers, but to drop the FRS and make do without it would not be too cool.  What would we replace it with but a damned political system being mishandled and abused by idiots like Obama has in the Treasury Department?  Those incompetent thugs are the last people you should want to be mishandling our money supply.

[ivanm]

So what does Ron Paul want to replace the FRS with?  How would it work? 

[Hollybaere]

The following article by wikipedia gives a lot of information about the history of the Federal Reserve System, which is the present central bank of the US.
A brief history of central banking is also given.  I think that before dissing the FRS one must first see why it was created and what it is supposed to be doing.

http://en.wikipedia.org/wiki/Federal_Reserve_System

"What it is supposed to be doing"

According to your link: According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government."

Since it was inacted in 1913, it seems that the FRS DID NOT prevent the Great Depression that began in 1929, since that is what your article claims it was one of the things it was  "supposed to do".

Laptop Brigade: Ron Paul on Monetary Reform	Small | Large

[dustup]

Chairman Ben S. Bernanke, who said in a 2002 speech:

    "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."


Ron Paul often talks about legalizing competing currencies to begin the process. Obviously ending the Fed cannot be done overnight. There would need to be a smooth transition out of the FRB system and into something else..like a new gold standard. Put Congress back in charge of Coining America's money.....

There is a good book called “End the Fed” by Ron Paul, maybe give that a read
http://www.amazon.com/End-Fed-Ron-Paul/dp/0446549177/

[ivanm]

"What it is supposed to be doing"

According to your link: According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government."

Since it was inacted in 1913, it seems that the FRS DID NOT prevent the Great Depression that began in 1929, since that is what your article claims it was one of the things it was  "supposed to do".

Laptop Brigade: Ron Paul on Monetary Reform

I think that Mr. Benanke admited that much. 

[ivanm]

Chairman Ben S. Bernanke, who said in a 2002 speech:

    "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."


Ron Paul often talks about legalizing competing currencies to begin the process. Obviously ending the Fed cannot be done overnight. There would need to be a smooth transition out of the FRB system and into something else..like a new gold standard. Put Congress back in charge of Coining America's money.....

There is a good book called “End the Fed” by Ron Paul, maybe give that a read
http://www.amazon.com/End-Fed-Ron-Paul/dp/0446549177/

  I assume the government prints paper currency and  mints coin. However, it leaves the management of the money supply to the FRS.

The Bureau of Engraving and Printing is part of the US Treasury, and I assume the US Mint is also part of the US Treasury.

[dustup]

The Creature From Jekyll Island (by G. Edward Griffin)

The Creature From Jekyll Island (by G. Edward Griffin)	Small | Large

[ivanm]

"What it is supposed to be doing"

According to your link: According to the Board of Governors, the Federal Reserve is independent within government in that "its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government."

Since it was inacted in 1913, it seems that the FRS DID NOT prevent the Great Depression that began in 1929, since that is what your article claims it was one of the things it was  "supposed to do".

Laptop Brigade: Ron Paul on Monetary Reform

The folllowing link points to an article on the duties of the FRS.  Whether or not it performs these duties well is a matter of opinion.

http://www.investopedia.com/university/thefed/fed2.asp#axzz1az6qg9Oc

[Hollybaere]

"Bernanke Threatens The Congress" We will cause an Economic Collapse if you audit the Fed!

"Bernanke Threatens The Congress" We will cause an Economic Collapse if you audit the Fed!	Small | Large

What the??