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

http://www.americanbankingnews.com/2009/09/02/what-would-the...

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 Fed".

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

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.

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.

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