At the core of every free and fair democracy is an expertly managed monetary system, administered by an elite team of professional economists. It is impossible to have a free society without both a stable economy and a stable currency. Countries have tried and failed to run their economies without Central Banks, in each case having to concede that the economy cannot function without one, and that money needs to be centrally issued and controlled in order to be useful. America was once one such Country, managing to survive in relative poverty for the first half of its existence, until the evidence was overwhelming that things just weren’t working. In order to modernize America’s economy, in 1913 congress partnered with a group of distinguished financiers to form America’s Central Bank, the Federal Reserve Bank of the United States. This article discusses the essential functions of Central Banks, and why they form the bedrock of a modern liberal democracy.
Our Federal Reserve’s Dual Mandate
Our Federal Reserve bank is committed to a dual mandate of “maximum employment and stable prices”, and every decision they make is ultimately intended to influence these two variables, for the good of society. Democracy only works when there is a thriving middle class with a stake in the economy, and enough disposable income to exert control over their own lives and take part in the political process. Our Federal Reserve works to ensure that jobs are available for the middle class, and that businesses have a predictable economic environment to operate in. Without our Federal Reserve and its comittment to the dual mandate, natural political and economic instability would have inhibited the spectacular economic growth that we have witnessed over the last 100 years.
Free and Independent Monetary Policy
When our Federal Reserve was founded, it was specifically set up to be independent of congress. It was set up this way so that politicians could not corrupt the institution by letting their political motives interfere with monetary policy. Our Federal Reserve’s founders were wise enough to foresee the potential conflicts of interest between a congressman’s need to serve his constituents, and the need for sound, objective monetary policy. Part of the reason our Federal Reserve has been able to take such swift and decisive action, is that it is free from the bureaucracy and interference of congress. Our Federal Reserve’s independence also ensures that monetary policy is handled by economic experts only, and grants them the freedom to think and act as necessary, without political interference.
An Economic Safety Net
Capitalism cannot work on its own. Economists know that if capitalism is insufficiently regulated for too long, market participants become greedy, and the system eventually collapses. When this happens, it is the role of the Central Bank to step in and save the economy. We witnessed this phenomenon with the financial crisis of 2007-08. Because of insufficient regulation, Wall Street got ahead of itself and came close to crashing the entire financial system. This is when our Federal Reserve stepped in to pick up the pieces and save our economy from the brink of destruction. By buying up the destructive financial instruments that threatened the economy, our Federal Reserve was able to relieve our banks of their liabilities and save our financial system. Since this crisis, our economy has not only regained its strength, but we have also seen one of the greatest stock market rallies in history, demonstrating the power of quick and decisive monetary policy to truly turn an economy around for the better.
In Defense of Central Banking
There appears to be a libertarian subculture that expresses genuine hatred for central banking as a whole, and would like to see an end to Central Banks around the world. I have to imagine that this hatred is born out of ignorance or nihilism, as to disregard the essential functions of Central Banks, against all of the evidence and the complete consensus among top economists, simply makes no sense at all. I believe that the key to combating this ignorance is education, and I therefore urge congress to include an overview of the basic functions of Central Banking in our national curriculum. We all benefit from the workings of Central Banks every day, but it requires a grounding in the basics of economics to really appreciate what Central Banking has given us.