E The Federal Reserve – Purpose And Motivation

With each succeeding day, the obsession with the Federal Reserve continues. And the obsession is a good indicator of just how misinformed most of us are.

This is true with respect to various policies, statements, and actions; and includes comments made by board members, either in speeches or interviews. But it is also true regarding purpose and motivation.

To a large extent, it is a matter of perception. Some, maybe most, people see the Fed as the lead driver. There is an assumed aura of authority and control. On all matters economic, we look to them for direction. But where are they taking us?

That question might be better answered by asking where they/we have been. And not just since last month or last quarter.

The Federal Reserve Bank was established in 1913. One of its stated purposes is to manage the economic cycle (stages of the cycle: prosperity, inflation, recession, depression).

The intention was to smooth out the changes in the cycle so that a more consistent and positive level of economic activity would endure. And, in addition, avoid recessions and depressions.

One of the biggest motivating factors behind this attempt was the fear of panics and crashes.

Panics and crashes had occurred on a reasonably regular basis throughout the country’s economic history.  But they are not unique. And they did not last long. What they did do was allow the necessary correction of imbalances and excesses to take place.

However admirable the efforts to avoid recessions, depressions, and their effects may be, it is simply not possible. Nor is it wise.

When someone suffers from a cough, one of the first things most people do is to take a cough suppressant. The cough and its symptoms are seen as undesirable. Unfortunately, this action stems from a misunderstanding about coughs.

Coughing is a sign of healing – not illness. Coughing is one of the body’s most efficient ways to eliminate toxins. By suppressing a cough, one is altering or delaying the healing process. The toxins will remain in the body and contribute to more severe problems later on.

Over the course of the last century, the Federal Reserve has managed to suppress and smooth out the stages of the economic cycle to a degree. We have had seemingly longer periods of prosperity and less frequent downturns in our economy. But at what cost?

For one thing, they have destroyed the value of our money. The U.S. dollar today is worth less than 2 cents compared to its purchasing power in 1913, when the Fed began its life on earth. This is a direct result of the inflation which they (the Fed) create continually by expanding the supply of money and credit.