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From 1836, when the Second Bank of the United States lost its congressional charter, to 1913, when the Federal Reserve Act passed, the U.S. was without a central bank. Major financial panics (and their accompanying recessions) occurred in 1873, 1884, 1893, 1901, 1903, and the Panic of 1907 led to a demand that Congress take action. The Aldrich Commission was dispatched to make a study, and shortly after its final report was made Congress changed hands from the big government Republicans (those were the days) to the more grassroots-oriented and anti-federalist Democrats. Instead of one central bank located in New York as the Commission recommended, twelve regional banks were created throughout the country, with a Board of Governors, which is the bank's present form.
What does it do?
The Fed essentially controls the amount of cash money in the United States and sets monetary policy. It has 12 branch banks (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco) which loan money to banks within their respective regions. This money is then lent at an interest rate to banks who then lend it to people and businesses. The Fed buys bonds to increase the money supply, lowering interest, and sells bonds to decrease money supply, increasing interest. This is the key part of the open-market operations for the Fed, allowing it to control inflation and growth to a certain extent. Previously the money supply was effectively in the hands of various Wall Street movers and shakers (e.g. JP Morgan).
Maiden Lane, AIG, and aid to central banks
During the banking crisis of 2008, the answer to "What does it do?" became "buy loads of toxic assets from failing banks." The Fed created a number of dummy corporations (sorry, "special purpose vehicles") called Maiden Lane I, II, and III to buy up crap from Wall Street and government-sponsored entities Fannie and Freddie. Some question the legality of the Fed's actions, however the Federal Reserve Act of 1913—Section 13(3) gives it authority "under unusual and exigent circumstances" to extend credit to individuals, partnerships, and corporations. A subsequent, full audit of the Fed revealed numerous alleged conflicts of interest in the deals.
After drastically increasing the size of its balance sheet, in what became nicknamed the "backdoor bailout," the Fed was able to provide $3.3 trillion in liquidity and a peak of over $9 trillion in short-term loans and assistance to Wall Street firms and foreign central banks, over several years. Total commitments were over $29 trillion, an amazing feat considering the GDP of Earth is estimated at $70 trillion.
Common arguments against the Fed
There are many criticisms of the Fed, varying in levels of coherence. Some criticism arises from a conspiratorial worldview that falsely attributes malicious motives to the Fed instead of incompetence or bad luck. The American monetary system is difficult to understand, even for someone in the financial industry and/or someone with an advanced degree. In fact, many principles that people were taught in schools before the 2008 crisis were turned on their head (e.g. big bank debt was risk free). The 2008 crisis and subsequent growing income inequality has furthered a greater distrust of the Federal Reserve.
The Fed has been a frequent subject of conspiracy theories alleging the Fed deliberately creates inflation, recessions, and even the Great Depression, through manipulation of the money supply. Father Coughlin, the John Birch Society, Liberty Lobby, Eustace Mullins, Pat Robertson, Alex Jones, Texe Marrs and several others have frequently expressed such conspiracy theories. Many of the popular claims made today are recycled from G. Edward Griffin's The Creature from Jekyll Island. In some (but not all) cases these conspiracy theories have an anti-Semitic component, alleging "Jews" secretly or openly control the Fed. These theories are furthermore sometimes tied in to other conspiracy theories about the Trilateral Commission or the New World Order, or manipulation of the U.S. economy by the Rockefeller and Rothschild banking families.
It seems like one of America's
nutjob dominionists True Scholars of the Faith™ has come up with a new completely insane theory in 2011 about the Federal Reserve, borrowing some points from Lyndon LaRouche. Apparently the Federal Reserve is now a foreign banking institution controlled by the British, and Britain is now firmly in control of (who else?) the Rothschild family. Through their control of the Federal Reserve, they are making the national debt increase (apparently the Federal Reserve controls fiscal policy) to the point where they can take their former colony back (apparently being indebted means England wins you). Only the Constitution Parteh can save you now! 
There is also the misconception that the Fed is independent or private, sometimes called "no more federal than FedEx." This is not entirely true as it is a quasi-public entity. The Fed, like most central banks in the world, is considered "independent," which is basically a term of art meaning that its day-to-day operations are not overseen by the federal government; it's similar to how state broadcasters (say, the BBC) are protected from becoming propaganda outlets. However, its chairman and board of governors are appointed by the president subject to 2/3 Senate approval, with regular 30 day reporting and Congressional oversight, and its mission of maintaining price levels and full employment is determined by Congress.
The extent to which banks "control" the Federal Reserve is that they technically "own" it, but not in the way that shareholders own Microsoft. Since the Federal Reserve was created by Congressional charter, they are not organized like a normal corporation. Shareholder banks have no voting power, and all decisions are made by aforementioned government-appointed policy wonks. Shareholder banks elect 6 out of the 9 members of each regional Federal Reserve Bank's directors, but these regional directors have no power over monetary policy; that power lies solely in the hands of the central Board of Governors.
However, the Board of Governors are appointed by lists which are given to the President by the staffs of banking committees of Congress and private sources. The most powerful of these groups are the financial institutions (which includes prominent members of the Fed itself) and the media corporations over which they have control. Thus, the appointment of these members is highly susceptible to political interests. The President does not select these people from his own personal address book, nor does he ask the public to submit nominations.
Trouble with accounting identities
Some monetary conspirators claim that the Fed creates money out of nothing and lends money to the government at interest, thereby stealing "the people's" money and selling us into debt slavery or some similar nefarious scheme to take over the US government. The way this works, however, is not quite the same as your regular commercial bank. The interest on debt held by the Fed actually goes to two places: One, the Fed pays itself out of this interest to cover its own operating costs, and two, the rest of the interest is rebated to the Treasury.
Typically, the Congress authorizes the U.S. Treasury to issue debt obligations, usually 90 day T-bills or longer term bonds, to cover its operating deficit. The Federal Reserve then purchases these obligations out of its reserve account with Federal Reserve Notes, aka U.S. currency.
This usually ties into the above point. The basic idea is that the Constitution gives Congress the power to coin money, so the Fed is unconstitutional because it is not the Congress. This is a pseudolegal argument because the Congress may delegate its powers. This is similar to pseudolegal arguments made by gold bugs. It also raises the question that if they were right, then do all 535 members of Congress (or 541, counting the non-voting delegates) have to personally make the coins and bills?
Sometimes a big deal is made of the fact the law bringing the Fed into existence was passed December 23, 1913, implying that most of the Congress was away for Christmas. The reality is quite different -- the House passed the law 298-60, with 76 not voting but with 34 announced pairs, while the Senate passed it 43-25, with 27 not voting but with 12 announced pairs. For those not aware, an announced pair is where a member of the House or Senate who will be absent arranges with another member who who will be present and is on the opposite side of the issue to form a “pair” with the absent member, thus allowing the absent member to have recorded how he would have voted had he been present. This means that at best only 42 more House members and 15 more Senate members could have said no to the creation of the Fed.
Although the vote would have passed even had everyone been present, some whale.to denizens claim that legislating on one of the last days of the session circumvented the possibility of challenges and debate. Why Congress would meet on days it thought off-limits when the two houses could, each with the consent of the other, choose to adjourn is beyond them.
Austrian school and free banking proponents
Much of the opposition to the Fed in non-conspiratorial circles (though there is some overlap) comes from the Austrian school, who are free banking proponents and generally draw on Ludwig von Mises' arguments against central banking. Ron Paul is particularly known for his multi-decadal anti-Fed crusade in Congress. In short, they claim that the Fed creates the business cycle through the expansion of the money supply which leads to "market distortion" and "malinvestment" due to easy money.
Ignoring lessons from the US Free Banking Era (1837 to 1864)
The biggest flaw with the free banking proponents is they either are ignorant or ignore the many problems seen in the Free Banking Era of the US.
The first problem was that during this era banks issued bank notes based on the gold and silver in their vaults effectively printing money. Since these bank notes could only be redeemed at face value at the bank that issued them the result was the actual value of the note decreasing the further from the bank it got. Then there was the issue if the bank failed these bank notes became worthless. This made any form of long distance commerce difficult, if not impossible.
The second problem was since the laws were set up by the individual states there was no consistency with regard to reserve requirements, interest rates for loans and deposits, capital ratios, or anything else. Worse enforcement of what laws there were was highly variable within a state. This resulted in some states what was later called "wildcat banking," where the bank notes were not backed by precious metal at all, but by mortgages or bonds. In other words the exact same problems as are claimed regarding the Fed but with even less oversight.
Ignoring the original Great Depression (1873–79 or 96)
Before the Crash of 1929, the term "Great Depression" referred to the period of 1873–96 which was marked by deflation (largely because the US shifted from a bimetallic standard to a de facto gold standard in 1873) and the rapid industrialization of the country. The term Gilded Age is also applied to this period and sometimes in a pejorative manner -- a shiny golden cover hiding a rotting or rotted core. The deflation that marked this period is why some wanted to return to a bimetallic standard, as hammered home in William Jennings Bryan's Cross of Gold speech in 1896. Even the shorter range of 1873–79 stated by the NBER is longer than the 1930's Great Depression by 22 months. This era is now called "the Long Depression"; the lesson it gives us is that switching over from a bimetallic standard to a gold standard (which the Coinage Act of 1873 effectively did) triggers deflation for extended periods of time.
After the establishment of the Fed
The US only saw three major banking crises after the establishment of the Fed (Great Depression, S&L crisis, 2008 financial crisis) and only two since the creation of federal deposit insurance, compared to one about every decade prior to that. The business cycle had also seen shorter and smaller contractions.
Essentially, what this demonstrates is that the minority of libertarians and Austrian schoolers who believe in free banking, like Ron Paul seem to love the idea of going back to the 19th century and having us all stuff gold bricks under our mattresses every time it looks like there's going to be a run on the bank.
Louis Thomas McFadden, a former United States Congressman and a former Chairman of the United States Banking and Currency Committee who believed that Jewish bankers were plotting with others against the United States, testified before Congress in 1934 outlining his criticism of the Fed. He also submitted a petition for articles of impeachment against the Board of Governors of the Federal Reserve Banking System for numerous criminal acts including conspiracy, fraud, unlawful conversion, and treason. These charges went exactly nowhere.
Ron and Rand Paul have been trying to shove legislation requiring an audit of the Fed and a review of its monetary policy (apparently independence from the political bickering on the Hill is a bad thing after all) through Congress since 2011. Although three versions of this legislation have passed the House, they all failed miserably in the Senate. The 2015 version was a fail, with Bernie Sanders even voting on it.
- Ben Bernanke: 14th chairman of the Fed (2006–2014)
- Fractional-reserve banking: Controlled by the Jews or selling us into debt slavery... or something.
- Milton Friedman: Wrote the first definitive history of the Fed.
- Zeitgeist: Helped to revive the conspiracy theories.
- The Fed's website
- Debunking Federal Reserve conspiracies
- Federal Reserve myths
- Debunking Zeitgeist's segment on the Fed
- The Fed - Tool of the New World Order or Jewish Conspiracy? Part I, Part II
- The Federal Reserve Explained, The Aporetic
- Rethinking Central Banking, Brookings Institution
- Structure and Function of the Federal Reserve System, Congressional Research Service Report
- ↑ Roughly corresponding to the Gilded Age so beloved among certain libertarians.
- ↑ The Panic of 1873 spawned the 1873-'79 Long Depression
- ↑ Essentially the progressive Republicans who were the heirs to the Radical Republicans and the predecessors of the Rockefeller Republicans; Theodore Roosevelt-types.
- ↑ The Balance of Power: The Political Fight for an Independent Central Bank, Kansas City Federal Reserve Publications, 2012, pp. 21-29
- ↑ The Federal Reserve buys Treasury Notes and Bonds on the Open Market by issuing Federal Reserve Notes aka. an "accomodative stance." Milton Friedman describes Federal Reserve Notes as "receipts for taxes paid."
- ↑ By buying back the Federal Reserve Notes, thus draining banking reserves from the system. The Fed is being less accomodative in supplying reserves, or Federal Reserve Notes, making it more costly to borrow and lend.
- ↑ Chad Emerson. The Illegal Actions of the Federal Reserve: An Analysis of How the Nation's Central Bank Has Acted Outside the Law in Responding to the Current Financial Crisis. William & Mary Business Law Review, vol. 1, iss. 1
- ↑ Read it
- ↑ Federal Reserve Audit Highlights Potential Conflicts of Interest, Washington Post
- ↑ $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient, James Felkerson, University of Missouri–Kansas City, December 2011.
- ↑ World Bank. 
- ↑ Actually, it does do these things, but not quite in the way conspiracy theorists mean. The Fed sets a "target rate" of inflation through open market operations to set interest rates. The Fed does not have all-powerful control over inflation (or deflation) as conspiracists allege, its operations are merely one factor influencing the value of currency. Similarly, in an attempt to head off excess inflation, the Fed may overreact, tighten up too much and induce unemployment, possibly creating a recession. (Again, this is due to the fact that the Fed cannot perfectly micromanage the economy, not that it's deliberately causing these problems.)
- ↑ The Creature from Jekyll Island by G. Edward Griffin
- ↑ G. Edward Griffin and the Fed: Is Glenn Beck about to do another swan dive into the deep end of conspiracism?, Dave Neiwert, Crooks and Liars
- ↑ Jewish "Control" of the Federal Reserve: A Classic Anti-Semitic Myth, Anti-Defamation League
- ↑ The Scion of Zion! (you may need to scroll down a bit)
- ↑ Federal Reserve Bank Ownership, FactCheck
- ↑ The Fed's dual mandate dates to a 1946 act, Washington Post.
- ↑ Myth #8
- ↑ The Importance of the Federal Reserve, Joint Economic Committee Report, Mar. 1997
- ↑ The Federal Reserve Act of 1913 - A Legislative History, Law Librarians' Society of Washington, D.C.
- ↑ Pairing in Congressional Voting: The House and Voting and Quorum Procedures in the Senate, CRS Report for Congress
- ↑ http://www.whale.to/b/m_ch_3.html
- ↑ http://query.nytimes.com/mem/archive-free/pdf?res=9802EFD6103FE633A25751C2A9649D946296D6CF How it actually went down
- ↑ http://www.llsdc.org/assets/FRAdocs/fra-lh_v51-cr-1487-1488-sen.pdf For bonus points, some of the actual "circumvented" debate.
- ↑ Investopedia definition
- ↑ See the Wikipedia article on List of banking crises.
- ↑ Even Friedman didn't want to get rid of the Fed. He actually proposed replacing it with a computer that would just spit out money as economic growth occurred.
- ↑ http://home.hiwaay.net/~becraft/mcfadden.html