The Federal Reserve is a Central Bank. A Central Bank provides a government with its currency. Because of legal tender laws making it illegal for citizens of the US to use any other currency other than Federal Reserve Notes (USDs), the Federal Reserve is the sole producer of the nation's money supply. This is also known as a monopoly.
The Federal Reserve is made up of 12 regional banks. Directing the actions of these banks are what is known as the Board of Governors and the Federal Open Market Committee. Both of these are federal agencies. When a government agency has official control of a monopolized good (in this case money) that is socialism (or fascism, but that is a whole other topic!). Every country in the world has socialized money.
Of course the implementation of central banking in every country is different. It is the outcome of complex phenomena and is unique to each country. But the general theme is simple. Governments love to spend money whether it is to subsidize farmers, entitlement programs for the poor and rich, bailouts to favored businesses, or embark on imperialist wars. The only thing that changes are the ruling political parties and their favored voting block du jour. The problem is, absent a central bank, governments never seem to have enough money. For some reason those pesky citizens just don't like to have their money stolen (ie pay taxes).
We learned from the previous post, however, that bankers love to issue money. Their only problem is that some bankers (usually ones with special privileges granted by govt) issue too much make fake money and eventually their schemes go sour and they become bankrupt. For some reason those pesky customers just don't like to have their money stolen.
Now we have the makings of a convenient relationship. The government (with a monopoly of law enforcement) needs money and the bankers (the issuers of money) need legal protection. Voila! Central Banking is formed!
Obviously it is not that easy. As I stated earlier the implementation of the Federal Reserve in the US was a long process. In the 19th century the American public defeated two attempts to by federal government to form a national bank. Clearly the general public was aware of the evils of fiat (money not backed by a physical commodity).
The tide begin to turn following the panic of 1907. Yet despite the severity of this panic the majority of the voting public was still opposed to the idea of giving so much power to any institution, whether it be public or private. Even many politicians were weary of giving so much power to one institution. This is shown by the fact that it took nearly 6 years after the panic of 1907. The Federal Reserve Act was passed on December 24, 1913 (yes, Christmas Eve... nothing fishy there).
If you are more into history and politics and not so much economics, then I highly recommend America's Money Machine by Elgin Groseclose. It can be downloaded for free by clicking on the link. In this book he unlocks the mysteries surrounding the origins of the Federal Reserve. He also shows that the creation of the Federal Reserve and future modifications to it were the outcome of personal ties to the leading banking families of the early 20th century; the Rockefellers and Morgans.
It is my belief that since the election of Woodrow Wilson in 1912 all presidents of the United States have been nothing more than puppets acting on behalf of powerful banking families. This can be seen in the close personal ties of Wilson to the Rockefellers, FDR to the Morgans, and now Bush and Obama to Goldman Sachs.
This concludes Part III. Part IV will deal with the consequences of credit expansion brought about by fractional-reserve and Central Banking. This is known as Austrian Business Cycle Theory (ABCT) or, more simply, the boom-bust cycle.
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