How Does The Federal Reserve Affect The Economy

How the Federal Reserve Has Affected the U.S Economy The Federal Reserve act, passed in 1913, marked the creation of the Federal Reserve. The Federal Reserve now acts as the United States central bank, and was intended to create stability in the U.S. economy, prevent widespread bank failures, such as those that occurred during the Panic of 1907, and control inflation or deflation. To accomplish these goals, the Federal Reserve was given the power to regulate the money supply, and act as a lender of last resort for failing banks.[i] Rather than regulate the money supply, the Federal Reserve has overseen its massive expansion, creating inflation which as stolen value from the dollar, and rather than creating stability in the economy, the

Banks which invest a greater portion of their deposits and/or are willing to make high-risk investments will have a greater potential profit and therefore interest rates they offer to depositors will be higher, but because the portion being kept in the reserves is lower and/or the chance that their investments will lose money is higher, the risk that the bank will fail is also higher. This inherent risk of failure is what prevents widespread mismanagement of the depositors’ money. Some depositors will be attracted to the higher interest rates offered by riskier banks, others will prioritize security of their savings and accept a lesser interest rate for a lower risk bank. If a high-risk bank fails, the only people harmed are those responsible, the bank management which place too much of the bank’s money into investments or placed money in high risk investments, which failed to profit, and the depositors who accepted the higher risk in hopes of a greater return on investment. Because of this, banks are incentivized to limit risks in their investments, and

The rain came down, the streams grew, and the wind blew and beat against the house; yet it did not fall because it had a foundation on a rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man you built his house on sand. The rain came down, the streams grew, and the wind blew and beat against the house, and it fell with a great crash”. This parable may have been used to describe how critical it is to have a solid foundation to one’s faith, but the same truth can be applied to the foundation to a nation’s economy. Whether it a building, faith, or economy, every structure is only as strong as the foundation it is built on, and for an economy that foundation is its money. When money is weak, the economy will soon collapse, as was shown in the 18th century by the destruction of the continental in America, and 20th century by the destruction of Mark in Germany. If a nation’s economy is founded on paper, it is like building a foundation on sand. In truth, money would be stronger if backed by sand than the fiat money being issued by the Federal Reserve. Sand, at least, has intrinsic value, even it is miniscule, and a finite amount, even if it is immense. Fiat money, on the other hand, has no intrinsic value, and