Metal Sludge Gossip Board

Why not cut out the Fed completely? What have they ever done right?

Why not cut out the Fed completely? What have they ever done right?

What the fed has done right is shorten recessions and avoid deflation which magnifies indebtedness and reduces the standard of living for the average person. Before the fed was created in 1913, recessions were frequent and lasted as long as 4 years. The economy adjusted via deflation which means unemployment drove down wages. If you were in debt, you became more indebted. If you were wealthy, you became wealthier without having to risk your capital. Twenty years of that at the end of the 19th century led to the Gilded Age.

After the fed was created, recessions have been fewer, shorter and the economy does not have to adjust via deflation. The only exception was the 1929-33 recession in which the fed defended the gold standard and attempted to adjust to the market crash via deflation rather than inflation. FDR took the country off the gold standard and the recovery started in 1933.

US Business Cycle Expansions and Contractions
http://www.nber.org/cycles.html

The Fed also acts as a lender of last resort. Without the Fed there would be many more bank failures.

Getting rid of the Fed is an incredibly stupid idea.

Why do we have to pay interest on money from the Fed?

Interest on money from the Fed? Banks are required to hold reserves and they get paid interest just like you get paid interest on a savings account. The Fed does not use tax dollars to pay the interest. They just change the number (print money).

Perhaps you mean why does the federal govt. pay interest on the bonds held by the Fed. The Fed refunds that money to the Treasury. In 2011 the federal govt. paid 250 billion in interest and received 79 billion back from the fed so total interest expense was 171 billion not 250 billion. Past two years about 1/3 of the interest paid was returned to the treasury.

Thanks for the detailed explanation!