“The Congress shall have Power To […] coin Money.”
– Constitution of the United States of America

    The Constitution gave the federal government the power to coin money and create the currency of the United States. Throughout history, the United States government has tried to find the best solution and strategy to complete this action through the First and Second Banks of the United States as well as a national banking system put in place after the Civil War (Rothbard 5).  Many times in our nation’s history, there was no centralized banking entity or system. Today, however, and since the early 20th century, we have had a central banking system known as the Federal Reserve System. The interesting aspect of this system is that the government has little control over it. The Federal Reserve is a privately owned agency with little oversight by the federal government (Meltzer 147). It is also interesting that the Constitution did not explicitly give Congress authorization to give the power to coin money to a central bank. In discussing this Giant, I will examine the creation of the Federal Reserve, its powers, and why I believe it is unnecessary and harmful to our economy.

    On December 23rd, 1913, President Woodrow Wilson signed the Federal Reserve Act (The Federal Reserve System). Over the years it would gain additional powers and become more active in our market. How and why did it come to be in the first place? Due to the inefficiency of the national banking period, developed after the Civil War, major economic panics arose in 1873, 1884 , 1890, 1893 , and 1907 (Broz 44). The pro-central bank reformers used these crises as an opportunity to sway public opinion and justify their beliefs in the need for a central banking system (Livingston 172). The crisis provided evidence to the pro-central bankers that even though there were natural cycles in the market, where businesses fail, there was no central entity or authority in the banking system that could predict or influence these events (Livingston 172). They knew that Americans were troubled over the instability of the banking system and used this as an opportunity to put their plan into action.

    One of the pro-central bank pushers was Paul Moritz Warburg who called openly for a central bank, having spent time in European banking (Rothbard 38). He was a fan of the German Reichsbank and gave conferences on the idea of a central bank, making sure to note that the nation’s bankers were welcoming the idea of a central bank as long as it was “not controlled by ‘Wall Street’ or any monopolistic interest” (45). Warburg even touched on the structure of the bank saying that the Reserve would not be called a central bank and its governing board would be chosen by government officials, which became the actual system in use today (45). Warburg believed that the money market could not be free and self-regulating but had to be determined by “the best judgment of the best experts” (45). His sentiments toward a central banking system reflected those of many other economists and bankers at the time who attempted and were successful at influencing businessmen and the public to the advantages of a central bank. If the central bank was such a savior to the marketplace, why did it take so much convincing to get it put in place?

    Once the idea of a central bank became popular, it required many trial and error plans before a central banking system could finally be passed through Congress. The financial tycoons, Morgan, Rockefeller, and Kuhn, Loeb or people linked with them were the men behind the curtain pushing for this legislation (Rothbard 50). On November 22, 1910, Senator Nelson W. Aldrich, Henry P. Davison, Paul Warburg, Frank A. Vanderlip, and A. Piatt Andrew met in a secretive meeting on Jekyll Island, off the coast of Georgia, using facilities arranged and co-owned by J.P. Morgan (46). Each of these men, who were connected to the financial tycoons previously mentioned, began work on the draft of the Federal Reserve Act (46-47). In the Federal Reserve System, they wanted to create a private banking cartel sanctioned by government that could be used to inflate the nation’s currency without consequence, and were successful (50). Three years later, the Act passed through Congress, and was signed by the President. The private bankers finally had control of our money supply. Their next goal was to increase the Fed’s influence on the market.

    In 1971, the elasticity of the dollar increased once it was not backed up gold or any other precious metal (Field 70). Llewellyn H. Rockwell, Jr., of the Ludwig von Mises Institute, writes, “Since the end of the gold standard of the Bretton Woods age — the last institutional check on out-of-control government that existed — we have lived under a fiat money regime.” The Merriam-Webster dictionary’s definition of fiat money is “money (as paper currency) not convertible into coin or specie of equivalent value.” Rockwell goes on to say that since the Federal Reserve has a monopoly over the money supply given to them by the US government, the government can spend as much as it wants, and the Fed will guarantee that it can print the money in order to pay the debt. Economist and Author, Hans F. Sennholz says, “The deficits force the Fed to generate ever more money and credit which in turn weaken and erode the dollar's trustworthiness in the eyes of the world.” This creation of more money to pay these debts causes inflation, and eats away at the value of the dollar.

    This has been the case in the past and in the present. In the 1960’s and 70’s, we went through a period of large inflation. Donald R. Wells, author of The Federal Reserve System: A History, argues that the Fed helped cause the inflation of this period by doubling the money supply (Hyser). The American dollar has lost almost 70 percent of its value since 1971 and does not show signs of slowing down any time soon (Sennholz). Even the current Federal Reserve chairman, Ben Bernanke admits that the Fed can cause inflation (Rockwell).¹ We constantly hear the words inflation and recession  in the news and it is for the most part due to the actions of the Federal Reserve generating more money and manipulating interest rates (Polleit). What is even more frightening is that recently, Secretary of Treasury, Henry M. Paulson Jr. created a plan to give the Fed even more power by making it a "market stability regulator" rather than just the head bank (Shiller BU.5). I believe that this will have even more serious effects on the economy, instead of fixing any problems.

    Is the Federal Reserve System moral? I will dare to conjecture that it is not. History suggests that it has created more problems than it was designed to fix, and now its powers are being expanded. It has barely any oversight by the Federal Government and can really do what it pleases without regulation, which puts the value of our currency into the possession of a handful of private bankers. The authority of Congress to create such a system was never outlined in the Constitution. The founders of the Federal Reserve System manipulated the public by putting Federal in the name, giving it the illusion of a government agency. The Federal Reserve could not be a moral institution because it was formed by the interest of business elites, rather than in the interest of the American people. I am not an economist and do not know the best replacement for such a system, but I would agree that having money backed by something sound such as gold would nearly eliminate inflation and make our government more wise about its spending choices. The Federal Reserve is a giant that our government depends on to loan them money, which it has the power to create out of thin air. The system, in turn, inflates our currency, brings economic turmoil, while at the same time expanding its powers every year.

^1. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” – Ben Bernanke (Rockwell)



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Federal Reserve System: Purposes and Functions, The. Washington, D.C.: Board of Governors, 1974.

Field, Stanford. "The Weakening of the U.S. Dollar." Futures Apr 2008: 70.

Hyser, Raymond M. “The Federal Reserve System: A History.” Rev of The Federal Reserve System: A History. History: Reviews of New Books. Winter 2005. 56.

Livingston, James. Origins of the Federal Reserve System: Money Class and Corporate Capitalism 1890-1913. Ithaca, NY: Cornell University Press, 1986.

Meltzer, Allan H. "Origins of the Great Inflation." Federal Reserve Bank of St. Louis Review 87(2005): 145-175.

Polleit, Thorsten. “Manipulating the Interest Rate: a Recipe for Disaster” Ludwig von Mises Institute. 13 December 2007.     Ludwig von Mises Institute. 15 April 2008. <http://www.mises.org/story/2810> 

Rockwell, Llewellyn H., Jr. “The Case for the Barbarous Relic.” Ludwig von Mises Institute. 21 March 2006. Ludwig Von Mises Institute. 15 April 2008. <http://www.mises.org/story/2263> 

Rothbard, Murray N. "The Origins of the Federal Reserve." The Quarterly Journal of Austrian Economics 2(1999): 3-51.

Sennholz, Hans F. “Why Gold?.” Ludwig Von Mises Institute. 3 March 2003. Ludwig von Mises Institute. 14 April 2008.     <http://www.mises.org/story/1175>

Shiller, Robert J. The Fed Gets a New Job Description." New York Times 06 Apr 2008, late ed.: BU.5.