In 1913, the year the Federal Reserve was established, an ice cream cone typically cost about $0.05 (a nickel), while the average American home cost around $2,500 to $3,500 to purchase or build. Today, the national average cost of an ice cream cone is about $4.00 to $5.50 for a single scoop, while the median sale price of an existing single-family home in the United States is approximately $404,300.
In 1970, the year before America went off the gold standard, gold traded at an average price of roughly $35.96 to $38.90 per troy ounce. Today, the live spot price of gold is approximately $4,320 to $4,350 per troy ounce.
The Federal Reserve, through its artificial control of interest rates, credit expansion, and increases in the money supply, is the root cause of inflation and the weakening of the U.S. dollar. In the United States, a capitalist country, we trust the market to set the price of shoes, sandwiches, movie tickets, and cars. Why do we not trust the market to set a market-driven interest rate?
If interest rates were determined by the market, they would never be artificially too high or too low, and America could avoid the cycles of boom and bust fueled by cheap money. Whether during a boom or a bust, both periods ultimately result in a weaker U.S. dollar. Eliminating the Fed would make the dollar stronger and economy more stable.
Before examining how the Fed contributes to inflation, currency devaluation, and economic instability, a few common misconceptions should be addressed.
First, it is not a hidden secret that the Federal Reserve is not a direct agency of the U.S. government. This is publicly available information. The Fed is a federally chartered, operationally independent institution. Its Board of Governors is a federal agency whose members are appointed by the President and confirmed by the Senate, while its 12 regional Reserve Banks are privately owned by member commercial banks. Congress retains the authority to alter or abolish the Fed by legislation.
Second, this arrangement is not unusual. Nearly every country has a central bank, although it may operate under a different name. Central banks exist on a spectrum from fully independent to fully government-controlled, with most operating as hybrids that combine varying degrees of operational independence with government oversight and accountability. The Federal Reserve is simply the American version of a central bank.
The Federal Reserve, created by the Federal Reserve Act of 1913, operates through three primary mechanisms: setting the federal funds rate, conducting open market operations, and regulating reserve requirements for commercial banks.
The core of its money-creation power lies in open market operations. The Fed controls the monetary base, currency in circulation plus deposit balances that depository institutions hold at the Fed, by buying or selling securities. When the Fed buys a security, it pays by crediting the bank’s reserve account. No prior savings are required. The reserves are created by accounting entry.
Those reserves flow into the broader economy through fractional reserve banking. When you deposit $1,000 in a bank, the bank keeps a fraction and lends out the rest. That money, spent and redeposited elsewhere, is lent out again. Through this money multiplier effect, banks expand the money supply well beyond the original deposit.
Since March 2020, the reserve requirement floor has been set at zero, meaning US banks face no mandatory reserve floor at all. The only remaining brake on credit expansion is the interest rate the Fed itself sets and can raise or lower at will.
The federal funds rate is the rate at which commercial banks lend and borrow excess reserves overnight. The FOMC meets eight times annually to set this target. This single administered price, set by committee rather than by markets, governs the cost of capital for the world’s largest economy.
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