Federal Reserve vs Gold Standard
The Federal Reserve Bank was created in 1913 and was created in response to all of these economic swings. We used to have all of these booms and busts in our economy. We wanted a mechanism that would help us address when we have downturns. That’s what the Federal Reserve does. They do that through their ability to control the supply of money, which means they can create or print money. That can lead to inflation which is not so good of a thing, but when they do that, they can have an impact on our economy and employment and to help spur things on which is what we’re trying to do.
The Gold Standard and the Federal Reserve did function at the same time for a short period of time. It was totally phased out by 1971. With the Gold Standard, gold is pegged to our currency at a fixed price. The good thing about doing that is you end up with low inflation. The bad thing about doing that is you have no mechanism when you use only the Gold Standard to address recessions—to be able to spur on the economy and address high unemployment. That’s a problem. People will say, “Can’t we go back to the Gold Standard?” Well, we don’t have enough gold to match the currency that we have out there right now, so that would be very difficult.
The other thing we have to look at is what the tradeoffs are. With the Federal Reserve, we’re going to have some inflation because of this printing of money, but we will also have lower unemployment than we would have under the Gold Standard. So, with the high unemployment that we see right now, if we had not had the Federal Reserve to help us through this crisis, our unemployment would be even higher.
The Federal Reserve operates on these twelve districts that were set based on the population in 1913, and it hasn’t changed. We are in the 6th district. Every district collects economic data, and they act on that data. We think the Federal Reserve is here to stay.