Treece: Another look at the Federal Reserve SystemWritten by Ben Treece | | email@example.com
Note: Part 2 in a series. Part 1 here.
When the United States was still on the gold standard, depositors could literally take their greenback notes to a bank and exchange them for gold or silver. Great Britain used to be on the gold standard as well, until 1914 and the start of World War I, when their need for cash to finance the war surpassed the need to trade currency for metal. Following World War I, the U.S. became the world financial leader as it was not bogged down by debt and excessive spending from the war, and had roughly as much gold as all of Europe combined.
Following the war and the start of the ’20s, the U.S. had a brief bout of unemployment and inflation, but the fiscal policies of Presidents Harding and Coolidge helped introduce an economic boom. During this decade, the Federal Reserve took on a policy of expanding credit by setting interest rates very low and minimizing reserve requirements for member banks. This resulted in drastic growth of money supply and consumers overleveraging themselves, a perfect set-up for a depression.
Just before the crash of 1929, the Fed did attempt to combat the crisis by raising rates and slowing down the economy, but it was too late. Rising rates resulted in bank runs and lending institutions simply had no money to give; many closed their doors for good. Of course, this was before the days of FDIC.
Fastforward to 1944 and the Bretton Woods Conference. Out of this gathering the International Money Fund (IMF) and International Bank of Reconstruction and Development (IBRD) were formed, but there was a much larger and more important result of this gathering. It was mandated that all of the participating nations at Bretton Woods must tie their currency through an exchange rate to the U.S. dollar (USD). Therefore, while the USD was tied to gold, all other currencies were tied to the USD, essentially making the Fed the “World’s Bank.”
By 1965, spending and inflation were out of hand with Lyndon B. Johnson’s “Great Society.” The Fed knew at that point that the only way to combat the out-of-control inflation rate was to raise interest rates, but LBJ would not allow it, as he felt that rising rates would hinder the progress his administration had made. In 1971, Richard Nixon took the U.S. off the gold standard, and for the first time in U.S. history our currency was only worth the full faith and credit of the United States government.
For those interested in learning more beyond this series, Treece Investment Advisory Corp. will host a film screening of the Federal Reserve documentary “Money for Nothing: Inside the Federal Reserve” at 6:30p.m. Dec. 3 at the Maumee Indoor Theatre. There is no cost to attend, but we do require reservations, as seating is limited. Anyone who would like to attend may call our office at (419) 843-7744 or email your name, telephone number and the number of seats you would like to reserve to firstname.lastname@example.org.
Ben Treece is a 2009 graduate from the University of Miami (FL), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
Tags: 1971, Bretton Woods, FDIC, Federal Reserve System, Gold, Gold Standard, Great Britain, International Bank of Reconstruction and Development (IBRD), International Money Fund (IMF), Maumee Indoor Theatre, President Coolidge, President Harding, President Lyndon B. Johnson's "Great Society", Richard Nixon, Silver, United States, World War I