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The Rise of Central Bank Influence
A Brief History
We can’t seem to go a day without hearing about the economy during the pandemic. Inflation is on the rise, restaurants can’t find work, and the FED is actively trying to keep us out of a recession. During the past few presidential administrations, the Federal Reserve (the FED) has had an increasing role in keeping our financial systems in check. A few decades ago, the Federal Reserve had not been as Keynesian with their monetary policy. Now, let’s dive into what that means and study the timeline of the FEDs rise
John Maynard Keynes was a British economist in the 20th century who gained prominence during the great depression. After the market crash of 1929, Keynes believed that unrestrained capitalism would result in tragedy like that of the great depression. He became a strong supporter of government intervention in the financial markets in order to keep our free markets a viable option over communism. His viewpoints live on today and are practiced by our central banks at an increasing rate.
Central banks have existed since the 1600s when countries like Sweden and England started commissioning these banks to buy government bonds. This continues to be one of the primary tools central banks use to regulate markets: the buying of financial assets. These original central banks also did a lot of traditional banking services like facilitating transactions and acting as a safety net of loans for financially distressed banks in their country.
Our Federal Reserve was established in 1913 as a response to several economic challenges of the time. With the banking panic of 1907 in recent memory, and WW1 starting up, Congress was motivated to start facilitating more government interaction in our financial markets. Their goal was to keep prices stable and unemployment a non-issue by being the ‘last-resort lender’ in times of financial crises.
Central Banks Responsibilities
Since its inception, the Federal Reserve has been reshaped and given more responsibility as our nations needs change. The great depression and WW2 brought challenges, as did the stock crash of 1987, and the great recession of 2008. With each curve ball thrown at the US economy, the federal reserve has had to find new ways to keep our financial markets in check.
Today, the coronavirus pandemic is proving to be the next major chapter in the ongoing evolution of the federal reserve. The FED has dedicated itself to lowering interest rates to near zero and buying assets in order to keep cash moving around at levels they have never done before. The role of the federal reserve has forever changed as we are in uncharted territory for central banks.
The fear now comes from some politicians believing that the FED needs to do more, and others saying they have already done too much. This dynamic can be seen in the current debt ceiling debacle between Democrats and Republicans right now.
Politics aside, the FED has an interesting future ahead of it. How will the future of Bitcoin and Ethereum impact financial markets? How will the FED respond to that? The Central Bank of China is beginning to play with digitalized currencies as cash is expensive to mint, store, and move. Will the US respond with their own? How will they respond to increasing automation?
As financial markets get more savvy, as too will central banks. History tells us that the Federal Reserve has proven to bring more financial security to the US. It grew with us over the decades and I believe it will continue to do so. An economy driven by the financial habits of humans has tendency to lash out in fits of runaway inflation, unemployment, etc.
Now, the FED has had push back from many economists around the world. They argue that the policy the FED demonstrated over the covid lockdown has increased the global wealth gap. Central banking will have to evolve again to better serve citizens equally.
I hope this helped someone understand the role of the FED a little more and I hope I can inspire more people to learn about this organization. If you have any requests for future articles, please comment your ideas!