“Why the Fed?”, A Presentation by Dr. Tyler Watts

Tyler Watts: Professor of Economics: Ball State University

For another weekly meeting of the Ball State Economics Club, Dr. Watts gave his presentation on the mystery surrounding the Federal Reserve System. Dr. Watts, always an enthusiastic presenter, began his exposition by asking the 5 journalistic questions; who, what, where, when why? Soon after addressing the journalistic premise of his presentation, Dr. Watts moved to the meat of information surrounding the Federal Reserve System.

The Federal Reserve System is a decentralized banking structure with 12 regional banks with seven board of governors located in Washington D.C. The Fed has the unlimited ability to print and issue United States dollars; essentially a monopoly over the money supply. Also, the Fed engages in Monetary Policy under their dual mandate of price and interest rate stability.

The Federal Reserve System originally had an extremely narrow objective for the economy. The original purpose of the central bank was to keep the stable gold standard, provide an emergency currency only, and to be the classic lender of last resort for the banks located in the United States of America. Dr. Watts addressed an issue many people critique the Federal Reserve for, its privatized label. Although true, Dr. Watts assured the audience that when one is strictly focused on monetary policy, this private status is not a factor that amounts to much.

Later on in the second half of 20th century, the Federal Reserve began to expand their objective to control the economy. Now, the Federal Reserve System has three primary objectives. The first is to still be the lender of last resort for bank failures. The second objective is to support the government’s debt, which has been done since World War I. The fed supports this debt by targeting interest rates on government bonds and expands the money supply to help the banks buy these government bonds. Another name for this is quantitative easing or monetizing the government debt. Third, the Federal Reserve is the authority on Monetary Policy in the United States. This has been a power used by the Fed since they began open market operations in the early 1920’s, aiming for price stability. The Federal Reserve also began an updated dual mandate set by Congress in the 1970’s. This included price stability (i.e. low inflation) and unemployment. The debate on whether the Fed should be worried about unemployment is always up for discussion.

The entire Federal Reserve System in general has been up for much debate since it’s inception on December 23, 1914. Since then, the Fed has expanded its power and has gained complete control over the monetary base of the United States dollar. This has been done through the transition of gold to a fiat currency. Throughout the presentation, Dr. Watts hinted at his support of free banking. It is a system that had been in place in the United States before and worked quite well according to Watts. Many of the bank runs he explained, were caused by government intervention in the market before the Federal Reserve System came about.

Dr. Watts ended his presentation on a high note, explaining how the Federal Reserve has been undertaking what their incentives have pushed them towards doing because of the federal government.  Only time will tell whether the Federal Reserve System is a viable one for the future of America.


Michael Redchanskiy



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