The Federal Reserve Bank and the Decline of the U.S. Economy

3510 Words 15 Pages
There is perhaps no other political issue in our contemporary society that is more pertinent, pervasive, and encompassing than a nation’s economy. From the first coins used in Greece and the Asia Minor in the 7th century BCE, to the earliest uses of paper money, history has proven time and time again that the control of a region’s economy is absolutely crucial to maintaining social stability and prosperity. Yet, for over a century scholars have continued to speculate why the United States, one of the world’s strongest and most influential countries, has one of the most unstable economies. Although the causes of this economic instability can be attributed to multiple factors, nearly all economists agree that they have a common …show more content…
It was one of the earliest monetary policies to institute the circulation of paper money on a national level. Customers would deposit their gold coins for storage into a bank for a small fee. In return, they received bank receipts, which were then used as paper money in place of valuable elements like gold. The idea of using bank notes as paper money quickly gained popularity because they were, of course, much easier and more convenient to transport and exchange than heavy gold coins.

Initially, bank receipts merely served as a substitution for gold. For example, 100 bank receipts could be given in exchange for 100 pieces of gold, which meant that a customer could redeem their gold at any time. However, the early goldsmiths soon recognized an enormous potential for increasing their profits: more bank receipts could be printed and lent out at interest. Consequently, 5 or 10 bank receipts could be lent out for every piece of gold, which meant that these bank receipts would be worth only a fraction of that gold. In other words, only a fraction of the receipts were now backed by gold because there were more bank receipts in circulation than there was gold stored in the banks. Thus, banks no longer served as warehouses for simply storing money; they actually had the ability to artificially control the value of this paper money by increasing (inflating) or decreasing (deflating) the amount of it in circulation. This…

More about The Federal Reserve Bank and the Decline of the U.S. Economy