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The United States congress passed the Federal Reserve Act about a century ago just after a two central banks attempt was not successful (Clifford 8). The act dictated that the country create a federal reserve system to endow an elastic currency. This was believed to be necessary so as to be able to rediscount commercial paper, and to be able to come up with a more reliable and effective supervision of the banking system in America. This act established twelve regional Federal Reserve Banks, each of which had control of their own district. This was deemed necessary so as to ensure the system was not centralized. Since its initiation, the Federal Reserve Bank has undergone a couple of changes. There is a board of governors located in Washington DC that, oversees the entire system. With the twelve districts still in place, there is also component referred to as the Federal Open Market Committee that has also been included which, together with the BOG, and the regional banks is tasked with the mandate of making monetary policy decisions (Meltzer 19).
A growing list of individuals with vastly differing political leanings are increasingly demanding independence or rather greater transparency in the way the central bank of this country functions and operates. Bernie sunders is very clear on attack on Ben Bernanke, the Federal Reserve boss, whom he accuses of cuddling and enabling the rampant greed witnessed in Wall Street. He accuses him of leading a financial system that is unsafe, unstable and unsound. Ron Paul on his part accuses the Fed and its boss of implementing policies that have brought about destructive business cycles (Easton 1). These thoughts bring forth the question whether the Federal Reserve Bank should be independent or dependent. Independence in this context is all about separating the federal government from the government both economically and politically (Clifford 8). Those who are for independence argues that, an independent federal reserve bank can have long-term policy goals without outside forces constraining the short-term policy decisions that hamper the goals (Meltzer 20).
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What most of those people who are for independence agrees on is that, the implementation of an independent federal reserve bank may not be able to assure an economy will run smoothly (Cukierman 18). However, it will certainly help, in that it will assist in staving off inflation and ensure there is less variability in inflation as the economy will not be at the impulse of politicians. It also has the capacity to ensure that, the Federal Reserve Bank behaves in a more predictable manner thus, increasing its credibility and creating more public confidence regarding the institution (Cukierman 18). Even though, independence is a gamble, it is the best option since its benefits automatically outweighs the costs.
There are outside forces that will always influence the Federal Reserve Bank, but at some point, there is a possibility of replacing this force with another (Cukierman 19). This is in reference to those people who argue that, the bank is under the influence of the Wall Street and not the government. To be able to reduce outside influences, the government can define clear goal/goals for the Federal Reserve Bank in order to be able to keep it in a strict course (Cukierman 19). This is something that is evident in the European Central Bank. The bank has one goal, which is to fight inflation (Cukierman 20).
More importantly, independent Federal Reserve Banks have the capacity to avoid the collaboration between politicians and central bankers that is geared towards manipulating the economy (Meltzer 22). An independent Federal Reserve Bank is very essential in doing away with issues that surround a dependent system, while at the same time achieving socially desirable outcomes. It is very vital in the process geared towards dealing with one major issue, that of politicians trying to sway public votes by manipulating the economy in a boom during an election period. In collaborations between politicians and central bankers, the politicians are likely not to think of the economy first (Meltzer 22). Instead, they are likely to put their political agenda ahead of doing what is best. Manipulation of an economy by politicians for their political interest could always bring on a wave of inflation (Meltzer 29).
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Another risk of dependence is an attempt by politicians to borrow from the Federal Reserve Bank to fund deficits. By guaranteeing that the Federal Reserve bank is independent of politicians and any other outside force, an economy can avoid some this far reaching consequences caused by the above mentioned scenarios. A very good example of political manipulation of a central bank is the story of Argentina. The manipulation in this country caused stern inflation that has yet to be contained.
Just as, those who are for independence argues for it, there are also those critics who argue against independence of the Federal Reserve Bank. In the quest for independence, the Federal Reserve has and is always expected to be at the top front, leading the resistance army against any such proposition (Guttmann 176). The Federal Reserve has always argued that significant supervisory and regulatory responsibilities are very necessary to ensure an effective and reliable conduct of monetary policy (Guttmann 176). It goes ahead to mention that, the information about the banking industry, and the ability to influence the same industry, are very vital to the formulation of monetary policy. Also, the Federal Reserve Bank has the responsibility to the banks, of lender of last resort (Guttmann 176).
Most monetarists argue that Federal Reserve Bank independence would pose a real challenge towards realizing an effective monetary policy (Congress 26224). Instead, they have proposed rules as the perfect substitution or rather alternative for discretion. Opponents argue that, monetary policy is a big responsibility of the executive. This is because the monetary policy affects the economy largely (Congress 26224). Those who hold public offices such as the president are elected on the basis of authentic economic policies. For this reason, the Federal Reserve Bank should not be allowed to operate independently of the executive. Any institution that has been tasked with the mandate of formulating and executing monetary policy should not be created on the basis of any superficially different standard as compared to the other government institutions that are in place (Committee on Finance 247). Western political concepts dictate that, the executive needs to be responsive to the general public. In fact, at various times and in various ways is expected to subject itself to a vote of confidence by the general public. With this in mind, there is no reason why the monetary institution should be exempted from this kind of accountability. At the same time, it is important to note that, independent fed policies are likely to conflict with the executive policies in and independent system (Committee on Finance 247).
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Arguments have been made for and against the independence of the Federal Reserve. Proponents argue that the implementation of an independent federal reserve bank will certainly help stave off inflation and ensure there is less variability in inflation as the economy will not be at the impulse of politicians. It also has the capacity to ensure that, the Federal Reserve Bank behaves in a more predictable manner thus, increasing its credibility and creating more public confidence regarding the institution. Opponents of independence on the other hand, argue that, this action would pose a real challenge towards realizing an effective monetary policy. The Federal Reserve on its part has always argued that, significant supervisory and regulatory responsibilities are very necessary to ensure an effective and reliable conduct of monetary policy. With all this in mind only time will tell which one is best approach likely to meet the needs of the common man.