The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence

The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence

The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence

The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence

Synopsis

Shrouded in mystery, managed behind closed doors, and the subject of both awe and derision, the Federal Reserve is commonly referred to as the fourth branch of our federal government, with wide-ranging influence over monetary policy, and by extension, banking, price levels, employment rates, and economic growth, income, and wealth. Bernard Shull traces the fascinating and improbable history of this institution from its establishment by an Act of Congress in 1913 to the present day. His careful analysis reveals a paradoxical phenomenon: focusing on three periods of economic stress (the inflation and deflation following World War I, the stock market crash of 1929 and subsequent Depression, and the stagflation and volatility of the 1970s and 1980s), Shull argues that despite convincing evidence that the Fed contributed to these crises, it has consistently emerged from each more powerful and influential than before. Setting the current profile of the Fed against its evolutionary context, The Fourth Branch sheds new light on the Fed's character and its impact on our economic, political, and cultural history.

In many ways, the story of the Fed is the classic American epic: turning adversity into opportunity, responding to threat by innovating and adapting. Even today, under attack by liberals and conservatives alike- in the wake of the stock market bubble, economic recession, and rampant job loss- the Fed is poised to remain strong long after the tenure of legendary Chairman Alan Greenspan. Setting the current profile of the Fed against its evolutionary context, The Fourth Branch sheds new light on the Fed's character and its impact on our economic, political, and cultural history.

Excerpt

Established by an act of Congress a little less than a century ago, the Federal Reserve System began as a relatively small organization with little capacity to affect the economy. Over the years it has grown enormously in its power and in the scope of its authority. It is widely viewed today as “the most powerful economic institution in the United States.” Despite an unrelenting degree of moderate criticism, it is generally accepted as an unqualified success.

It is hard to believe that only about twenty-five years ago, a diverse array of determined critics were condemning the organization for its dysfunctional policies, which they believed had resulted in disastrous inflation, high levels of unemployment, and unprecedented interest-rate volatility, and for adhering to inefficient and antiquated regulatory restrictions. As interest rates reached unremembered heights and incomes fell during the early 1980s, criticism and despair arose from many sectors of the economy. Some, taking an historical approach, not only condemned current System policy but also argued that the Fed had always been dysfunctional and had periodically implemented policies that had caused great harm. They traced its “monetary malpractice” to the character and culture of the organization itself. The protests at the time were so intense and pervasive that one could reasonably question whether the Federal Reserve would make it out of the 1980s, to say nothing of the millennium. As matters turned out, the Federal Reserve prevailed, as it had in previous episodes of intense criticism.

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