Milton Friedman quoted a statement of a politician as under:
“War is much too a serious matter to be entrusted to the military.”
- George Clemenceau, Prime Minister of France at the end of World War 1.
And paraphrased the same as under:
“Money is much too a serious matter to be entrusted to the Central Bank.”1
Friedman, while describing the role of Federal Reserve System in the USA in controlling the quantity of dollar and its resulting effects on, and relationship with, employment, interest rates and inflation, commented that:
“The Fed has the power to control the quantity of money. However, it has given its heart not to controlling the quantity of money, but to controlling the interest rates, something it does not have power to. The result has been failure on both fronts.”
US Federal Reserve was created by the US Congress in 1913. Its story goes back to few earlier years. It was initially a private venture by bankers themselves in the face of loss of public faith in the banking system because the failures of some of them. Banking is solely dependent on the confidence of the public at large that their deposits are in safe hands. The whole system may crumble if this faith is lost. The failure of some of them may have severe repercussions for all of them, and for the system itself, because this system cannot afford a bank run, where all the depositors come for withdrawals. The reason is simple: banks do not keep the public's deposits physically, so they cannot face mass withdrawals.
J. P Morgan, a big banker himself at the time, felt the threat of the collapse of banking industry on the face of many banks being on the risk of failure. He called on his colleagues from the industry in his Madison Avenue mansion and convinced that the banks at- risk should be provided financial assistance from other banks. He himself pledged a big sum of money. The panic in the industry was successfully addressed by this move. However, it was a temporary solution. The bankers, in order to set things right for them for good, did a clandestine step forward. Three years later, representatives from the major banks secretly assembled on Jekyll Island in Georgia. It was, on the face of it, a pretence of duck-hunting trip and one banker actually carried a short gun with him to maintain the disguise. They boarded the train separately so as not to arouse any suspicion regarding their real intention. It was a ten days’ conclave and they came out with a report which finally became the draft for the US Federal Reserve System after required political canvassing and persuasion. The system comprised 12 regional banks and the power to issue currency was assigned to it. 3
Fed, to this date, decides the quantum of dollars to printed every year. It is a quasi-government agency. It is a network of 12 regional Federal Reserve Banks located in major cities of the US with seven governors appointed by the US President.
References
1. Milton Friedman (1994); Money Mischief: Episodes in Monetary Theory; Houghton Mifflin Harcourt Publishing Company, New York; Chapter 11
2. Ibid; Chapter 8
3. Andrew Leigh (2024); The Shortest History of Economics; Publisher – Black Inc., Australia; P 76-7