Central Banking in the United States: The Federal Reserve System

The Inflationary Structure of the Fed

Rothbard states that the new Federal Reserve System was "deliberately designed" as a method of controlling inflation.

Member banks could not print notes, but were required to buy cash from the Fed, which would pyramid its deposits and notes on top of gold. Membership was optional, but any nonmember bank had to obtain cash from a member bank, which would obtain it from the Fed.

Gold certificates, backed 100% by gold in the reserves, were withdrawn and replaced by Federal Reserve Notes, which were partially backed with gold.

There was also the distinction between time deposits (savings accounts) and demand deposits (checking accounts) - since the former were long term, fewer customers would make withdrawals on a day-to-day basis, so a more liberal reserve rate could be applied.

To encourage customers to shift funds into time deposits, a higher interest rate was offered. There was some experimentation to provide further encouragement (advanced notice of withdrawal required), but these were not tolerated by customers.

The Inflationary Policies of the Fed

In general, bankers were using the Fed as a cartelizing and inflationary device. Rothbard goes into specific detail about individual instances.

Of special note is the financial impact of the first World War, the change for backing federal deposits with gold coin (in small enough units that currency could easily be redeemed) to gold bullion, and temporary suspension of any reserve standards during the period of postwar economic recovery.