The Fed’s Boom and Bust
Joshua Philipp, Valentin Schmid, 22 Jan 18
       

Central banks were supposed to end the cycle of boom and bust, instead they amplified it

People gather outside the New York Stock Exchange following the Crash of 1929. The crash followed a Fed-fueled credit boom and many banking insiders had advance knowledge. (LIBRARY OF CONGRESS)

Politicians created the U.S. Federal Reserve system in response to the 1907 Knickerbocker Crisis, when stocks fell 50 percent over a three-week period and the financial system froze up. This new centralized system, with the Fed as the lender of last resort, was supposed to end the boom and bust cycles for good.

More than 100 years and many booms and busts later, it can safely be said that the Fed failed at preventing cataclysmic busts like the Great Depression of the 1930s or the Great Recession of 2008. But not only did it fail to prevent them, the Federal Reserve System and fractional-reserve banking—the practice of only holding reserves equal to a fraction of a bank’s liabilities—have actually caused the booms and the busts.

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