There’s an idea rooted among some libertarians that the Federal Reserve was originally a sound institution but has grown corrupt. As a bankers’ bank, it was fine, they believe, but not as the monster it has grown to be. If we could only go back to the Fed’s founding charter, all would be well.

The original manifestation of the Fed included these developments:

  • The Fed monopolized the issue of all banknotes; national and state banks could only issue deposits, and the deposits had to be redeemable in Fed notes and gold.
  • All national banks were drafted into the Fed, and their reserves had to be kept as demand deposits at the Fed.
  • As banks around the country sent their depositors’ gold to the Fed, they received Fed notes in return. Thereafter, when the public made withdrawals, they were handed Fed notes instead of gold coins. -The disuse of gold coins not only encouraged inflation, but it also made confiscation easier later on.
  • With the centralizing of gold and bank reserves, the Fed doubled the inflationary power of the banks by reducing the reserve requirement from 5:1 to 10:1. With more credit available, the banks could lower their interest rates.