The Rent-Seeking Origins of the Federal Reserve: A Model
Posted: 23 Apr 2014
Date Written: April 22, 2014
Central banks are historically relatively young organizations. Their main purposes are to regulate money supply through interest rates, regulate the banking sector and act as a lender of last resort to banking sector during the time of financial crises. Historical evidence suggests that in the second half of 19th century in the USA private clearing houses were able to provide the banking sector with similar services. In this paper, I follow such evidence and present a rent-seeking model with endogenous rent within which I classify and explain possible interests of three interest groups: (i) federal representatives (ii) small scale state bankers (iii) and financial entrepreneurs for establishment of the Federal Reserve System. My model provides interesting Public Choice insights which support the thesis that the Federal Reserve System was established rather to strengthen political control of the American Federal Government than to avoid financial crises.
Keywords: Federal Reserve System, Rent-Seeking
JEL Classification: D72, D73, E42, E58
Suggested Citation: Suggested Citation