The Rent-Seeking Origins of the Federal Reserve: A Model

Posted: 23 Apr 2014

See all articles by Tomáš Otáhal

Tomáš Otáhal

Mendel University - Faculty of Economics and Business Administration

Date Written: April 22, 2014

Abstract

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

Otáhal, Tomáš, The Rent-Seeking Origins of the Federal Reserve: A Model (April 22, 2014). Available at SSRN: https://ssrn.com/abstract=2427636

Tomáš Otáhal (Contact Author)

Mendel University - Faculty of Economics and Business Administration ( email )

Staňkova 578/16b
Brno, 602 00
Czech Republic

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