When the Federal Reserve System was established, fascism was fashionable. One of the premises of fascism was that government and big business should conspire together to manipulate the economy. Thus the FRS was designed to be a conspiracy of government and big business. Some FRS officials are chosen by the government, and other FRS officials are chosen by big banks.

It is remarkable that many people who claim to be opposed to fascism still think government and big business should conspire together to manipulate the economy.

The FRS has a complex organizational structure. This complex structure obscures the chain of command. The FRS has multiple committees. Some members of some committees are chosen by other committees. The local banks control the regional federal reserve banks, and the regional federal reserve banks control the local banks. The regional federal reserve banks control the federal reserve board, and the federal reserve board controls the regional federal reserve banks. No one is in control of the FRS. No one has the power to tell all other employees of the FRS what to do. No one has the power to fire any other employee of the FRS who fails to obey instructions. Thus if one employee of the FRS wants to do something, another FRS employee might obstruct. The FRS appears to be highly vulnerable to bureaucratic infighting, gridlock, and institutional paralysis.

In reality, the FRS is less chaotic than predicted. In the beginning it was common for one person with a strong personality and support from government and business to control the FRS. Different people controlled the FRS at different times, and they usually had different jobs within the FRS, and sometimes their official job was outside the FRS. There was no job within the FRS which was associated with control of the FRS. You could not determine who controlled the FRS simply by asking who had the top job. For example, some people say that Benjamin Strong, governor of the Federal Reserve Bank of New York, controlled the FRS in the 1920s; and Adolph Miller, member of the federal reserve board, controlled the FRS in the late 1920s and early 1930s. But the FRS was less effective and less efficient than the FRS would have been if one person had been clearly in command.

Later, especially after Paul Volcker became chairman of the federal reserve board in 1979, it became customary for the chairman of the federal reserve board to lead the FRS. Employees of the FRS were expected to obey the chairman of the federal reserve board even when that was contrary to the laws which established the FRS.

In the beginning, real power in the FRS had to be exercised indirectly. This was a problem for historians, because it is difficult to determine who made what decision and when. If mistakes were made, it is difficult to determine who is to blame. This is a problem for anyone who wants to monitor the FRS, including the government, opposition parties, and journalists. This is a violation of the principles of open government.

In the beginning, the main function of the FRS was to loan money to banks. The FRS was not supposed to create or destroy money. So the only way the FRS could manage the money supply was to manipulate banks. This is an indirect way to manage the money supply. This is less effective and less efficient than directly creating and destroying money.

After World War I, the FRS began to directly create and destroy money. But the FRS managed the money supply reluctantly and hesitantly. These activities were a violation of the laws which created the FRS. Leaders of the FRS said these activities were an emergency response to the disruptions caused by World War I, and would be abandoned when the international financial system returned to prewar normalcy. But prewar normalcy never returned. Only after World War II did the FRS fully accept the task of managing the money supply through the direct creation and destruction of money.

The original power of the FRS to manipulate banks was limited. The FRS could lend money to banks, and the FRS could attach conditions to the loans, but the FRS could do little if a bank refused to borrow money from the FRS.

If the FRS tries to force banks to do things which would reduce the profits of the banks, then the banks would have an incentive to evade the FRS. See government policies which are in opposition to the free market cannot be enforced without terror. If the FRS tries to require banks to do stupid things, most bankers would refuse. The FRS would have to fine, imprison, beat up, or murder a few prominent bankers to terrorize the rest of the bankers into submitting. The FRS had little control over the economy because the FRS had little control over the banks.

The banks would also try to conceal the banks' evasions of FRS manipulations to avoid antagonizing the FRS. Data about banks' compliance with FRS rules would be unreliable. If the policies of the FRS were not working, it would be difficult to determine if this was because the banks were not complying, or because the policies were wrong. This lack of reliable data would make it difficult for the FRS to make good decisions.

Gradually, the FRS increased the number of employees who inspected banks and reported on whether or not the banks were complying with the FRS. Gradually the FRS gained power to prosecute bankers who failed to obey the FRS. Gradually the FRS relied more on direct creation and destruction of money and less on manipulation of banks to control the economy. When the FRS was established, the FRS had little control over private banks or the economy. By the end of the twentieth century, the FRS had significant control over private banks and the economy.

The question of what the FRS did during the great depression remains subject to debate because the data about what the FRS did, who made the decisions, and what was the result are unreliable. Since the FRS was not competent enough to collect reliable data, I doubt that the actions of the FRS during the great depression had much effect on the economy. And if the FRS was powerless during the great depression, then the great depression was not the fault of the FRS.

The ineffectiveness of the FRS is the fault of the members of the government who created the FRS with such a chaotic organizational structure. The FRS was and still is a badly designed organization. There have been many improvements to the FRS, and the FRS has become much better than the FRS used to be, but many organizational defects remain. I think the FRS should be abolished and an entirely new central bank should be created.

A central bank has six functions: managing the national debt, making loans to private banks, manufacturing new coins and paper money and disposing of old coins and paper money, regulating private banks, coordinating payments between private banks, and managing the money supply. I think that there should be a seperate organization for each of these functions, and some of these functions should be eliminated or privatized.

Before 1900, it was difficult for a bank to borrow money from another bank because of poor communication. But during the twentieth century communications technology improved and it became easier for banks to borrow from financial markets. There is no need for the central bank to lend money to private banks.

Private banks should be regulated by competing governments, not by the central government.