The Federal Reserve was built from a number of false premises, desires, and demands of the powerful elite in finance and banking who wanted more “elasticity” in the monetary system. Such a system would allow them to generate income off of fiat currency and credit which was not backed by either a commodity, like gold, or by actual wealth creation of products and services. It also helped to drive forward the Administrative State envisioned by progressive president Woodrow Wilson.
Benjamin Strong, “as governor of the Federal Reserve Bank of New York […] was about to facilitate a 24-fold increase in the American public debt and a questionable union of the central bank and the Wilson administration.” A substantial construct of a statist administration, and as financial journalist and historian James Grant writes, “Before [WWI], it went without saying that no central bank should go buying up the debt of its own government. Such a thing violated the canons of common sense as well as the unspoken rules of the gold standard.”
The contempt for the Original Intent of self-government and desire for Statism ran deep in the Wilson administration. Wilson’s secretary, Joe Turmulty, and former New Jersey legislator, proposed that the administration after the war [WWI], in regards to the takeover of multiple industries under the emergency war powers, “go to the country, standing for the permanency of those instruments whose use in the War has been demonstrated to be practicable.” Wilson and his administration was full of interventionist elites who had utter contempt for private business and liberty.
Economist George Selgin of the University of Georgia best recognized the false premise of the Federal Reserve as a central bank. “Theoretical treatments of central banking place almost exclusive emphasis on its stabilizing capacity,” explains Dr. Selgin, and “its tendency to focus on ideal rather than actual central-bank conduct.” Selgin further noted that “central banks are fundamentally destabilizing – that financial systems are more unstable with them than they would be without them.” He exposes “the modern view of central banks as sources of monetary stability is in essence a historical myth.”
After the Panic of 1907 there was a massive push, which had originated over the past several decades, by academics and the power elite for a socialist banking system – a Central Bank – which they would control and gain a substantial financial advantage. “Putting the situation in virtually Marxian terms, [liberal academics] declared that the alien external power of the free and competitive market must be replaced by central control following modern, allegedly scientific principles of banking…This backward system must be changed, to follow the lead of other great nations [the social-democracies of Europe], where a central bank is able to mobilize and centralize reserves, and create an elastic currency system.”
With the central bank drums beating for several decades prior to the creation of the Fed, the Panic of 1893 really agitated the liberal and statist financiers and academics to begin a much more aggressive drive. They were demanding for more elasticity of the currency and the gold standard, which strongly anchored the currency and credit to wealth creation of products and services.
One of the underpinnings – supposedly – of the Federal Reserve was to stabilize prices. However, the stabilization of prices when productivity is constantly improving, as it has continually in the United States, can mislead the market. These false signals can damage markets, prices, wages, and the investment of capital. Murray Rothbard accurately describes how the comfort of stable prices can ultimately lead to damage or even the collapse of markets or even the entire economy. Rothbard writes:
One of the reasons that most economists of the 1920s did not recognize the existence of an inflationary problem was the widespread adoption of a stable price level as the goal and criterion for monetary policy. The extent to which the Federal Reserve authorities were guided by a desire to keep the price level stable has been a matter of considerable controversy. Far less controversial is the fact that more and more economists came to consider a stable price level as the major goal of monetary policy. The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.
Actually, bank credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion….Suffice it to say here that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods. But this “offset” was only statistical; it did not eliminate the boom-bust cycle, it only obscured it.
 For a detailed report and analysis of the actions and events which lead up to the creation of the Federal Reserve see Murray N. Rothbard, Fall 1999, “The Origins of the Federal Reserve,” The Quarterly Journal of Austrian Economics, Vol. 2, No. 3, pp. 3-55.
 James Grant, 2014, The Forgotten Depression, (New York, NY: Simon & Schuster), p. 50.
 James Grant, 2014, The Forgotten Depression, (New York, NY: Simon & Schuster), pp. 55-56.
 George Selgin, Spring 2010, “Central Banks as Sources of Financial Instability,” The Independent Review, Vol. 14, No. 4, pp 485-486.
 Murray N. Rothbard, Fall 1999, “The Origins of the Federal Reserve,” The Quarterly Journal of Austrian Economics, Vol. 2, No. 3, p. 40.
 Murray N. Rothbard, Fall 1999, “The Origins of the Federal Reserve,” The Quarterly Journal of Austrian Economics, Vol. 2, No. 3, pp. 15-17.
 Murray N. Rothbard, 2008 (originally published in 1963), America’s Great Depression, (Auburn, AL: Ludwig von Mises Institute), pp. 169-170.