Steven Horwitz is a Mercatus Center Affiliated Senior Scholar and
the Charles A. Dana Professor of Economics and department chair at St. Lawrence
University in Canton, NY.
This December will mark the 100th anniversary of the opening of
the Federal Reserve. As we have seen in recent years, there is no institution
of economic policy with more power and less transparency than the Fed.
The Fed has almost never been held accountable for how it has
performed. We have simply assumed that we need a central bank and trusted those
in charge to make the right decisions. But the Great Recession may have changed
that.
Congressman Kevin Brady, R-Texas, has proposed creating a
bi-partisan Centennial Monetary Commission (H.R. 1176) that would engage in a
formal performance review of the Fed, exploring both how well it has met its
stated goals and what those goals should be. This is an excellent, and long
overdue, idea.
The Fed itself emerged from a National Monetary Commission created
in the aftermath of the Panic of 1907 to examine the problems with the previous
banking system. Scholars who have compared the Fed's record to the National
Banking System that it replaced have found the Fed's performance to be worse.
In its first two decades, the Fed generated a wartime inflation
that led to a sharp, though short, recession in 1920-21, and then contributed
to the 1920s boom that ended with the onset of a recession in 1929. The Fed
then allowed the money supply to fall by 30 percent over the next three years,
turning that recession into a very deep depression that would last for another
decade.
Since World War II, the Fed's record has been one of consistent
inflation that has led to a series of recessions, culminating in the housing
boom of last decade and the Great Recession from which we are still struggling
to recover. That inflation has also distorted the price formation process,
making it more difficult for entrepreneurs to use those prices to create
wealth.
This never-ending inflation has also reduced the real value of
household savings and other assets. The frequency and depth of the resulting
recessions have thrown the U.S. economy into periodic bouts of high
unemployment, devastating families in the process.
The challenges facing the Fed as it tries to get the money supply
right are but a smaller version of those facing national economic planning of
the sort that has failed across the world. Combine that with the fact that most
central banks were created by political compromise and were intended to serve
the government's desire for revenue—and not to solve imagined problems with
markets that textbooks invented as rationales after the fact—and the Fed's
miserable record is no surprise.
Contrary to the conventional wisdom, there are alternatives to the
status quo to consider: Different macroeconomic targets the Fed could adopt,
some version of the gold standard, or eliminating the Fed completely in favor
of a system of true competition in money production. Economists and historians
have compelling arguments for each of these, and one advantage of the
Centennial Monetary Commission is that it would provide a platform for open discussion
of all of them.
With the damage it has caused in its 100 years, no task could be
more important than asking whether the Federal Reserve System and its current
policies are the best way to ensure a stable currency and sustainable long-term
economic growth. Regardless of what comes from it, the Centennial Monetary
Commission would at least provide a venue for asking a series of long-overdue
but necessary questions about the Fed's performance and goals.
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- Check out U.S. News Weekly, now available on iPad
Biblical Christianity is suspicious of the timing of this "all of the sudden" appearance of these outward displays by the media to change the way we do financial business.
Especially interesting to my paranoid mind, is the rise of the Bitcoin and its success. Geeky types are rushing to an electronic form of money that is showing to be possibly more stable and convenient than other currency.
What do they think will replace the current form of currency? Think "chip" electronic transactions might be more stable? Think that with the new "Pope" pushing for less opulence and social transition to more even distribution of the wealth might have anything to do with the scripture that says the false prophet will cause all to recieve a mark that without it you won't be able to buy or sell?
Don't be too quick to rejoice over the possible downfall of the FED! It may have been in the plan the whole time. Remember, these world planners play a long game.
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Anyone have any thoughts about this?