Good Compared to What?

The Fed: Good Compared to What?

I want to thank all those posting comments. I particularly want to thank the authors of the three other essays. I will respond to some points, and I will do so one author at a time. I have been delayed in doing so by a heavy travel schedule.

Professor White’s essay is an important addition to the discussion because he succinctly presents the historical record of Fed policy, making important comparisons to the pre-Fed record. I call everyone’s attention to his 4-point summation:

1. The Fed drastically increased inflation compared to the pre-Fed period.

2. The Fed increased price-level uncertainty.

3. The Fed has not reduced real-output uncertainty.

4. The Fed has not reduced the unemployment rate, which calls into question the whole idea of full-employment mandate. 

Despite the historical record, there have been any number of papers written in the past year suggesting the Fed’s record is a good one. In light of White’s essay, I ask “compared to what?”

A Note on Bitcoin

A comment was posted on Bitcoin. This is a topic worthy of an essay unto itself, and the subject comes up in many discussions. Here is my take on it. “Money” is defined as a generally used medium of exchange. Bitcoin does not meet that definition.

I accept that Bitcoin is a work in progress, and like many others, I await further developments. But I stand by my statement that no private money has been successful if not convertible into a hard asset or assets. Warren Coats’ comment is on point here.

Also from this issue

Lead Essay

  • Gerald P. O’Driscoll reviews the history of central banking. He argues decentralized banking is possible, but getting there will be difficult. Under a commodity money regime, central banks are neither necessary nor particularly dangerous, while under a fiat money regime, central banks are capable of exerting substantial influence on monetary policy. The Fed’s use of that influence has been, in O’Driscoll’s words, “unenviable.” Governments have come to depend on central banks to run deficits and spend more than they otherwise could. To do without central banking, however, we will first have to shrink the federal budget itself, and this will be no easy task.

Response Essays

  • Lawrence H. White explains that the Federal Reserve has “dramatically increased secular inflation.” Additionally, it has increased price level uncertainty, while failing either to tame the business cycle or to reduce unemployment. Instead, throughout its history, it has bowed to political pressures and expanded the money supply again and again.

  • Scott Sumner argues that monetary policy needs to respond to crises, and that commodity standards don’t meet that test. He argues that a politically independent central bank tasked with keeping a low rate of inflation will generally be able to fulfill that obligation, and that rigid monetary regimes do much greater harm when they ultimately collapse. In particular, the failures of such regimes have usually been attributed to free-market capitalism, and the result is ever-greater financial regulation.

  • Jerry L. Jordan argues that legislative restraints on monetary policy tend to fail; in this area, we just can’t trust government to watch itself. Standards intended to preserve the value of the currency have all fallen, as legislatures simply find it too convenient to siphon away value through inflation. Jordan is skeptical even of a balanced budget amendment, noting that state governments with such amendments have still come to fiscal grief. One of his most important concerns is that the public right now is dangerously apathetic about this underappreciated issue.