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Happy 100th Birthday to the Federal Reserve

December 27th, 2013 - 10:40 am

Now please go away,” says Mark Spitznagel. More:

One hundred years ago, on Dec. 23, 1913, the Federal Reserve Act was signed into law, giving the United States exactly what it didn’t need: a central bank. Americans had gone without one since the 1836 expiration of the charter of the Second Bank of the United States, which Andrew Jackson famously refused to renew. Not to be a party pooper, but as this dubious centennial is observed, we should ask ourselves: Has the Fed been friend or foe to growth and prosperity?

Economists Selgin, Lastrapes and White analyzed the Fed’s record and found that even focusing on the post-World War II era, it is not clear that the Fed has provided more economic stability compared with the pre-Fed regime that was characterized by the National Banking system. The authors concluded that “the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.”

In other sectors, we don’t normally defer to a committee of a dozen experts to set prices. Yet this is what the Fed does with its “open market committee” that routinely sets a target for the “federal funds rate” as well as other objectives. If we all agree that central planning and price-fixing don’t work for computers and oil, why would we expect it to bring us stability in money and banking?

The Fed’s original mission was price stability, and the dollar has lost something like 98% of it purchasing power since 1913. In the 1970s, the Fed was given a second task, to keep unemployment low — and there’s nothing funny to say about that.

Japan faces similar problems with its central bank:

Japan’s inflation accelerated to the fastest pace since 2008 last month, bringing the rate closer to policy makers’ target while threatening to erode household spending power unless employers boost wages.

Prices excluding fresh food rose 1.2 percent from a year earlier, the statistics bureau said today in Tokyo, more than a median forecast of 1.1 percent in a Bloomberg News survey of economists. A separate report showed industrial output rose 0.1 percent from October, less than forecast, in a risk for projections of an acceleration in economic growth this quarter.

Eroding wealth to force people to spend money to force businesses to inflate wages to reinflate an economic bubble is considered “success.” We’ve been trying the same thing here, with mixed results, since 2001.

Fact is, during the century before the Fed’s creation, the US dollar enjoyed a modest deflation, rewarding savings and non-speculative investment. Per capita income and our population both grew phenomenally — an explosion of wealth and creativity unparalleled in human history.

Not everything we’ve endured since is the Fed’s fault, but ending that century-long failure wouldn’t be a bad place to start repairing the damage.

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All Comments   (2)
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I'm not a big fan of an oligarchy setting the value of money, but I don't see a viable alternative.

Specie currencies simply put the oligarchy in charge of setting the price of whatever commodity is backing the currency, and it makes the fundamental assumption of socialism - that wealth cannot be created - nearly true. Only miners create wealth, all other economic activity simply redistributes it.

Private currencies make trade more difficult by inserting uncertainty about the value of the currencies involved. If the store banks with Chase and I bank with USAA I'd have to convert all of their prices from Chase Dollars (TM) to USAABucks(C). There's so much more information that needs to be processed that I don't see people, even with smartphones, being able to manage it. The result is going to be people will choose to trade with people who share their bank, and choose to bank with the ones that have more commercial accounts. Both factors will restrict trade - and hence wealth creation - until there's only a few banks left. At which point we'll be back where we are now, except the oligarchs will answer to shareholders instead of Congress.

Frankly, I'd like to see a repeal of the mandate that the Fed maintain full employment. We have 40 years of evidence that monetary policy can't do much in that area. Let's stop trying and tell the Fed to do something it can do: Control inflation between a set band, say 1-3%.
15 weeks ago
15 weeks ago Link To Comment
Read "Wealth of Nations". Smith describes all sorts of schemes involving manipulation of the price of gold by governments and private interests. Inflation and speculative bubbles were realities in Europe in the 18th century. I am not sure where you got your information about 19th deflation, Towards the end of his life Sam Clemens complained of the inflation that had occurred since his boyhood in the 1850s.
15 weeks ago
15 weeks ago Link To Comment
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