Money: Free and Unfree by George Selgin

Author:George Selgin [Selgin, George]
Language: eng
Format: epub
Tags: ebook
Publisher: Cato Institute
Published: 0101-01-01T00:00:00+00:00

* Originally published as Cato Institute Policy Analysis no. 729 (June 2013). An earlier version was prepared for the Hillsdale College Free Market Forum on “Markets, Governments, and the Common Good,” Houston, Texas (October 4–5, 2012).

8

HAS THE FED BEEN A FAILURE?*

WITH WILLIAM D. LASTRAPES

AND LAWRENCE H. WHITE

No major institution in the U.S. has so poor a record of performance over so long a period, yet so high a public reputation.

—MILTON FRIEDMAN (1988)

IN THE AFTERMATH of the Panic of 1907, the U.S. Congress appointed a National Monetary Commission. In 1910, the Commission published a shelf-full of studies evaluating the problems of the postbellum national banking system and exploring alternative regimes. A few years later Congress passed the Federal Reserve Act.

Today, in the aftermath of the Panic of 2007, and as the 100th birthday of the Federal Reserve System approaches, it seems appropriate to once again take stock of our monetary system. Has our experiment with the Federal Reserve been a success or a failure? Does the Fed’s track record during its history merit celebration, or should Congress consider replacing it with something else? Is it time for a new National Monetary Commission?

The Federal Reserve has, by all accounts, been one of the world’s more responsible and successful central banks. But this tells us nothing about its absolute performance. To what extent has the Fed succeeded or failed in accomplishing its official mission? Has it ameliorated to a substantial degree those symptoms of monetary and financial instability that caused it to be established in the first place? Has it at least outperformed the system that it replaced? Has it learned to do better over time?

We address these questions by surveying available research bearing upon them. The broad conclusions we reach based upon that research are that (1) the full Fed period has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment; (2) while the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its (undoubtedly flawed) predecessor; and (3) alternative arrangements exist that might do better than the presently constituted Fed has done. These findings do not prove that any particular alternative to the Fed would, in fact, have delivered superior outcomes: to reach such a conclusion would require a counterfactual exercise too ambitious to fall within the scope of what is intended as a preliminary survey. The findings do, however, suggest that the need for a systematic exploration of alternatives to the established monetary system, involving the necessary counterfactual exercises, is no less pressing today than it was a century ago.

As far as we know, the present study is the first attempt at an overall assessment of the Fed’s record informed by academic research.1 Our conclusions draw importantly on recent research findings, which have dramatically revised economists’ indicators of macroeconomic performance, especially for the pre–Federal Reserve period. We do not, of course, expect the conclusions we draw from this research to be uncontroversial, much less definitive.

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