The Fed Is a Failed Central Planner
Almost all the mainstream discussion of monetary policy in the United States today and for a number of decades is and has been about what kind of monetary policy the Federal Reserve should carry out. Should the Fed target interest rates and, if so, how? For example, should it follow the Taylor Rule, named after Stanford economist and Hoover senior fellow John Taylor? Should the Fed target nominal gross domestic product, as Mercatus Center economist Scott Sumner advocates? Should the Fed give up on inflation and make sure that unemployment doesn’t spike? Should the Fed give up on unemployment and make sure the inflation rate stays low or, given today’s data, decreases to a low rate?
All these questions are worth asking. But notice that these questions are about how the Fed should engage in central planning of the money supply. Few Americans, and even a lower percent of economists, think it’s a good idea for the federal government to centrally plan the number of cars that should be produced in the United States. Economists don’t typically call for the federal government to decide how much steel should be produced. Why, then, do the vast majority of economists think that the Fed should centrally plan the money supply? It must be because monetary policy before the Federal Reserve existed led to much worse results than after the Fed started operating in 1914.
Yet it turns out that we got better results on inflation and roughly equivalent results on business cycles prior to 1914. Moreover, our monetary institutions prior to the Fed had serious deficiencies due to damaging regulation. Without those regulations, monetary policy prior to the Fed would have been even better.
These are the opening 3 paragraphs of David R. Henderson, “The Fed Is a Failed Central Planner,” Defining Ideas, April 1, 2022.
My favorite paragraph:
Many people now say that the Great Depression was an unfortunate learning experience for the Fed. Indeed, at a party at the University of Chicago to belatedly celebrate Milton Friedman’s ninetieth birthday, Ben Bernanke, then a member of the Federal Reserve Board, ’fessed up. He said, “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” But saying that it was a learning experience reminds me of the famous scene in the 1964 movie Dr. Strangelove in which President Muffley, played by Peter Sellers, realizes that one of his generals, Jack D. Ripper (Sterling Hayden), has acted on his own to start a nuclear war with the Soviet Union. Muffley says to General Turgidson (George C. Scott), “General Turgidson, when you instituted the human reliability tests, you assured me there was no possibility of such a thing ever occurring.” Turgidson’s priceless reply: “Well I don’t think it’s quite fair to condemn a whole program because of a single slip up, sir.” The Great Depression was a pretty big slip up.
But even examining the record of the Fed after WWII with the pre-Fed experience doesn’t make a clear case of the Fed on recessions and depressions, as I show.
Read the whole thing.