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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