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. – US News
Dominant Social Theme: The Fed is doing fine. No more oversight necessary. They are very imaginative.
Free-Market Analysis: Steven Horwitz, once interviewed by the Daily Bell, has written an article in US News (see above) on ending the Federal Reserve. 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. You can see his interview here: Steve Horwitz on GMU, the Mises Controversy and the Promise of Austrian Economics in the 21st Century.
Horwitz's article marks another break out of serious discussion about the changing role of the Fed. Just the other day, an article by David Stockman in The New York Times excoriated the Fed, which was surely a significant event. We've written several articles about it and many others in the libertarian community have noted it as well.
While some have pointed out (even feedbackers in these pages) that Stockman's book and excerpts do not envision a central banking shutdown, his statements surely constitute the most serious mainstream attack on the Fed's functionality and performance in years. Also, Stockman's stature as a senior functionary in the administration of former US president Ronald Reagan provides him with an element of gravitas that the mainstream media has to acknowledge – and react to.
We shall see whether Horwitz's article in US News commands similar attention. But in a sense it need not. The article is a reflection of a fairly significant legislative move being made to create a Centennial Monetary Commission to examine the Fed's workings, performance and credibility after 100 years.
Of course, we could save them the money and time. The idea of a handful of men configuring the volume and price of money on a daily or even hourly basis is a ludicrous one. Even a Friedmanite "steady state" Fed makes no sense.
These massive central banks provide nothing but a disguised price fix, and price fixing never works. It creates inefficiency, queues or worse. In the case of the Fed, it creates endless, inevitable price inflation and because the dollar is such a strong currency, the mismanagement at the Fed generates first booms and then busts that resonate ruinously around the world. Here's more from the article:
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.
Horwitz has written a good, calm and meaningful article that reflects the times we live in. There are no excuses anymore. After 100 years, the Fed's record is clear for all to see. One need merely travel through the US or Britain, observing the incredible devastation of the industrial infrastructure, to comprehend how destructive these money regimes have been.
Toward the end of the article, Horwitz observes there are good alternatives to monetary business as usual. including "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."
Again, what is most important about this article – as with Stockman's book – is that significant questions are being raised in mainstream forums about the Fed's incompetence and lack of any compelling reason for its continued existence – certainly in its current activist form.
Even Ben Bernanke has seemingly lost the will to fight on, indicating that he is not indispensible and that someone else can easily be appointed to take his place. We figure Bernanke simply doesn't want to face what he has wrought. A tidal wave of monetary devastation is on the way because of the tens of trillions he has printed, irresponsibly and without significant consultation.
When these trillions finally begin to circulate and rates start to rise, the US itself, like other countries, will face bankruptcy and alternatives, as always, will be fraught. When the electorate finally understands what has occurred, central banking will likely suffer blows from which it may not be able to recover from.
We figure the powers-that-be see the proverbial writing on the wall, which is why anti-Fed messages are beginning to circulate in the mainstream media. We predicted this years ago, when we saw how incompetently the Fed was responding to public relations and congressional challenges regarding the 2008 financial crisis: Beginning of the End? Fed Cannot Account for $9 Trillion.
It seemed a bold statement to make then – that the entire central banking regime and the Fed in particular was in danger of becoming de-legitimized. But we believed it then and nothing since that time has given us any reason to rethink our conclusions. A change is coming.