A Century of Failure:
The Case for
Ending the Fed
the fed’s mission
• To “Promote effectively the goals
of maximum employment, stable
prices, and moderate long-term
interest rates.”
• To “contain financial disruptions
and [prevent] their spread outside
the financial sector.”
“”””’’“Stable prices allow people to rely on
the dollar as a measure of value when making
long-term contracts, engaging in long-term
planning, or borrowing or lending for long
period.”
Fed Chairman Ben Bernanke
Consumer Price Index, 1790-2009
3000
2500
2000
1500
1000
500
0
U.S. Monthly Inflation, 1914-2009
30
25
20
15
Axis Title
10
5
0
-5
-10
-15
-20
“A broad historical look finds
many more periods of deflation with
reasonable growth than with
depression, and many more periods
of depression with inflation than
with deflation.”
Atkeson and Kehoe (AER 2004)
Percent Deviation of GNP from Trend: Standard Measure
Percent Deviation of GNP from Trend: Romer’s Revision
Government Outlays as Percent of GDP
“Recessions have not become
noticeably shorter over time. The
average length of recessions is
actually one month longer in the
post-World War II era than in the
pre-World War I era. There is also
no obvious change in the
distribution of the length of
recessions between the prewar and
postwar eras.”
Christina Romer (1999)
Percentage of Output Forecast Error Variance Explained by Supply Shocks
Years Ahead
Pre-1914
Post-World War II
1
95
88.66*
5
2
97
83.84*
21
4
98
77.19*
40
10
99
77.00*
68
Sources: Keating and Nye (1998), *Bordo and Redish (2004)
“There were no more than three major
banking panics between 1873 and 1907,
and two incipient banking panics in
1884 and 1890. Twelve years elapsed
between the panic of 1861 and the panic
of 1873, twenty years between the panics
of 1873 and 1893, and fourteen years
between 1893 and 1907: three banking
panics in half a century! And in only
one of the three, 1893, did the number
of bank suspensions match those of the
Great Depression.”
--Elmus Wicker (2000)
Willem Buiter: Fed Interventions,
including its rescue of Bear Stearns,
appear “to have been designed to
maximize bad incentives for future
reckless lending and borrowing by
the institutions affected by them.”
I know it will be said that in this work I have
pointed out a deep malady, and only suggested a
superficial remedy. I have tediously insisted
that the natural system of banking is that of
many banks keeping their own cash reserve, with
the penalty of failure before them if they
neglect it. I have shown that our system is that
of a single bank keeping the whole reserve
under no effectual penalty of failure. And yet I
propose to retain that system, and only attempt
to mend and palliate it.
I can only reply that I propose to retain
this system because I am quite sure that it
is of no manner of use proposing to alter
it... You might as well, or better, try to
alter the English monarchy and
substitute a republic, as to alter the
present constitution of the English
money market, founded on the Bank of
England.