Fed Critics Go Mainstream

By: John Rubino | Fri, Dec 3, 2010
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It's suddenly fashionable in the mainstream media not just to criticize the Federal Reserve but to question its reason for existing. Watch Bloomberg's clearly sympathetic take on the ascendancy of Congressman Ron Paul, whose most recent book is End the Fed:

And here's an excerpt from a Wall Street Journal editorialby Cato Institute senior fellow Gerald O'Driscoll:


Why Do We Have a Central Bank?

Ordinary citizens will increasingly ask that question if the Fed keeps acting as an unelected fiscal authority.

Why do nations have central banks? Countries have developed without one, and sophisticated financial systems have evolved in their absence. Some countries with a central bank have suffered for having one. Zimbabwe comes to mind.

The Federal Reserve System was created by an act of Congress only in 1913. It then presided over a great wartime inflation followed by a major depression in 1920-21. The 1920s were an era of prosperity, due as much to Treasury Secretary Andrew Mellon's wise fiscal policies as anything the Fed did. The Fed's performance in the Great Depression was disastrous, a judgment shared by its current chairman, Ben Bernanke.

The Canadian banking system weathered the Great Depression without a central bank. Instead of the thousands of small, undiversified banks that the United States had, Canada had a small number of banks (with many branches across the country) that were able withstand localized downturns. Even in the Great Depression, banking failures in the U.S. were concentrated in specific regions. Canada's central bank, the Bank of Canada, was created in 1935 in part because of pressure from the rest of the world. Canada had survived without it quite well.

In short, central banking has been neither necessary nor sufficient for the development of a modern economy and financial system. A number of reform proposals for the Fed are being crafted, but there is no agreement on why the institution exists.

Policy makers are debating the wisdom of the Fed's dual mandate of providing price stability and full employment. Rep. Mike Pence (R., Ind.) has introduced a bill to amend the Federal Reserve Act to end the dual mandate and give the Fed one goal: maintaining price stability (H.R. 6406). The dual mandate is seen by many as giving the Fed an impossible assignment of simultaneously optimizing two variables with one policy tool. It is also not clear that a central bank is capable of maintaining full employment.

Yet maintaining stable prices was not part of the Fed's original mandate and, aside from some economists, few thought it the Fed's job. The gold standard provided for stable prices over time, and the Fed's job was to maintain that standard (which does not require a central bank).

Some thoughts:

 


 

John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

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