A lot of folks are wondering right now if Ben Bernanke knows what he’s doing. But perhaps the issue isn’t the wisdom of the man in Fed chairman’s chair, but the wisdom of the whole Federal Reserve setup. Along come George Selgin, William Lastrapes, and Lawrence White asking: “Has the Fed Been a Failure?” That’s the title of a new working paper they’ve authored for the Cato Institute. Reader beware: It’s not beach reading. But there’s some good information in there, and apparently there have been few if any attempts at a comprehensive literature review on the Fed’s performance on monetary policy since its creation in 1913. Here’s one compelling datum they note about the Fed’s failure to control inflation:
A consumer basket selling for $100 in 1790 cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913. But thereafter the price soared, reaching $2422 in 2008 … .
There’s a lot more. Their conclusion, in part:
The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output. Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I. A genuine improvement did occur during the sub-period known as the Great Moderation. But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly.
Its record strongly suggests that the Federal Reserve’s problems go well beyond those of having lacked good administrators.