Well, we’ve crossed a historical landmark.
From the founding of the Federal Reserve to the present, the United States has experienced fully 3,000 percent inflation. That is to say, the value of the single dollar in terms of goods and services has been systematically reduced since 1913 to only 3.2 cents today.
This is surely one of the great failures of central management in U.S. history. The Federal Reserve system has not worked. Instead of being a guardian of the dollar’s value, it has presided over its near destruction.
To be sure, you could say that the Fed was never supposed to curb inflation but rather give the United States a more flexible monetary policy than had previously existed. Under the older system, the banking system was unable to adapt to changes in money demand, unstable, prone to bouts of bank failures, and vulnerable when faced with localized investment frenzies. The point of the Fed was merely to reduce bank failures, curb “wildcat banking,” and provide more stability.
All of that is true. The Fed certainly has given us a flexible monetary system. It’s also true that when the Fed was founded, there was no such thing as “monetary policy” as we currently understand the term. Keynesian economics had not yet been invented. There was nary a thought of manipulating the money stock to reduce unemployment or curb macroeconomic business cycles. Economics as it was then understood could not conceive of such a thing.
At the same time, the founders of the Fed did in fact have an anti-inflationary agenda. The Fed itself explains:
“The Federal Reserve Act … did, however, require the Reserve Banks to maintain gold reserves equal to specific percentages of their outstanding note and deposit liabilities. Implicitly, this requirement was intended to limit the amount of currency and loans the Fed could issue and thus serve as a brake on inflation.”
This is correct. The founding generation were not all ruling-class racketeers. Some were old-school sound money advocates who favored the gold standard and were extremely wary of populist demands for looser money. The money debates of the 1880s and 1890s profoundly affected them. They came out decidedly for strict standards of accountability. They did not want the banking system involved at all in financial schemes, which is why signing up to be part of the system came with all sorts of regulatory strings attached.
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