Bashing the Federal Reserve has become a major indoor sport. Tea Partiers and libertarians blame the Fed for the housing bubble, and they fear the Fed's accommodative policies will re-ignite inflation. Republican presidential candidate Newt Gingrich has vowed -- if elected -- to replace Ben Bernanke as Fed chairman. And the most vocal Fed critic, Republican presidential candidate Ron Paul, wants to "end the Fed" and return to a classical gold standard.
Does all this Fed bashing and gold-standard loving make sense? Is the mainstream dismissal of the gold standard appropriate, or are the Fed critics really on to something? Here is a calm assessment that will disappoint both sides in this debate.
Mainstream economists of every political persuasion have long recognized that the Fed's record is far from perfect. Most dramatically, Milton Friedman and Anna Schwartz blamed the Fed for the Great Depression, and subsequent scholarship has largely accepted this view. Ben Bernanke, at a 90th birthday party for Friedman, famously quipped to him and Schwartz, "You're right; we did it. We're very sorry. But thanks to you, we won't do it again."
More broadly, few economists dispute that the Fed has contributed, at times, to the boom and bust cycles in the post-WWII economy. Many also believe the Fed should have deflated the housing bubble earlier.
With respect to the recent financial crisis and recession, most economists give the Fed higher marks, accepting at least the possibility that Fed actions prevented an even more severe downturn.
Yet even here the positive evaluations are mixed with criticisms and concerns. Prominent economists were skeptical of the Fed's support for TARP, of the Fed's implicit Wall Street bailout via purchases of mortgage backed securities, and of quantitative easing and perpetually low interest rates. Many worry that the Fed is overestimating its ability to reverse these polices if inflation heats up.
Thus, most observers acknowledge both past Fed mistakes and the potential for future difficulties. This might seem like a strong indictment.
The right question, however, is not whether the Fed has been, or ever will be perfect, but rather how economic performance under the Fed compares to some feasible alternative, such as the pre-1914 gold standard favored by most Fed critics.
So let's compare economic performance under the two regimes.
By one measure, the gold standard did outperform the Fed: inflation averaged about 0% under the gold standard but more than 3% in the post-war period. This is the fact that most animates Fed detractors.
But so long as inflation is predictable, it is hard to see much benefit from 0% versus 3%, since markets readily adjust to a higher rate if it is steady. And inflation was not stable during the gold standard period; years of deflation preceded years of inflation, balancing out at zero by dumb luck.
In any case, inflation is only one component of economic performance. The more important aspects are how fast real output grows and how much this growth fluctuates.
As it turns out, real output has grown slightly faster under the Fed than under the gold standard, and the volatility of real output growth has been somewhat lower.
Thus by the measures that matter most, economic performance was worse under the gold standard than under the post-war Fed. Gold standard defenders must therefore put implausibly large weight on inflation outcomes, rather than real output growth, to justify their perspective.
Nothing in this assessment, to be sure, means the gold standard was a terrible system; U.S. economic performance was indeed solid under the gold standard.
And much criticism of the gold-standard period is misplaced or exaggerated. The financial panics that plagued the period were not due to the gold standard but to specific features of the pre-1914 banking system. Recent research, moreover, suggests that panics were less frequent than indicated earlier, and their impact less severe.
Available evidence, therefore, does not show that the gold standard was markedly worse than the Fed, but neither does it show the opposite. Thus recent vilification of the Fed, and claims that a gold standard can solve U.S. economic problems, are without empirical foundation.
The crucial problem for the U.S. economy is not its monetary system but the unsustainable path of future entitlement spending. Unless the U.S. gets its debt outlook under control, any monetary system will face inexorable pressure to inflate these debts away.
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Yes, the impulse to control the money supply, relative to the GDP is correct.
But a gold standard does not do that. A gold standard controls the money supply, relative to the availability and demand for gold.
Neither the availability (quantity or ease of mining more), nor the demand (industrial, consumer, or financial) is directly coupled to the rest of the economy. That is the fatal flaw of a gold standard.
A gold standard is delfationary.
Our economists know how to cure inflation, although doing so is sometimes unpopular.
Right now, they really DON'T know how to cure deflation (just look at Japan!!!). A gold standard guarantees that we would have to wrestle constantly with that problem.
No thanks.
A. You have no idea how many "Liberals" have read this blog.
B. Even if you are correct and this blog has drawn "very few Liberals", the odds are good that it's because they aren't interested in propaganda from conservative propaganda tanks.
C. Conservatives are only concerned about the national debt when Democrats are in office. When the GOP is running up the debt, it's apparently OK.
That simply illuminates your extreme ignorance of economics.
The US Treasury Bonds that the US government printed on fresh paper and then sold to individuals and governments in various industrialized nations to get US Dollars back from the people that made our consumer items HAVE ABSOLUTELY NO VALUE, except that they are used to purchase (are redeemable for) title to (corporations that own) privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of redeeming these US dollars with Gold from Ft. Knox.
The USA is running out of assets that foreigners can buy with their freshly printed paper US Treasury Bonds and US dollars, so the US government borrowing "power" will soon disappear and then we will have to start producing the things (food, shelter, clothing) that we need to support our lives.
WHY DO YOU WANT TO DO THAT? IT IS DEFLATIONARY!
THE AVAILABILITY OF GOLD DOES NOT CORRELATE LINEARLY WITH THE OUTPUT OF GOODS AND SERVICES!!!!!
Take away the ability to counterfeit and "representatives" might actually listen to constituents rather than remain beholden to the money printers. Leave the counterfeiting alone and our representatives will continue to ignore us and work for the counterfeiters interests.
Look at the Depression Jackson caused when he killed the bank in the 1830's. That one lasted about a generation.
Besides, if that is the case, then taxation will work just fine.
The real key is matching the money supply to the GDP.
Gold cannot do that. Gold matches the money supply to the availability of gold.
Please note that that can, sometimes, be HUGELY INFLATIONARY!!! (Go ask Spain what happened when they flooded western Europe with gold stolen from the New World).
There is no guarantee, whatsoever, that some new process won't be developed that would allow the cost of the extraction of gold to plummet. With a gold standard, this would drive inflation through the roof. Do you want to tie the monetary system to the ability of the mining industry to cut its costs???
Conversely, under a gold standard, when people hoard their gold, the 'money velocity' decreases, thus, reducing the effective money supply. This is deflationary. Sometimes this would help damp inflation. In other times of crisis, it is exactly the wrong thing to do.
As the GDP grows, the gold supply doesn't grow at the same rate. That is deflationary. That stops growth. I guess you don't like growth?
If the growth of the amount of gold is slowed by the depletion of gold in the ground, that will stymie further growth.
Maintaining the (money supply/GDP) ratio at a fairly constant value is a good thing, but tying the economy to gold is idiotic on the face of it.
http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/
Woodrow said this after signing the Federal Reserve into Law in 1913.
I know it, many others seem to know it, why don't our Political leaders know it? Or do they?
Is Ron Paul the only Politician that knows this truth or is he the only one who cares?
Too bad he won't be President, because we need a radical change to return to the Constitutional principals that this Country was built upon.
by those unscrupulous few who manipulate the currency.
I'm quite sure Hamilton, Washington et al would not support TARP.
That said, what part of Oligarchy do you think Hamilton, Madison and Washington were supportive of? Quotes? References?
So I'm to believe that the government can't manage anything better than private business (since these libertarians support charter schools and private schools and quasi-privatization everywhere), but that suddenly, mysteriously, one single central bank can run the whole economies time preferences?
You've decided to act as though the time before the Fed was a "pure free market" in banking, despite state banks and bank holidays and government guaranteed loans and the green backs of the civil war and 2 prior national banks...
So for you to come out and say "well we can't know the gold standard would be better" is anti-libertarian at the core. The point of reducing the state isn't primarily about efficiency, it's because the state doing things beyond what is absolutely necessary is wrong. The use of force through legal tender laws can't simply be justified based on "well it's not necessarily worse."
US Dollars are now redeemed for title to (corporations that own) privately owned businesses, factories, casinos, hotels, farms, land, ports, refineries, forests, ports, breweries, distilleries, and other privately owned NATIONAL WEALTH and other assets located in the USA that were created by previous US generations prior to de-industrialization overseas instead of redeeming these freshly printed paper US Treasury Bonds with gold from Ft. Knox.
America still has 12,000 tons of gold on hand, but this is nothing compared to the value of rare, strategic metals such as Platinum, Beryllium, and Ruthenium.
If I consider your argument seriously, it could be repeated ad infinitum. For if the euro acts like the "gold standard" for Greece and Spain, does not the dollar act like this for the individual states? But oh.. what about the states and the individual counties? Should not all local governments have their own printing press? Should not all individuals?
It is at this point that the post you've written might gain some merit, for if individuals could be responsible for their own money, they would have to make it have value to others. But this is precisely the value that a market driven commodity has that fiat money does not.
And time it is closer than we think.
America is on a Unsustainable course that will end in bankruptcy if not corrected.
Land will always have value and so, too, will the food grown on it. "Precious" metals will likely still have value.
With the government bankrupt, a huge part of the US population will soon be also--and not just gov't employees being laid off or fired. If the economy is that bad, most of the so-called 99% will be seriously hurting. So...
I would not 'bet the farm' on the rest of your list. Unless you are an owner of a property such as a hotel, apartment building, etc., AND are either personally guarding it or paying someone to do so, it is likely to meet the fate of many an abandoned house.
If you cannot pay your electric bill, those pork bellies and/or their "futures" might not be worth so much either.
Before something has value, someone must be able to afford to buy it. Henry Ford wanted his employees to be able to buy the product they made for good reason. After a while, when what little jewelry, cash and/or other liquid assets the masses once had is traded for food or other necessity, then expect that the wealthy or the thieves would likely be the only consumers in those or the casino market.