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

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500

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Consumer Price Index, 1790-2009

Jan-14

Jan-19

Jan-24

Jan-29

Jan-34

Jan-39

Jan-44

Jan-49

Jan-54

Jan-59

Jan-64

Jan-69

Jan-74

Jan-79

Jan-84

Jan-89

Jan-94

Jan-99

Jan-04

Jan-09-20

-15

-10

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U.S. Monthly Inflation, 1914-2009

Axis Title

“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.