It has been 100 years since the Federal Reserve system was implemented in the United States by President Woodrow Wilson. In all those years, the benefits of the Federal Reserve never materialized, but we did get a bunch of unintended negative consequences. Thomas Sowell discusses the fact that Americans seem unwilling or unable to look at the government’s track record when it comes to deciding future policy, in his article Prophets and Losses. Would you leave your kid with a babysitter who had lost the child she was watching last weekend? What if she promised it wouldn’t happen again?
The recent release of the Federal Reserve Board’s transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today — or the policies based on those prophecies?
They thought that we would be able to avoid a recession, and quite obviously, we did not avoid a recession. The point of the Federal Reserve was to allow currency to expand and contract as needed, essentially preventing the market shocks of drastic inflation or deflation. But again, we cannot simply look at the goals of the Federal Reserve, and assume it all went to plan.
In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s. As for bank failures, they reached levels unheard of before there was a Federal Reserve System.
Woodrow Wilson thought the economy could be put in a constant state of expansion with the Federal Reserve, but he was wrong because of the nature of money. The Federal Reserve’s “quantitative easing” is really just printing money in order to purchase government bonds, but this means that the value of the currency is reduced. Fed policy has led to inflation, when that was exactly one of the things it was meant to protect against. The point is that we should stop trusting the government and Federal Reserve to make decisions that the free market should handle.
Without the Federal Reserve, bad lending policy would effect the bank that made the policy, and a handful of individuals involved in that particular bank. Since the bank needs to be successful in order to remain in business and make money, they will fix these mistakes and not make them again. Likewise other banks will learn from the failures, and implement good policy; the monetary self interest of the bankers would require their success. With the Federal Reserve, we all get to share in the failures of poor policy, which seems to be implemented more often than good policy. And then, the bad policy is not fixed, because only a board of “disinterested officers of the government” have the power to change policy.The Federal Reserve has allowed our government to kick the can of responsibility down the road over and over again, and rob the taxpayers through inflation brought on by the Federal Reserve buying government bonds with printed money. If something was a miserable failure for the last 100 years, why would it succeed in the next 100?