The Federal Reserve was created a century ago on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act. The US central bank was supposed to lead to more macroeconomic stability. Here are three charts that show the Fed’s three major monetary mistakes:
1.) The Great Depression. In real terms, the US economy fell by a quarter from 1929 through 1933. Even Fed chairman Ben Bernanke has conceded that “the leading and most persuasive explanation of the worst economic disaster in American history” is that the Fed tightened monetary policy when it shouldn’t have.
2.) The Great Inflation. Monetary economist Scott Sumner:
Between December 1947 and December 1964 the Fed increased the currency stock from $28.9 billion to $39.7 billion, and prices rose modestly. Then they started printed money like crazy, and prices soared between December 1964 and December 1981. By the end of 1981 the currency stock had hit $144.4 billion: Printing money is what the Fed does. … That policy affects all sorts of other variables, such as the fed funds rate. The Fed’s Great Inflation policy caused the fed funds rate to soar into double digits by 1981, so don’t assume that printing money causes lower interest rates, at least over any extended period of time.
3.) The Great Recession. Richmond Fed economist Robert Hetzel
A moderate recession became a major recession in summer 2008 when the [Federal Open Market Committee] ceased lowering the federal funds rate while the economy deteriorated. The central empirical fact of the 2008-2009 recession is that the severe declines in output that in appeared in the [second quarter of 2008 and the first quarter of 2009] … had already been locked in by summer 2008. … Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008.
Well, hopefully the next 100 years will be better. Here’s how to mend the Fed, not end it.