David R. Henderson  

Bad Argument for the Fed

Random Thoughts on the Bowles-... Speaking of the Fed......

In a recent Slate article critical of returning to the gold standard, Christopher Beam writes:

The creation of the Federal Reserve in 1913 didn't stop fiscal crises, of course, but it did a lot to reduce their damage.

I'm not sure what Mr. Beam means by "fiscal crises," but shouldn't he count the Great Depression as a pretty important failure of the Federal Reserve? His statement reminds me of General Turgidson's line in Dr. Strangelove, when the president and his advisors are sitting around trying to figure out how to stop a renegade general from destroying the world. When the president criticizes the program they put in place to prevent just such an event from happening, Turgidson replies:
Well I don't think it's quite fair to condemn a whole program because of a single slip up sir.

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CATEGORIES: Monetary Policy

COMMENTS (9 to date)
Dale Moses writes:

Bad Bad Argument for the Fed:

That the Fed had ineffective policy goals or ineffective policy tools is not a condemnation of the fed if those tools and goals have been fixed.

Your post reminds me claims that government doesn't work made by people in government who believe that government doesn't work. Well of course government doesn't work when the people in charge believe it should be doing nothing. What did you expect to happen?

The real question of whether the fed is valuable is whether or not it has changed course from its past missteps. Is it currently allowed to pursue a policy which is best? Is there a better mechanism available that will in the Fed's absence?

J W writes:

"The real question of whether the fed is valuable is whether or not it has changed course from its past missteps."

Only the fact that it changes after a mistake is the 'real question'? The Fed could be a random number generator and you'd still consider it valuable.

Hyena writes:

You mean the "Great Vacation".

Jeremy H. writes:
Ned Baker writes:


Aren't you taking around the point? Beam is writing about how the Fed relates to the gold standard and recessions. My understanding of the conventional wisdom is that going off the gold standard in about 1933 was a very good thing. The gold standard era would be contrasted with the modern Fed fiat era. Don't you think he's thinking about the post-1933 Fed? I don't know myself since I didn't read the article. :-)

David R. Henderson writes:

Maybe that's what he's talking about. But he didn't say that. That's why I said it's a bad argument. To say someone makes a bad argument is not to say that he couldn't have made a good argument. It's to say that he didn't.

Ned Baker writes:
Liam writes:


I am still not sure what your position on the gist of the article. I understand you think he made a bad argument but what about the topic of the Gold Standard. I share Ned's opinon that coming off of the standard was a very good thing.


Dale Moses writes:

Re: J.W.

Yes, I am using the unstated assumption that we perceive that these deviations are consistent in a manner with better policy.

Also, don't ignore the other important aspects of that paragraph. Consider it an application of opportunity cost. The fed is good not if it is perfect(or even good), but if it is better than the next best option. The issue of observation and correction is ancillary to this crucial point.

The criticism in this blog post requires that both of these aspects be false in order for the argument to be bad, yet neither are shown to be so.

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