As part of their Economics 101 series, the Center for Freedom and Prosperity has launched a new subject string that is sure to generate interest, if not controversy, on the Federal Reserve.  Economist Dan Mitchell of Cato hosts the introduction of the topic by giving a thumbnail history of banking and currency, with an emphasis on the split between central and free banking in the 19th century and the decision of the US to use the former in the 20th century.  But the big issue may not be central banking, according to Mitchell in this launch, but the move to fiat currency that took place forty years ago:

Veronique de Rugy writes:

The Cato Institute’s Dan Mitchell makes the case that the Federal Reserve has a dismal track record and bears significant responsibility for almost every major economic upheaval of the past 100 years, including the Great Depression, Seventies stagflation, and the recent financial crisis. And yet it always seems to get more powerful over time.

That’s mostly true, although Mitchell points out that the banking and monetary system was actually worse before the creation of the Fed in 1913.  It was the series of rapid and massive booms and busts in the American economy that pushed the US to create the Fed system as a means of exercising some systemic control over monetary policy without directly monopolizing the banking system.  The Fed’s role in creating the Depression is as questionable as its role in the 2008 crash and economic stagnation; there were plenty of other factors, such as a buildup of margin-based trading in the stock market, protectionism at the worst possible time (Smoot-Hawley), and a massively wrong direction into government expansion and Keynesianism that failed to pay off in the 1930s much as it failed in 2009-10.  Moreover, even though the Fed controlled monetary policy during this period, we still remained on a metal standard for our currency, and there is little evidence to suggest that the previous banking system that the Fed replaced would have performed any better in the context of the Keynesian policies of FDR.

The big problem is policy and spending from Washington, not the Fed.  The expansion of federal intervention into so much of our lives might have been enabled by a switch to fiat currency, but it’s the Wickard marker on federal authority that presents the biggest issue.  Without that, we wouldn’t have the massive federal budgets of today, whence sprang the need for fiat currency in the first place.

The Fed is an easy and legitimate target, especially after their decision to pursue the second round of quantitative easing in place of better fiscal policies from Congress and the White House.  But what should replace the Fed, and how exactly will a change impact the US?  How will that affect those who hold American debt in the current fiat-currency system, which for better or worse underpins the global economy now?  Mitchell promises to highlight three different directions in coming weeks to answer that question, which should be highly intriguing.

Tags: White House