The Corner

Fear of Rules

Reviewing a new book on the creation of the Federal Reserve, Robert Rubin concludes with this drive-by attack on unspecified congressional proposals to rein it in:

Protecting the independence of the Fed from political influence was built into its creation and, as Lowenstein demonstrates, is critical to the effective use of its powers, to its credibility and to the credibility of our markets. All that is vital, both because of the inherent cyclicality of economies and because of the never-ending need to prevent — and, when necessary, mitigate — financial disruptions. It’s true that the Federal Reserve has sometimes exercised poor judgment. What is clear, however, is that a number of the reforms currently being proposed in Congress could undermine the system’s effectiveness by adversely affecting the Fed’s independence from Congressional political influence and reducing its ­policy-making flexibility.

“America’s Bank” provides a dire warning against such actions.

It’s hard to see how the book could do any such thing, assuming Rubin’s summary of it is accurate. But this kind of factually-light paean to the wonders of unconstrained discretion for the Federal Reserve is pretty common in the elite media.

Not for the first time, I’ll quote three monetary economists’ recent summary of the Fed’s history:

Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output. Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I.

If Lowenstein offers any evidence against this assessment, Rubin does not mention it.

It is certainly possible that a congressionally-imposed rule for monetary policy would make things worse: I would oppose a rigid inflation-targeting rule, for example, or a gold standard. But there is in fact a debate about whether the right rule would improve the conduct of monetary policy, for example by making it more predictable, and it can’t be waved away by invoking vague lessons of history.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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