Perhaps it’s wishful thinking, but while calling the usual suspects for comment in the aftermath of the discount-rate increase from 6 per cent to 6’/2 per cent on August 9, I seemed to detect a certain weariness with the whole process. The financial community is deeply divided about whether inflation is returning—and, unusually, this dispute is not merely a rationalization of partisan preferences but can be found right across the political spectrum. There is a widespread rueful awareness that no theory of monetary policy has performed particularly well in recent years. As a result, most factions tend to acquiesce grudgingly in the policy of Fed Chairman Alan Greenspan, although no one is sure exactly what it is.
Now, finding the Federal Reserve at the heart of the otherwise basically free U.S. economy is an anomaly rather like finding the bones of a sacrificed virgin beneath the altar of a Christian church. The Fed is a central bank, albeit a peculiarly American version, since, unlike the central banks of other industrialized nations, it is not a government agency but a government-enforced cartel technically owned by the major commercial banks. Organized only in December 1913—more than a year younger than one of its most relentless critics, Nobel economics laureate Milton Friedman—the Fed, like modern public education, is part of the legacy of the Progressive Era, another of America’s periodic spasms of faith in the efficacy of government intervention.
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