When did the myth of the uber-competent government official begin? While there have obviously been good government officials in history, looking over the Sweep of Time is not terribly encouraging. What percentage of powerful people did a good job?
That question is interesting when thinking about the current Fed, which is embarking on a Giant Game of Chicken. The monetary base has soared, and they are promising that they will pull it all back out before inflation hits. To believe that they will do this is to believe that they are really good at what they do. Why would we assume this?
Enter Allan Meltzer’s magisterial A History of the Federal Reserve, Volume 1: 1913-1951. This is The Book on the history of the Fed (well, this and volume 2 to be precise (always a good thing to be)). I assigned it to my Money and Banking class this semester, mostly to see what they would make of it. It is, you see, magisterial, which you can read as “long and full of every detail one would possibly want to know.”
The thesis of the book. In those early years the Fed was populated with well-meaning, smart people who had absolutely no idea what they were doing. None. That Great Depression thing you might have heard about? Their fault. And why? Because they had absolutely no idea what they were doing. We have known this ever since Friedman and Schwartz argued this point, but Meltzer amassed so much evidence on the matter that it is hard to see how anyone could argue anything else. And, Meltzer also documents something else rather well—there were people around at the time, some of them actually working at the Fed, who did understand the way monetary policy worked and who did suggest doing the right thing. But, the majority of Fed officials, being clueless, ignored the good advice and journeyed on their merry way taking the economy right over the cliff with them. This book is amazingly good—but you probably don’t want to read it. Unless, that is, you are really fascinated with the inner workings of monetary policy before 1951. There is little in this book that would be gripping to the casual reader. My students liked the Depression part, but hated the stuff that came before the Depression. (Economics is like traffic—traffic is boring unless there is a major accident at which point everybody wants to slow down to see if there is a dead body. Hence, thinking about the 1930s is way more interesting than thinking about the 1920s. This surely says something about human nature.)
Now, one way to read Meltzer’s book is that it tells us about the Bad Old Days when Fed officials didn’t know what they were doing. Does it mean anything for today? That depends entirely on whether you think a) Fed officials learned from the past and now won’t make any big mistakes or b) the economy is every bit as complicated now as it was in the 1930s, Fed officials are every bit as human as they were in the 1930s, and thus there is no reason that they won’t make huge mistakes.
The Fed gave indication earlier this week that it does not plan to reign in the massive QE2 program anytime soon. That cliff is getting nearer and nearer.
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