Critical analysis of U.S. Federal Reserve policies 1913-1951

March 12, 2003

Free Market Foundation

In his multi-volume, A History of the Federal Reserve,” Allan Meltzer, an economist at Carnegie Mellon University, covers the years 1913-1951. Federal Reserve (the Fed) Chairman Alan Greenspan calls it a “methodical illumination” of the confusing events of the period.

Confronted by boom or bust, the early Fed bumbled from crisis to crisis, says Meltzer showing little understanding of economic relationships, and failed to implement sensible economic policies that are taken for granted today.

The Fed’s “pro-cyclical” monetary policies precluded an effective response to the Great Depression or to the deep recession of 1937-38.

In the early days of the Great Depression, Fed officials noted an economic contraction, but did nothing to pump money into the system in response.

The Fed stimulated the economy when it was rapidly expanding and did nothing to prime the pump when demand was low.

Meltzer suggests that the Fed should have pursued price stability as a priority which would significantly have altered the history of the 20th century.

The Fed was hobbled by a limited sense of how money, international gold flows and credit worked and how they affected economies.

Source: Mary Anastasia O’Grady, A Fed Without Reserve, Wall Street Journal, February 20, 2002.

For text http://online.wsj.com/article/0,,SB1045705443586586063-search,00.html
For more on Federal Reserve Monetary Policy http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/4 March 2003