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Inflated Reputation

Here’s a letter to the Washington Post:

George Will doubts the Fed’s ability to carry out its “dual mandate” (“The trap of the Federal Reserve’s dual mandate,” Nov. 18).  His doubt is well-founded.

This mandate, as described in 2007 by Federal Reserve governor Frederic Mishkin, is for the Fed “to promote the two coequal objectives of maximum employment and price stability.”

How’s it doing?

The Great Depression occurred on the Fed’s watch, as have several other recessions.  As for price stability, from the Fed’s creation (in 1913) to 1945, the dollar lost 45 percent of its value; between 1945 and 1980 it lost another 78 percent of its value; and between 1980 and today yet another 62 percent of the dollar’s value was inflated away.  All told, during the less than 100 years that the Fed has been charged with keeping the value of the dollar stable, the dollar has lost 95 percent of its value.  This shrinkage in the dollar’s value since 1913 is especially striking in light of the fact that, between 1790 and 1913, the dollar’s value declined by only about 8 percent.*

Given this performance, Americans should be well and truly fed up.

Donald J. Boudreaux

* See George Selgin, William D. Lastrapes, & Lawrence H. White, “Has the Fed Been a Failure?” (Working paper, Nov. 2010), p. 3:

far from achieving long-run price stability, it [the Fed] has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar‘s establishment as the official U.S. monetary unit, to fall dramatically. A consumer basket selling for $100 in 1790 cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913. But thereafter the price soared, reaching $2422 in 2008.