In the latest issue of the Journal of Economic Perspectives there are several articles in a symposium on the first 100 years of the Federal Reserve. Displaying what Donald (now Dierdre) McCloskey once characterized as “the intellectual range from M to N,” there is no real comparison of the Fed’s record with that of the system that preceded it; no mention of other monetary systems circa 1913 that had better records than the United States (most pertinently, that of Canada); not nearly enough acknowledgment of the great harm the Fed has caused more than once in its history; no discussion of why a few other central banks–though surprisingly, only a few–have performed better than the Fed; and no inkling that central banking may not be the best of all possible systems in the best of all possible worlds.
In among the articles by the academics, though, there is an interview with Paul Volcker. It was of particular interest to me because I recently read William Silber’s book Volcker: The Triumph of Persistence. Rather than being a fully rounded biography, it focuses on key episodes of Volcker’s life as a policy maker and how he came to the decisions he did. Since Volcker is acknowledged as probably the best Fed chairman ever–the one who inherited a bad situation and left it much better, without planting the seeds of a new bubble–the book is well worth reading. (As is common, though, the biographer is a little too fond of his subject.)
The opening section of the interview briefly discusses Volcker’s part in the U.S. abandonment of the Bretton Woods gold standard, a subject treated in much more depth in the book. What struck me when reading the book was how little Volcker and the other major participants in making the policy knew. Volcker was in a powerful but subordinate post, secondary to the major players Arthur Burns, John Connally, George Shultz, and Richard Nixon. They needed his knowledge of markets, his international contacts, and his bureaucratic expertise, but they and not he made the decisions. It was incredible to me that as market pressure on the U.S. dollar mounted, there was no real acknowledgment among the group that the underlying problem was overly expansionary Federal Reserve policy. Arthur Burns, though a fine academic, was a terrible policy maker. He was willing to subordinate the Fed, and by implication the U.S. financial system, to Nixon’s wish to keep the economy pumped up during his re-election campaign, even at the risk of a substantial hangover later. Nobody understood that the steps they were about to take would shake the pillars of the world financial system. The focus was instead on gold and the alleged need to devalue against gold, as if gold were the problem rather than a signal that the monetary policy was the problem. It took more than a decade of costly experimentation to establish some credibility for the dollar on new foundations under a floating exchange rate.